Battling Pay Compression and Pay Inversion

What is the difference between pay compression and pay inversion?

Pay Compression
Pay compression occurs when a new hire is paid the same as current workers in the same position, or when the pay difference between employee levels shrinks so higher-level workers feel that their salary advantage over newer employees is no longer significant. An example would be if an employee who has worked at the company for one year receives a $1.00 an hour raise for their tenure, but then it is necessary to increase the starting wage for new hires to $1.00 higher in order to attract candidates. The tenured employee no longer feels as though their one year of experience is valued by the company.

Pay Inversion
Pay inversion occurs when pay compression is left unchecked and/or taken to an extreme. It is growing more common in today’s tight labor market as employers continue to find they need to raise starting wages to attract candidates and fill open positions. Pay inversion is when the starting wage for a new employee is higher than that of an existing employee. This often leads to an increase in turnover from your existing workforce due to a misaligned pay scale and loss of knowledge within the company as employees who are skilled in the position exit your organization.

How can HR stay ahead of pay compression/inversion?

There are a number of steps HR and business owners can take to combat pay compression or pay inversion:

  • Keep pay in line – If newly hired employees are being paid the same as or more than a tenured employee, with a diminishing differential for tenure and experience, consider grooming longer-tenured employees for a promotion to the next level in their career.
  • Review job descriptions – If a new hire is earning as much or more than an experienced employee, ask yourself if they are truly both working the same position or if they are two different roles?
  • Train Managers – Consider training line managers to discuss salary compression and other pay issues and to refrain from making unhelpful comments, such as responding to requests for a raise with, “If it were up to me…”
  • Consider the alternatives – If it is not feasible to increase the pay for current workers affected by wage compression, consider rewarding them using alternative means. Examples include a title change or career-development coaching, providing additional paid time off, or granting them stock options if they are part of the benefits package.

Author: Arwyn Robinson – SHRM CP

Additional Resources:

Wage Compression

Pay Compression

Wage Inversion

Pay Inversion

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