Sunday, August 03, 2008

Salary Compression – A HR Nightmare?

If there's one thing that's tipping the scales for fresh employees and leaving the veterans out in the cold, it's salary compression. There's no room for loyalty to the company when market conditions have to be taken into consideration and new hires have to be paid according to industry standards. With the internal annual rate of increase between 4 and 7 percent and the industry annual rate of increase touching 10 to 15 percent, there's a huge disparity between what more experienced workers earn and what their fresh-faced counterparts just setting foot in the company make.

The situation is compounded year after year, as those with the company for a longer period of time continue to earn comparatively less than those who've come after them. HR professionals and managers have been put in a bind by salary compression – they're forced to pay the going rate for the best of the new talent to hit the market even as they risk the ire and resentment of individuals who have slogged for the company for more than a few years, but who are earning a significantly smaller amount than those coming in, even with the annual hike in their salaries.

Older employees are forced to change jobs then, since they are likely to be paid the higher market rates by new employers, which means that more new employees have to be hired at current market rates, and more money has to be spent on recruitment and training costs and on higher salaries. This leads us to the questions - Isn't it more rational to increase the salaries of older employees on par or at slightly higher rates than those of their newer colleagues? Is it worth the low morale, frustration and reduced productivity that older employees exhibit when faced with the news that their juniors, people they have to take under their wings and train, are taking home more money than they are? Does this make for a workplace conducive to harmony and cooperation?

Employers are struggling to address these issues without emptying the company's coffers on salary alone. In an attempt to retain valued and experienced employees, they are offering perks like the use of company transport, phone bills at the company's expense, access to health clubs and paid vacations. Some companies are restructuring their pay levels in a new attempt termed broad banding where employers assume more flexibility in defining job descriptions and adjusting pay scales accordingly. Others offer bonuses and incentives on a performance-based model.

A job market with a limited amount of skilled labor and a large number of jobs that require highly skilled professionals gives employees the upper hand – they are able to dictate terms and threaten to quit if they're not paid what they think they're worth. But then, too much of job hopping is seen as a sign of instability in industry circles, unless the employee has something really special to offer in terms of skill and ability. At the end of the day, it's up to organizations to affect the trade off between retaining experienced employees at a higher pay or spending more to bring in new ones and train them well.

This article is contributed by Heather Johnson, who regularly writes on HR manager. She invites your questions and writing job opportunities at her personal email address: heatherjohnson2323 @

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Anonymous said...

Good article. This same sort of injustice is happening to me and a couple of my co-workers right now. I've been with this Company over 5 years now. A couple of new hires are making close to $2,500 more per year. I brought it up to my Manager during my performance review. He had the nerve to tell me that the "difference wasn't that much". I was fuming but had to hold back from telling him that if the difference wasn't that much, then maybe he ought to write me a check for the difference out of his own personal bank account and we'll call it even.
Just like the article said, morale and productivity have gone down since but professionalism on our part has not. This Company is notorious for treating employees with contempt and disrespect, always looking for ways to blame and find fault in everything we do. Almost diliberately as if they're doing everything possible to make you want to quit. There's nothing more I would love to do but at 51 years of age, that would be a mistake right now. Unfortunately, I think I'm going to have to continue to take the abuse as long as possible until something else comes up.

Centennial College said...


Just before few months my friend said there was a problem related to salary appraisal in his office, and a salary amount between junior staff and senior staff. He said there was a tough period in his company.

Human Resources College

Centennial College said...

Yes,such disparities we witness in day today life very much.In such scenario also HR plays a dominant role!
Human Resources College

amuthan said...

Bad experience. But,this issue is more common in growing markets where talent is at great demand.

Anonymous said...

Salary Compression might happen if the senior employee base is 'lazily' appraised over the years...thereby widening the void between what he gets today and what the recent inductee earns today.

Timely appraisals of the best is the indicator of company's proactive approach.

the recent industry earnings and