It’s easy to feel trapped when we’re scrambling to fill hot jobs.
New positions keep coming, and existing positions keep opening. And to top it off, there isn’t enough talent to go around.
What’s a compensation pro to do?
Pay new hires almost as much as—or more than—long-term employees and managers?
It’s called salary compression, and it’s more common than you think.
We see it most in hot talent markets and at times of high company growth. Sometimes, it impacts entire companies—other times, it affects only specific departments.
But here’s the big question: Is salary compression avoidable?
Do we have to pay more than the market rate to attract talent? Do we need to push our budget just to fill roles?
One thing’s for sure—salary compression can be tricky to navigate. We address it head-on in the most recent episode of our podcast, Comp + Coffee, where we chat with Payfactors’ Director of Human Resources, Jo Rego.
- How (and why!) salary compression happens
- How you can prevent it from happening
- How you can fix it after it happens
P.S.: We have a lot of exciting stuff coming up on Comp + Coffee—you won’t want to miss out. Make sure to subscribe and rate us 5 stars!
For a full transcript of this episode, see below.
Shawn LaVana: We’re live. Good morning, Bill.
Bill Coleman: Good morning, Shawn.
Shawn: How are you today?
Bill: I’m fine. Yourself?
Shawn: Excellent, thank you. I’m really happy to be here today. I’m Shawn Lavana. I’m joined by Bill Coleman. Kaite Rosa here as always.
Kaite Rosa: Hello.
Shawn: We have a special guest, Jo Rigo.
Jo Rego: Hello.
Kaite: Jo is our Director of HR here at Payfactors.
Shawn: Good intro. Thank you.
Kaite: I thought you were going to skip that part.
Shawn: I wasn’t. I was going to come back.
Kaite: Sorry. [laughs]
Shawn: No, I was totally going to skip it. [laughter]
Kaite: You tend to skip the intro part.
Shawn: I’m bad at my job. All right, what we wanted to talk about today on today’s podcast is salary compression. Interesting topic which is why we brought our head of HR in today to discuss it. Why don’t we level set — Jo, what is salary compression?
Jo: Salary compression is when you bring an employee in at a higher level than– There’s a couple different ways to look at it, but one of the ones is you bring someone in because the market’s changed so that their pay is either close to or higher than their manager. The difference or the delta between the manager and the employee is small. So, it gets compressed.
Shawn: Why is this an issue?
Jo: Internal equity issues. People feeling valued. It’s hard to keep up with the market, especially in a hot market where the manager can sometimes feel like, well, I don’t want to pay that because it’s too close to my salary. You might run into issues where managers have a bias and they don’t want to hire someone that is going to be too close to them in salary.
Bill: Or the manager feels undervalued or taken advantage of in some ways.
Kaite: Is this is most common in certain types of companies or does this happen across the board?
Jo: I don’t know if it’s certain types of companies. I think you see pockets of it in certain positions where there’s a lot of demand and not a lot of candidates out there.
Shawn: Supply and demand issue.
Jo: You’re right, exactly. Supply and demand issue.
Shawn: Data scientists, engineers.
Jo: Right. Yes, I don’t see it as a across the board issue. I think that it’s very limited.
Kaite: Is this more comment where I would say that Pay Factor is probably a high growth company. [laughter].
Jo: As would I.
Kaite: Is it more common in high growth companies or does it not matter, does it not discriminate?
Jo: I would imagine that you’d see it more in high growth companies but again, even in companies that aren’t in high growth mode, if there’s a pocket of their population where they are expanding or they’re looking for a specific type of position to be filled and that position regardless of the company is in high demand, you could still see it there.
Kaite: Got it.
Bill: I think there will be a surprise in companies that — in places where the minimum wage is getting about a jump or has just jumped to $15 an hour not smoothly but the big jump and you’re going to have managers and their underlings either getting the same pay —
Shawn: Getting pretty close.
Bill: Yes, exactly. It will catch people off guard I suspect in some of these retailer [unintelligible 00:03:44] places. Places where there’s a lot of people that are at the lower end of the pay scale.
Shawn: Yes, and obviously that can happen because of all the recent votes that happened in November where either States, municipalities where that is rising but there’s even a big proxy effect that we’re seeing because of Amazon announcing their raise where they’re effectively the minimum wage [unintelligible 00:04:05] in a lot of areas now. That might be jumping up in a big way no matter what even if it’s not [crosstalk]
Bill: Competitively if not legally.
Shawn: Yes, exactly.
Bill: Or legislatively, I guess we could return.
Shawn: Legislatively typically, is more a ramp. You’re right. It’s like this year and this year and this year and it goes up a little bit every year but now Amazon’s like we’re just going to go across the board $15 to $18 an hour depending.
Bill: Because we can.
Kaite: What do you do in these situations and how do you- can you avoid it?
Jo: I don’t know that you can avoid it. I don’t know that anyone has the right answer to it either. I think it’s something that is case by case. I think companies, if it’s a high growth company absorbing just bringing every manager up to increase their salaries so that the band or the difference gets bigger, that can be hard to absorb from a company perspective. It might also not reflect on where the manager is personally. I think you have to look at it case by case, but Bill, I’d be curious just to hear your thoughts.
Bill: You managed to it I think. You have two things. I think two people you can approach. You have the manager and the employee for lack of a better name [crosstalk]. The prospect, right. Look for different ways to pay them, whether it’s is there a signing bonus or something that will keep the prospect more in line with your structure versus just a starting salary? Another issue that comes up in compression is the new hire is higher than all of the existing people doing the same job which is a second factor in this discussion that it’s a little less clear.
The manager knows what his or her employee is getting paid. The colleagues don’t necessarily know that but when they do find out, it’s a whole other issue. Do you want to raise all of your engineers, to use Jo’s example, up to the level of the newest hire or do you want to have a plan to do that over time treat this new hire as an anomaly and make a plan so that the new hire moves up slower than the current employees and they move up faster and catch up over six months, a year, two years or whatever?
Shawn: Can you do that in States where it’s equal pay for equal work?
Kaite: I was just going to ask?
Bill: It depends on the rules.
Shawn: How gray it is.
Bill: Right, and what the timeline for correction is. Although can you — I think maybe I misunderstood the question. The question is can you hire somebody in at —
Shawn: More or less, yes.
Bill: — at a different rate at a higher rate? I don’t know what’s —
Jo: Yes. I know the law has gone into effect and I think companies are still grappling with it. The law doesn’t necessarily take into effect market conditions.
Shawn: This is only here in Massachusetts.
Jo: Correct, yes. Sorry, just in Massachusetts. I think it depends on a lot of factors, again, what the structure and the gender of the team looks like. Is it a team that everyone does exactly the same thing? Are they similar? You can have teams that have a lot of different people doing similar but different jobs. I think there’s a lot of factors there but I think to Bill’s point, it’s still a little bit gray.
Shawn: We’re talking though a lot, and it’s just because of our experience, high growth organizations. What if you are a much more mature organization 20,000 employees, you have your structures. Are you less likely to run into this? At the front end, would your recruiting team just be like, “Sir, you make too much.” Would that be an issue?
Jo: I would think in companies that are larger in scale, you probably do run into it less because I do think there is more of the this is what we pay, this is the range, we don’t deviate from this and you’re outside of the range and we can’t even talk to you.
Kaite: Yes, you wouldn’t get through that initial call.
Bill: That’s really similar and tying back the last question, California, with their you have to post the salary for the job or that’s the way people are responding to the rules out there. [crosstalk] Self-select, right. That the employees that are coming in or the candidates that are coming in are going to be picking jobs that match their salaries. I do think the high growth companies are much more- they’re high growth and they’re faster and more nimble about making decisions which can help and hurt in this situation because it’s like, I met Shawn, I want Shawn, we’re going to hire Shawn and Jo, make it happen.
Kaite: Whatever it takes type of a thing, right?
Bill: Whatever it takes and then we’re going to deal with the problems after the fact whereas a large established company has rules and guidelines and it’s a lot harder to just say oh, we’re going to pay outside the band.
Shawn: It would be almost impossible for it to have an otherwise, for salary compression to have an otherwise in a large organization of like– You’re going to have here’s your promotional path. Each job has a different grade with it which means you’re going to get paid like so, it can’t really have an otherwise in that kind of a structure unless somebody is coming in from the external.
Jo: Yes. I don’t ever like to say it can’t ever happen but I don’t think- it’s unlikely. [laughter].
Bill: Well, I would say in large organizations with large teams, you’re also probably more likely to have a broader spread of people and you’re more likely to have somebody on the team who is earning significantly more than everyone else or significantly more than the midpoint of the range. That new hire comes in and they actually will fit in better to the spread.
Kaite: What happens in situations where if you’re at an organization that you give annual increase of 3% and you’ve got someone who’s tenured and been here for a decade. Then you’ve got the new guy in town or girl in town who has kept up with market pace. What do you do in that situation?
Jo: I think it’s going back to Bill’s point of you have to then look forward. What is the plan? Again, can companies absorb giving someone who’s been at a company for 10 years, a 10-20% raise to get them to market at one time.
Kaite: I guess it’s on you the organization then if you haven’t been keeping up with the market at all?
Jo: Right, because that becomes a retention issue. You’re going into other HR issues. It’s not like you’re moving on from one, you’re adding on more issues. I think it’s about coming up with that long term plan. Maybe if you’re a company that does a 3% every year, you take a look at all your employees, figure out who’s below market and then you know this person or this group of people, this year they’ll get 4%, next year they’ll get 5 % or whatever the case may be to try and get them to market over a period of time so the company can absorb the additional costs.
Kaite: A follow on question to that is if you realize that’s happening in your organization and HR is looking to make up for that, are you messaging that to the employee or are you doing it like you said normally with 3% this year you’re getting 4%?
Jo: Yes, I think it depends on the company and the company, the manager, risk tolerance. I don’t know how many companies would be super upfront about saying, “Oh we’ve been paying you under market.” I think that’s a tough thing to say.
Shawn: It’s a tough conversation.
Bill: It’s not going to show up in the newsletter.
Shawn: Although, couldn’t their- could an example of that be like Salesforce where they blatantly took a PR effort to do it and they took the [crosstalk].
Jo: Yes, status, correct.
Shawn: But they were very bold about that.
Jo: Again, I think it depends on the why. If you’re doing it to be in compliance with the laws maybe you do have to be more upfront about it to show that you have a plan because that’s part- especially Massachusetts, that’s part of the law that you have to show that you have a plan to correct it. Part of that plan might be publicizing it to your employees, but I can also see why you wouldn’t want to and you’re just doing it on the back end. There’s no requirement that says you have to tell the employees why you’re doing it. I guess to answer your question, I don’t know. I think it really depends on the–
Bill: I imagine it makes a difference whether or not your employees see that there is a problem. I think companies and just human nature is you don’t want to announce that you fixed a problem that nobody knew existed. If you have people complaining about something you’re saying, “I feel underpaid and blah blah blah,” and then this CEO or the head of HR comes out and says, “We’ve heard you and this is what we’re doing.” That’s a win in most cases. If nobody is complaining about something and you say, “Oh by the way we’ve been underpaying people for the last 10 years.”
Kaite: That’s like opening a Pandora’s box, probably.
Bill: But I did want to get back to something, Kaite, in your original question HR having raises of 3% a year whatever. In theory, those raises should be in theory exactly the same as what that person outside the company was getting. You were saying they’re keeping up with the market, your raises inside the company should be keeping up with the market. In fact, the same thing should be happening that the band is moving up and that the person is moving from a low-level engineer say to a higher level engineer one. They should be getting raises because of the value of the dollar, cost of living is going up and also their skill set and their value in the marketplace is going up.
Shawn: Right. It should be what the market dictates not just what your budget has room for.
Bill: Correct. I just want to make sure that was clear because although we sometimes joke that it’s always 3% or give or take.
Shawn: [unintelligible 00:15:04] 3.1.
Bill: There’s a lot of volatility.
Speaker 3: [unintelligible 00:15:07].
Bill: Plus or minus a tenth of a percent but that’s the way the markets have been moving. Now that’s again is a —
Shawn: For some jobs.
Bill: Past podcast, I was going to say, it’s not all jobs are moving at that average. You’ve got to be careful because these hot jobs the ones that are likely to have compression are also the ones that are likely to move way faster at a higher rate than the overall average.
Kaite: If you’re not adjusting their- like you were saying you run into the retention issues and all of that.
Shawn: Isn’t it though and maybe this goes back to something we were talking about earlier where when you talk about equal pay for equal work, for example, it gets a little grayer there I know, but isn’t the easy answer here potentially just to have title shifts and slight job description shifts?
Jo: It’s not just about the title and especially if you’re tying it back to the equal pay laws that are —
Shawn: Correct that’s where it gets messier.
Jo: Yes and no. I think just the titles in and of itself don’t matter, to be honest. They matter to employees so don’t take it the wrong way, but I think it’s the jobs description and really the job description of what people are actually doing not just the job description of what you think a job should be doing but what is the person in the job doing because I think there’s a lot of times there’s a doubter there.
You create a job description, you think this is what they’re going to do, they start the job and then you find out they have additional skill sets or things change and morph and six months later, a year later, they’re doing something either a little bit different or vastly different so the job description should keep up with the person.
Kaite: But how often realistically and maybe there’s no right answer or no way to know this but how often are most companies updating their job descriptions?
Jo: I don’t know that there is a set rule on it. I think best practice is once a year. I think that’s hard to do.
Shawn: But probably even too slow arguably right? Perfect world, right? That’s an improvement.
Kaite: Especially depending on those like if it’s a hot market job or a hot job right?
Kaite: That could be changing very quickly. More high growth companies.
Jo: Exactly. In an ideal world, it’s yearly, potentially even more than that for those specific jobs but it’s hard to do. I think historically, it’s sort of been filed. [unintelligible 00:17:43]
Kaite: Or we need to do it [unintelligible 00:17:46] thing?
Jo: Right or it’s we’ll do it when someone gets promoted or they switch their job. Then you look at it. I think it’s been more one-off just from my experience and as needed, but I think best practices to do it on an annual basis.
Bill: Well and I’ll probably say what everyone’s thinking and nobody wants to say is that in this comp and coffee world of the HR people talking that’s all well and good but outside the door and we’re all the line managers are there like, “Find this, we’ve got to do this for HR. We’ll sign off on the job description but this is what I want you to do.” There’s this black market underworld of managers telling their employees what their responsibilities are that are different from what’s been documented.
Shawn: Right but isn’t this an entirely different podcast topic but wouldn’t that be interesting though isn’t it more about communicating the value [unintelligible 00:18:48] HR communicating the value of why this is important? What it really means to you and what effect it’s going to have on your talent whether you retain them or not effectively?
Bill: It ties into everything, to performance reviews, to salary, to even to in some cases Fair Labor Standards Act stuff. Are you exempt or non-exempt? Back to what Jo said, what are you doing? Not what the papers say your job is supposed to do.
Shawn: Pin there for a future topic. Anything else we should talk about with salary compression today?
Kaite: Where does it leave, where does salary compression start? Is it a chicken versus the egg scenario?
Jo: To me, I think it has to start in a hot market because otherwise, you’d be able to plan for it and know where the market is.
Shawn: If the supply exceeds the demand there’s going to be less rising costs. Somebody would be effectively a perfect revolver, somebody who would be happy to have the job and take it at what would be the fair market wages as opposed to saying, “I have over another offer of the 20K more than you’re giving me.”
Kaite: I guess what I’m asking though is, internally is it an issue? The hiring manager is like, “I found this great candidate, I want them at whatever the cost is” or is it kind of [inaudible 00:20:12]?
Jo: No, I think a compression issue becomes an issue when the manager has an issue with it. I think its —
Kaite: I see.
Jo: I didn’t say that very eloquently but — [laughs]
Bill: Right, you trigger the possibility, the way Kaite said, which is when you start as an HR person, you start hearing things like ‘superstar’, ‘gotta have this person’, ‘worth whatever we can pay’ —
Jo: ‘Doesn’t matter what the budget is’ —
Bill: Right, those sort of things, that kind of argument, that’s where you are triggering a chance of somebody at one level being paid very close to or even more than somebody at the next level above them.
Kaite: Got it.
Bill: Then, what Jo was getting at was that it’s not a problem until somebody has a problem with it.
Kaite: So you’re managing to not have- how do I word this? You want to manage to not have someone have a problem with it, is that accurate in what I’m trying to say?
Bill: A mature manager will be like, I am okay with this because this helps me get my job done and I’m going to say– I’m going to get my bonus or incentive pay out at the end of the year if I hire that person, but the newer managers or people that are more pay sensitive or pay driven or more hierarchical in mind will then have a problem with it. I have seen in past jobs where managers very cleverly do that and then say, “Now I need a raise.” It’s a think-issue, it’s like I’m going to hire to work for me that makes almost as much as I do, and then use that as an excuse. [crosstalk]
Jo: Or leverage.
Shawn: Does that work?
Kaite: Aren’t they going to be sad when — [laughter]
Shawn: It depends. I’ve seen it work. Like everything else in HR it comes back to a people problem. That’s what we’re dealing with here.
Jo: It’s true. I think that’s the point, right? It’s about managing the people in the situation. It’s not necessarily managing the problem, but yeah I’ve seen it work and I’ve seen it not work, to your point.
Bill: Yes, exactly. If I’m not wrong I think I’ve benefited from it once, although I had nothing to do with it. [laughter]
Shawn: I think I’ve done it once, matter of fact, I’m giving you my playbook. [laughter]
Bill: I’m not that kind of man.
Shawn: By the way, Jill, Bill needs to meet with you at– [laughter] Somebody’s making almost as much as he is.
I think we’ll leave it there today. We’ll be back with a lot more in the new year here. We’re going to get more regular with this. We are very excited to have a whole litany of topics. We have a producer now.
Kaite: Yes. Shout out to Tessa.
Shawn: We are getting legit. If you hear us mention Tessa, she’s our new producer.
Jo: Hi, Tessa. [laughs]
Shawn: Give her some feedback and comments on LinkedIn and the comments of iTunes.
Kaite: Rate us, as always. Hit us up on Twitter @payfactors. What else, where else can they find us? Email us: firstname.lastname@example.org.
Shawn: In your local coffee shop. They can find us there.
Kaite: Perhaps. [laughs]
Shawn: Those smooth, dulcet tones.
Kaite: Shawn just sitting there typing out some- [laughs]
Shawn: There’s probably a pretty good chance.
Alright, well, thank you everybody for your time today. We look forward to the next one. If you have any feedback in the meantime let us know. Thanks, everybody.
Jo: Thank you.
[00:24:12] [END OF AUDIO]