- Blog post
Salary compression: How managers can ease the sting
I had a bad reaction after reading a recent article about “salary compression” – that is, what happens when starting salaries for new recruits to an organization increase faster than those for existing employees.
I recognize the problem. Older workers tend to resent that their annual percentage increases drop the longer they stay with the company. In the article, the solution was to make them happy by giving them perks like free cars, free cell phones, free health club memberships and even all-expenses-paid vacations.
Rewards like these are nice and should be given when appropriate. However, there’s another solution, one that has nothing to do with money or giveaways. It’s called “managing expectations.” That’s something good leaders are supposed to be able to do, right? In fact, if one of my managers came to me and said, “My older (higher-paid) workers are ticked off because they’re getting 2% increases while my younger (lower-paid) workers are getting 5% raises,” my first reaction would be, “Why have you been avoiding an adult-to-adult conversation with your older workers?”
Dissension over salary compression is a management problem, not a money problem. Managers need to think of individual compensation as an ongoing dialogue. It starts in the recruiting process and is revisited each year at salary review time. Successful managers talk candidly to their people about pay expectations. They describe salary compression. They do simple math; for example, explaining to an $80,000-a-year veteran that when he gets a 2% raise, that’s $1,600, whereas if a young $30,000 worker gets a 4% raise, that’s $1,200, significantly less in terms of hard dollars.
Anger about salary compression isn’t about logic. It’s about emotion, something managers need to be very effective at handling.
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I have to say, this is not surprising. I think there is a huge disconnect between HR, and the remainder of the work force. Sure, this is about emotion, somewhat, but it is fundamentally about why we come to work. At some point, HR conditions reason out of its ranks, and replaces it with appeals to more complex attitudes like loyalty and commitment. We come to get paid. Period.
First, I’d say your analogy is exaggerated at the surface. Two people sharing similar roles will never have the disparity you suggest. By the time an employee well over doubles their income, they must be on the cusp of retirement, and many levels of management above their entry condition.
Moving on, explaining to a 30 year veteran how their $1600 is more than their new hire couterpart’s $1200 is painfully empty. It all but says boldy their experience is not valued. The old adage ‘figures don’t lie, but liars figure’ fits perfectly here. The real measure is not in dollars, but buying power. The $1200 is, after inflation, at least a small bump in disposable income. The $1600 is, after inflation, actually a cut in pay for the experienced employee. And they KNOW this.
The preponderance of the literature is in stark contrast to what you have written here, and a great deal of it comes from within high levels of HR, so it’s easy to dismiss your opinion as an outlier.
In the end, you are writing this piece at a time that makes it easy to take a tough stance. We are kneeling on the edge of a recovery. We have had years in which pay was frozen or worse cut, and employees truly felt lucky just to have a job. BUT, as the market rises from its knees, I have confidence an organization led using your approach will be hardest hit. The children that don’t seem to understand your wisdom will demonstrate with their notice that you are woefully misplaced on this issue.
This article should win an award for worst advice ever for a company. The fundamental premise is wrong, it is exactly about logic and not about emotion. Companies that continue to compress salaries are going to lose talent because, at the end of the day, employees are there for the money. Just like companies, at the end of the day, are there to make money.
The new work environment has it beneficial for employees to jump from company to company to make more money. The best advice for companies is to recognize how to take advantage of this trend. By offering employees reasonable increases in pay, year over year, they can drastically reduce the costs of turnover and losing talent that other companies are claiming are ‘normal costs of business’.