The annual employee pay and performance review period is an opportunity for organizations to take stock of their workforce. Yet numerous market and workforce dynamics have challenged companies over the past few years. Tight labor markets, the widespread turnover seen in the “Great Resignation,” the popularization of quiet quitting and inflation concerns are driving wage growth. This results in many employers offering above-average salaries to new hires to compete for talent — salaries that, in many cases, are higher than the pay of incumbent employees at the same job level and function. Known by reward professionals as “pay compression,” the trend of hiking starting salaries without reviewing and adjusting existing compensation can lead to or exacerbate pay challenges from employees.
To add to this, pay transparency trends increase the likelihood that current employees know what salary ranges are being offered to new hires and where they stand in comparison. Therefore, pay compression can also lead to other significant workforce issues, including higher attrition if employees begin to feel they are underpaid or undervalued.
“Pay compression can affect any level of worker within any organization depending on a company’s actions regarding its skills or talent needs,” says Tim Brown, a partner in Aon’s Human Capital Solutions practice. “It’s important that in the competitive job market, employers still establish salary bands that are in line with current pay structures and then adhere to them for new hires and current employees alike.”