Pay compression – the reality of relativity


A noble gesture

As mentioned in a recent New York Times article, Gravity Payments CEO, Dan Price, had an idea while out hiking with a friend who shared how difficult it is to make ends meet on $40,000 a year. Realizing that some of his own employees were being paid at or less than the $40,000 mark, he decided to increase all salaries to $70,000 a year, reducing his own million-dollar pay to cover the cost of the increases.Paying_Hands Though it may seem like it, this wasn’t exactly a spur-of-the-moment inspiration. As the article reveals, his personal history had a significant impact on his decision as well.

The idea of raising low wage earners’ pay to provide them with a livable wage is a viable concept, if handled in an effective manner. For example, the proposal to increase the federal minimum wage to $15 an hour, if approved, will be a staggered implementation that should give employers time to review and update their overall pay plans.

No good deed goes unpunished

When I heard about Mr. Price’s pay initiative back in April, my first thought was that it’s a recipe for an employee morale killer. The article mentioned above confirms that supposition. Increasing pay at the lower end of the spectrum always affects employees being paid at higher levels. While some may view it as moderately demotivating, others may view it as a plain old slap in the face. Though such a plan pushes lower paid employees up a rung or two, it also pushes mid-range employees to a lower level on the overall scale.

Unless pay at higher levels of the organization is also adjusted up, increasing only the lower pay levels compresses some of the higher levels into what essentially becomes a new lowest level of pay. Employees who spent years gradually climbing to a higher level of pay may find themselves pushed back down to the lowest rung of the corporate ladder. They’re not receiving less pay but they may think, “what’s the point of working hard to get to a higher pay level when all I have to do is hang around until the pay catches up with me.”

It’s all relative

If you decide, whether due to minimum wage increases or you just want your lower level employees to be able to pay their bills a bit easier, that it would be a good idea to raise the lower pay levels within your organization, think about how that would impact the other levels as well. Will it create pay compression, resulting in a morale issue for another sector of your workforce? Will it send the wrong message about how employees are valued? Will it cause seasoned employees to leave the organization?

Though there are a few exceptions, for example an individual contributor that brings considerably more to the job, pay structure should never be based on employee criteria. Pay should be based on sound business principles that reflect the market value of labor supply and demand, while addressing internal equity.

If you’re new to compensation planning or an old hand struggling with issues like internal inequity, pay compression, or any other wage wrinkle, seek help from a skilled compensation expert. You can find them all over the place, but would probably be better served by networking within your area to find someone who can help you maneuver through pesky pay pitfalls. And, you can always find help at compensation.BLR.com.

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