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Addressing pay compression: Balancing internal equity and external market factors

Pay compression refers to a compensation scenario where the difference in pay between talent in various job positions or levels becomes relatively small, despite differences in experience, skills or responsibilities. This can occur when new hires are brought in at salaries or pay rates close to or even exceeding those of existing workers who have been with the organization longer or hold higher positions.

Pay compression can lead to internal inequities, reduced motivation and challenges in attracting and retaining talent. It’s essential for organizations to address pay compression to maintain a fair and competitive compensation structure.

Understanding internal equity

Internal equity refers to the fairness in compensation among talent within the organization. It ensures that individuals performing similar roles or possessing comparable skills are paid similarly. This consistency promotes worker morale and reduces potential conflicts arising from perceived unfairness.

External market factors at play

While internal equity focuses on fairness within the organization, external market factors consider the broader industry and geographical context. These factors encompass current salary trends, regional economic conditions and competitive practices. Staying informed about external market dynamics is essential to remain competitive and prevent talent drain.

The role of IT hiring managers

IT hiring managers play a pivotal role in maintaining equilibrium. They must strike a balance between internal fairness and market competitiveness. When new hires command salaries similar to existing talent, it can demotivate the latter and even lead to attrition.

To avoid this, IT managers need a well-rounded pay transparency [link to pay transparency blog] strategy.

Balancing internal equity and external market factors

To identify and overcome pay compression in your organizations, consider implementing the following tactics in your pay transparency strategy:

Salary structure adjustment: Reevaluate and adjust the salary structure to create more differentiation between job levels and experience levels.

Merit-based increases: Implement performance-based pay increases to reward high-performing talent and maintain pay distinctions.

Market-based adjustments: Regularly review market data to make salary adjustments that align with external market trends.

Internal equity analysis: Conduct internal equity audits to identify and address any pay disparities.

Career progression opportunities: Promote internal career growth and advancement to encourage talent to strive for higher-level roles with increased compensation.

Transparency and communication: Clearly communicate the compensation philosophy and practices to employees to build trust and understanding.

Salary negotiation guidelines: Establish clear guidelines for salary and pay rate negotiations to ensure fair and consistent outcomes.

Total rewards approach: For full-time employees, consider a comprehensive approach to compensation that includes benefits, bonuses and incentives in addition to base salary.

Training and education: Provide training to recruiters and hiring managers on pay compression issues and fair compensation practices.

Regular reviews: Periodically review and adjust compensation practices to address pay compression and maintain a competitive compensation structure.

Balancing internal equity and external market factors isn’t just about numbers; it’s about creating a work environment where fairness, motivation, and competitiveness coexist. Striving for this equilibrium ensures that your organization can attract, retain, and motivate the best talent while fostering a positive and harmonious workplace.

Download a copy of our infographic today for strategies that will help combat pay compression with transparent pay practices.

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