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March 10, 2009

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Congratulations! Your employees are satisfied with the company and with their jobs, and that means your employee turnover is incredibly low. Obviously you're doing a lot of things right (some of which, we hope, you've picked up in these pages.) There might be just one little problem looming on the horizon, though & pay compression.

To understand the problem, we talked with Laura Collins of The Collins Group, a human resources consultant with many years' experience. Pay compression, she says, happens when routine pay increases too closely match increases in your pay scale.

"Pay ranges are typically adjusted each year, perhaps 3 percent to 4 percent in the current market," Collins explains. "Then you have people in the company getting 3.5 percent to 4 percent pay raises each year. So the pay scale moves up in this slow, regular process, and people remain at the same relative point on the pay scale. So you can be in a job for 10 years, a good performer, getting 4 percent a year increases and not even be at the midpoint in the salary range, because the range keeps moving up pretty much at the same rate."

Compression affects ability to hire. As long as employees are happy, why is that a problem? Maybe it isn't, unless you want to hire someone. Collins gives the following example: A recruiter might ask the hiring manager for the qualifications the company needs, the pay grade, and how much money to offer a candidate for the job. "The manager says, 'I need someone with 10 years' experience. I've got someone who's been here already for 10 years, and we can't have the new person making more than he does.' So the recruiter puts ads in the paper, offering $50,000, because that's what the current employee makes. No one applies, or the ones who apply say, 'I make $65,000 right now, and I only have six years' experience. But I know that software, and if that's what you want, you're going to have to pay X,' " Collins explains.

"If you want to keep the skill level and the talent level as high as you need it to be for the company to be competitive," Collins says, "sometimes you have to bite the bullet and say: 'The problem is not how much people out in the market are saying this job is worth. I can't do anything about that, that's just reality. The problem is, my people are not being paid enough.'

"As a consultant, I was working with a company hiring patent attorneys," she says. "We were staffing up a whole patent law department. The company had about a 2.5 percent turnover rate. They had people who were at the company for 25 or 30 years. Good performers were not even in the first quartile of the salary range." After performing salary surveys, Collins reported to the company that in order to hire the talent it needed, it had to increase salaries to existing workers. "We were in the position," she says, "of needing to pay new hires $20,000 more, for less experience. They gave all their patent attorneys a 7.5 percent or 8 percent increase, across the board."

Data critical. Before you find yourself in a situation like that, Collins advises that you look closely at your salary ranges at least every other year. "The data are critical," she says. She also recommends that you review the surveys with a different focus than you may have in the past.

"The compensation department generally does salary surveys," Collins says. "But their purpose for doing them is to make sure their salary system is comparable to the competition. But the compensation department often does not have accountability, responsibility, or very often access to the information that says what current employees are actually making. The people who see that are the recruiters. So someone has to sit down and compare what the salary survey is saying with current payroll information.

"You have to do more than just give people cost-of-living increases," Collins asserts. "Managers have to bite the bullet and be prepared to give their better performers more money. Give that great performer a 7 percent increase and give the mediocre performer 2 percent. If your salary range goes up 4 percent, and you're giving strong performers 7 percent or 8 percent increases, they are moving up in the range."

Pay compression can also result in discrimination issues. The law firm, she says, "couldn't hire someone from the outside because we were going to be discriminating against long-established employees."

Collins explains how easily such an action could be construed as discrimination: "If someone is over 40, has been with the company for 20 years, now he or she is in a protected group. And who am I bringing in? A guy who's 30, has much less experience, but the market demands that we pay him more." Businesses that are largely female can face gender discrimination problems due to pay compression if new hires tend to be men.

Compression may necessitate increases. What if you're already suffering from pay compression? Collins says you'll need your public relations skills. "Your job as a human resources professional is to raise issues and get them in front of the people who can make decisions about what the changes should be," she says. "I know too many HR people who don't see their role as going into the CEO's office and saying, 'Let me talk to you about this problem. It isn't because I'm not doing my job to recruit and to find the best people for you. We've got a more fundamental problem here.' In the long run, the HR professional's job is not to say 'They won't let me,' but to go in and say 'My role is to educate my management team so they understand what's going on.' Then if [management decides] not to do anything, at least they have the information in front of them, and they have good reason to anticipate what some of the consequences are going to be."

"One thing I've seen organizations do," Collins continues, "is rather than take that hit all at once, they bring people up in stages. So I'll give everyone in a certain job group a 4 percent increase next July, and another 4 percent in January. If you are doing this, and someone brings a claim of discrimination against women or older workers, you can show you're in the process of bringing your protected group up to par with people you bring in. But you have to stick to it. That's when the HR person has to go back to the manager and say, 'Remember we need to give the other increase now.' "

Can you ignore the problem of pay compression if nobody's complaining? If current employees are happy with the salary they're getting, why rock the boat? Because, says Collins, the demands of a free marketplace require it. "That's what companies have to come to terms with--the reality of what the market demands," she says. "Because your only other choice is [to] get second-quality candidates. You get the people other companies don't want. That's why I believe very strongly in the critical role of HR to educate management as to what's going on. You probably won't have to [make adjustments] for every job in the whole organization, but sometimes you'll have to do it for certain job groups that happen to be very competitive."

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Filed Under: Workplace Issues

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