When it comes down to making the decision to stay or go, employees are more closely scrutinizing pay parity within the workplace than they have in the past. Not just equal pay for equal work and talent, but whether new and less-qualified employees are being paid the same, or more, than seasoned staff. Pay compression could be putting the squeeze on you and your best employees. If you’re not careful, it might just squeeze them right out your door.
There is a lot of focus these days on excessive executive pay versus the pay rates of everyone below them in a company. Such pay gaps have grown much, much wider for large corporations during the past few years. But the reverse can also happen when companies don’t keep pace with current acceptable pay rates for positions across the pay-grade spectrum. We call this pay compression.
When the market value of a job has outpaced what you are currently paying existing employees to do that job, you may be forced to offer higher salaries or other compensation to new recruits doing the same job. Now the newbie with less experience is earning the same as, or close to, the more experienced, higher-level employee who has been with you for 10 years. Ouch. While the newbie may initially win out in this scenario, everyone else loses — including your company.
Pay compression is a common phenomenon in small- to medium-sized businesses in the green industry. Businesses that may be resistant to change can often find themselves not only behind the times when it comes to market trends, but also market wages. Fear of economic uncertainty can cause many businesses to freeze employee pay — both intentionally and unintentionally — for long periods of time. Pay compression creep, as I like to call it, can build up over time to the point where it’s difficult to remedy.
What happens when your existing grower or department manager finds out the newly hired, less-experienced grower or manager is making almost as much as she is? She’s probably going to start looking for a new job. This is not a judgment on the potential or future capability of the new hire, but rather a matter of morale and self-respect for your existing employee. When you, as an employee, discover such wage inequities are affecting you directly, it’s severely demoralizing and demotivating, to say the least. The only leverage you may have, as an employee, is to leave.
Another form of pay compression can happen when employees in lower-level positions, with very different job duties and responsibilities, are paid wages that are too close to those in more senior positions. In the green industry, competition for labor is very tough — employees at the lower end of the entry spectrum are often commanding much higher hourly wages than companies are used to paying. Minimum wage laws are also changing in many parts of the country, which can also contribute to pay compression. This may not leave much of a gap between what your seasoned manager and cashiers are earning.
If you find yourself in a situation where you’ve allowed wages for seasoned staff to stagnate — and are now faced with raising the bar in order to recruit new quality employees — there are some corrective strategies you can employ to achieve future balance.
First, be open and transparent with your staff about how future increases will be determined and if there is an annual percentage cap on how much of a raise an employee an earn. Be careful though not to suppress your compensation potential too much. You’ll only hurt yourself overall when it comes to keeping and attracting the best talent if you’re stingy.
Next, see how you can supplement existing employee compensation with additional benefits, such as additional flexibility and PTO. Trade-offs in time can really round out employee satisfaction with their overall compensation. Review your vacation policy and make sure that talented, seasoned employees don’t have to wait excessive time periods before they earn reasonable time off. If you trusted your manager enough to hire them in the first place, then they shouldn’t have to wait five or 10 years for three weeks of paid vacation.
Finally, use better bonuses as a tool to retain valuable employees and offset concerns about stagnant base salaries. If you’re behind on appropriate base pay increases for existing staff, balance it out with a better bonus, and consider increasing their bonus earning potential moving forward. Make sure more tenured staff can earn bigger bonuses than new hires — if their performance warrants it, of course. If you don’t feel your seasoned employee’s performance warrants an increase or a bigger bonus, should they be working for you at all?
An important consideration for all businesses is that pay compression, while not technically illegal, can cause you legal strain if it affects a protected class of employees, or if you operate in a state with pay inequity laws in effect.
Prevention is always the best medicine for pay compression. It’s going to cost you a lot more to fix this problem if it exists in your company than it will to prevent it from getting out of hand along the way.