Earlier last month, Singapore news media Channel NewsAsia covered a story questioning if junior employees are getting paid less than new hires following the spike in graduate salaries. Coincidentally just days before, a tech worker in New York City became the latest poster child for pay transparency after finding out her company was paying more for her same job title.
This is not new news, but it calls into question the practice of pay compression, underlying issues, and its implications on employers.
Pay compression and what it costs
Pay compression is what happens when there is little pay difference earned by a newcomer and a more-experienced employee in the same job, or even between a junior- and senior-level employee in the same job family. According to the Society for Human Resource Management, it is often “the result of a market rate for a given job surpassing the increases historically awarded to long-term employees.”
Typically pay compression occurs when employers offer new hires above-average salaries to compete for talent without adjusting existing employees’ compensation. This is a rising trend not only in certain countries mentioned at the start of this post, but also across the board in different regions and industries according to Aon’s Human Capital Solutions.
A study by compensation data provider LaborIQ estimates that on average, new hires receive salaries 7% higher than what current employees earn in similar positions.
“Compression is bad because veterans, generally speaking, should get paid more than newbies, given that they’ve already proved themselves and are up to speed with the way their company works. When traditional salary ranges flip — when newcomers get paid more than longtime employees in similar roles — experts call it salary inversion.”
Aki Ito, Business Insider
It’s important to note that pay compression can also happen in other instances, such as: when a company increases the pay of a lower-wage junior employee (e.g. to comply with minimum wage) but not for senior employees, in mergers and acquisitions where teams have different pay structures, capped pay increases when there is a lack of career advancement, etc.
Regardless of the cause, pay compression can lead to negative consequences. Employee morale, job satisfaction and productivity levels can plummet, with turnover increasing as employees seek higher pay elsewhere. On a company level, this can also lead to an erosion of trust with existing and future employees, as well as other stakeholders.
The “loyalty discount” trap
Underlying this is also the issue of a “loyalty discount” trap where an employer takes advantage of an employee’s loyalty by offering them small increments instead of fair compensation increases or promotions. The employee who stays put through good times and bad is actually paying a price – a “loyalty discount” – when they could receive much more if they were to seek employment elsewhere.
“We’ve noticed for some time that incumbent employees are being punished in their paycheck for being incumbent employees,” says Stefan Gaertner, partner at Aon’s Human Capital Solutions. “If you’re an incumbent employee, you make 10 percent to 15 percent less than new hires.”
Take boomerang employees for instance, when they quit and then return to old employers, they tend to receive an average of 25% higher pay than before they left, though not in all cases. On a side note, people analytics solution Visier found rehiring on the rise, with boomerang workers accounting for one-third of external hires over three years.
When it comes down to job switchers versus job stayers, it seems that loyalty comes at a price – for employees that is.
Salary transparency: boon or bane
With pay disclosure laws starting to play out in parts of the world, salaries are becoming less of a secret and more of a public information. As companies are legally required to share their salary ranges in job postings, existing practices of pay compression and loyalty discount will come into light.
However, it does not mean an employer operating outside of those jurisdictions will be spared either. Even without laws in play, people are talking about salaries and secrets are likely to get out eventually. When that happens, the employer’s pay practices will be called into question.
Gaps and discrepancies in pay can cause employee dissatisfaction, tensions in the team and losses for the company. Even if a company manages to obscure salaries, their competitors may opt to disclose theirs, resulting in loyal but undervalued employees to leave for better opportunities.
In Singapore, close to five in ten employees surveyed said they would request for a pay raise, and 47% had plans to leave their jobs for higher-paying ones in 2023. Employers will need to review and adjust their compensation structure to align with their employees’ expectations.
Why salary range transparency helps
Introducing salary transparency in a company’s compensation philosophy can be a good opportunity to review any salary disparities and ensure unbiased pay practices.
Going into annual employee reviews, front-line managers can be better equipped to have conversations around compensation decisions and career progression with their team members. Rather than attempting to grasp at a vague criteria for a raise or promotion, it is a more objective and understandable approach to engage and motivate the employee.
Not only that, making salary ranges public can also build loyalty in the workforce by reassuring employees of the company’s fair and transparent practices. In fact, 91% of employees who believe their organization is transparent in their pay decisions process trust that their company pays staff equally for their work. This can ultimately help improve retention because employees can:
- believe they are fairly compensated,
- visualize a long-term career with the company, and
- trust the company
At the same time, this can help attract prospective candidates with not just the pay, but also the company’s values and policies as a whole.
If you’re interested to chat more about salary range transparency, speak with our friendly team here at JobWiz. For free posting of jobs with salary bands, visit our website.