How to Fix Salary Compression and Increase Retention

Pay is one of the most important factors in taking a job offer or remaining at a company. According to iHire’s 2022 State of Online Recruiting report, nearly one in five (19.3%) candidates who were seeking a new job indicated they were doing so because of unsatisfactory pay. On the employer side, 54% of companies shared that they experienced turnover in the previous year, meaning the Great Resignation is still going strong.

Workers seeking greener pastures with other companies often earn large pay increases, which may also mean receiving comparable salaries to their new coworkers. Between April 2021 and March 2022, the median job changer increased their pay by 9.7%, while the median worker who remained in the same position experienced a loss of 1.7% when factoring in inflation. This pay differential, known as salary compression, can lead to high turnover if it’s not addressed.

What is Salary Compression?

The most common form of salary compression occurs when a new hire earns the same or higher salary as existing employees with more experience. However, it can also happen by paying a newly promoted worker more than peers at the same level in the organization or when nonexempt (hourly) employees earn more than their supervisors who work the same hours without overtime pay.

Among the 41.2% of employees who voluntarily left their job in the past year, 43.4% left due to unsatisfactory pay, according to iHire's Talent Retention Report. As salary information becomes more commonly included (and sometimes required by law) in job postings, existing employees are increasingly aware of pay compression issues in their offices.

Replacing workers can cost 30%-200% of an employee’s annual salary, so being proactive in keeping existing employees engaged and on your team is also a bottom-line issue. With that in mind, here’s how to fix salary compression (and prevent it from coming back).

Conduct a Self-Audit

You can’t fix issues you don’t know about, so the first thing to do to address pay compression is to open your books and see how your employees are compensated at all levels and note any inequitable salaries. As of 2021, 58% of US organizations voluntarily conduct pay equity reviews to identify pay differences between employees performing similar work, and 83% of employers adjusted employee pay after the review. Doing so is a great way to build trust within your organization.

Budget for Merit-Based Raises

Rewarding high performers for their efforts goes a long way toward retaining top talent. Companies are projected to dole out a 3.4% salary raise in 2022, but job changers are seeing close to a 10% pay increase by jumping ship. Earmarking space in your budget to further reward your top employees (such as retention bonuses) shows they are valued within your company and can keep them from seeing if the grass is greener elsewhere.

Create Your Account Today

Start Hiring

Address Pay Inequities BEFORE Posting a New Position

Given the increased demand for posting salary information in job postings, chances are good that existing employees will see what you are willing to pay to recruit new talent. If that doesn’t align with what they are currently making, that will breed contempt in the workplace. Proactively fixing salary compression within your organization before adding new staff will prevent these issues from arising.

Be Transparent About Compensation

Maintaining transparency regarding salary in the workplace is a game-changer. The vast majority of employees (91%) who believe their organization is transparent about how pay decisions are made also trust their organization pays people equally for their work regardless of gender, race, and ethnicity.

Once you have gone through these steps to tackle pay compression, you should also go a step further to improve employee morale.

Consider Options Besides Salary

Salary is only one part of an employee’s total compensation package, and there are ways to invest in your employees beyond their paychecks. Other cost-effective ways that appeal to employees include:

•    Flexible schedules
•    Remote (or hybrid) work
•    More vacation time
•    Career development opportunities

Also consider providing employees with a detailed total compensation statement every year so they have a clear understanding of their compensation beyond salary.

Conducting routine salary audits, budgeting strategically for raises, and keeping pay information accessible to existing employees and new hires prevents salary compression from taking root in your organization. To learn more about retaining your valuable employees, visit our Employer Resource Center.