{"id":188547,"date":"2023-12-20T09:38:43","date_gmt":"2023-12-20T09:38:43","guid":{"rendered":"https:\/\/www.aihr.com\/?post_type=hr-glossary&p=188547"},"modified":"2024-11-05T11:49:31","modified_gmt":"2024-11-05T11:49:31","slug":"pay-compression","status":"publish","type":"hr-glossary","link":"https:\/\/www.aihr.com\/hr-glossary\/pay-compression\/","title":{"rendered":"Pay Compression\u00a0"},"content":{"rendered":"\n

What is pay compression?<\/h2>\n\n\n\n

Pay compression, also known as salary compression or wage compression, happens when the pay differences between employees with varying levels of experience, skills, or seniority become small. This often occurs when new hires<\/a> are brought in at salaries close to or even higher than those of long-standing employees, usually due to rising market rates, inflation, or increased demand for specific skills.<\/p>\n\n\n\n

This situation can lead to several issues within the workplace, including dissatisfaction<\/a> and demotivation among longer-tenured or more experienced employees.<\/p>\n\n\n\n

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Pay compression examples<\/h2>\n\n\n\n

Here are two fictional examples to better understand the concept of pay compression.<\/p>\n\n\n\n

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  1. New hires vs. existing employees: <\/strong>Due to market demands, a company hires new employees at salaries close to those of existing staff. For instance, a new accountant is hired at $60,000, while current accountants with several years of experience earn $62,000.<\/li>\n\n\n\n
  2. Minimum wage increases<\/strong>: When the minimum wage is raised, entry-level employees receive higher pay, but the wages of more experienced employees remain stagnant, narrowing the pay gap. For instance, if the minimum wage rises to $15 per hour and more experienced workers previously earned $16 or $17, the gap between entry-level and experienced workers shrinks.<\/li>\n\n\n\n
  3. Internal promotions<\/strong>: When an employee is promoted internally, they may receive a smaller pay increase than if they were hired from outside the company. For example, a junior marketing specialist is promoted to a senior role with a 10% raise, bringing their salary to $65,000. However, external candidates being hired for similar senior roles are offered $70,000 due to current market rates.<\/li>\n<\/ol>\n\n\n\n

    What causes pay compression?<\/h2>\n\n\n\n

    Pay compression can arise due to several factors, including: <\/p>\n\n\n\n