Four collective tactics to deal with pay compression

Four collective tactics to deal with pay compression

Today, I will share some of my favorite ideas on how to address pay compression in a systematic, collective manner. This is the third and final part in my mini-series on pay compression, which was initiated by a question from one of my subscribers. The first article covered how to deal with pay compression at the recruitment stage, while the second post dealt with tactics you can implement to deal with pay compression at the individual level.

So, from my bag of tricks and solutions, here are 4 approaches which I hope will help your organisation.

Create a hot skills premium to manage the high-pay employees

When you have a whole category of employees that are in demand, keep their base pay at levels similar to those before the “hype” began, and pay any differential in the form of a hot skills premium. This premium allows you to adjust to current market levels. And if you phrase it well (work with your Legal department), the hot skills premium can be temporary and reversible.

Temporary can be defined as open-ended to be reviewed as needed / dictated by market conditions. You could also define temporary as a fixed, but potentially renewable time frame, for example: “We will pay this premium for 12 or 18 months and may decide to renew it for a further period as warranted by market conditions and management decision”.

Like for international assignees that you localise after a number of years abroad, or sometimes when you retire an allowance, you can make the hot skills premium reversible by including a phase-out plan over, say, 1 or 2 years.

This way the talent feels reassured they will not be rapidly and negatively impacted financially if the hot skills ceases to be required. And it’s a great way to convey a sense of reassurance and therefore trust to these employees, thereby reducing the risk of attrition.

Making the premium reversible also, in the mid-term, allows the company to return to normal pay levels and not disrupt the salary structure that is still applicable to employees in similar levels of responsibility within the organisation.

Implement a retention scheme for the compressed employees

This solution addresses the other employee groupin apay compression situation, ie the one whose pay is now relatively “low” : the colleagues with more tenure and seniority who have not benefited from being recruited at the current, higher market rate, and/or the supervisors who are now paid little more than their team members.

Creating a retention scheme has a number of advantages :

  • First it can be clearly defined in time, meaning that when the market conditions return to normal and more senior/supervisors pay is not compressed any longer, you can end the scheme.
  • Mostly though, it allows you to target the people you really want to retain in the compressed population, based on performance, potential or any other criteria relevant to your organisation.
  • It sends a very clear signal to the employees that you enrol in it, that you care about keeping them in the company and that their contribution is valued.

Establish a market adjustment budget to increase the pay of compressed employees

This budget applies on top of normal salary increases and is applied only to the specific population of employees suffering of pay compression.

Being a “market” adjustment, by definition this adjustment would apply to all compressed employees regardless of performance, potential, tenure or any other criteria. But obviously, your company has to decide what is best for its specific conditions.

The market adjustment works well if the actual pay of the compressed employees is well within the established salary ranges of your company. Why ? Because even after the market adjustment, you remain within your established pay boundaries.

If the amounts are too big for the organisation to spend at once, you can always or commit to a second increase after 6 months have passed (so that your annual cost is halved in the year of implementation), or you can also target to reach a certain pay level over the course of 2 or 3 years if needed.

Change other pay components of the package of compressed employees

Basically, yo want to increase the attractiveness of their overall package in order to emphasize that base pay is not the only thing for them to take into account.

There are many options here, but the 2 most obvious ones are :

  • increase the on-target or maximum bonus opportunities of the compressed employees so that their annual cash take-home increases and becomes acceptably higher than that of the more junior or newer team members
  • offer special or flexible benefits, add features or increase ceilings / maximum payouts to their benefits.

Hopefully these systematic approaches, along with the individual ones and the tactics at point of recruitment that I shared earlier, will help manage pay compression at your organisation. Are there any solutions that you implemented and that reduced your issues of pay compression ?

 

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Comments

  1. Hi Saundrine,
    I’d like to hear your thoughts about communicating with employees about a negative pay diferential.
    For example “due to a tough economic climate the company won’t be paying discressionary bonuses this year” or “due to poor sales this year the profit sharing is about 50-70% of the bonus last year”.

    Another scenario here in the US is that hourly workers are being asked to contribute more $ per month to pay for healthcare insurance. The result can feel like a pay reduction to an employee like this.

    Love your blog BTW.

    Dan Priest

  2. Philip Mathew says:

    Interesting read..good to have these posts. Regards.

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