Two tactics to deal with pay compression

Two tactics to deal with pay compression

Two weeks ago I described pay compression and, at the request of one of my readers, gave some advice on how to deal with it at the time of recruitment.

Today I will go through 2 tactics around how to deal with pay compression at the individual, one-off level. I will cover collective tactics in the next instalment of Reader Question in about 2 weeks.

Case 1 : Pay compression due to overtime/shift

An employee who was eligible to shift payment, for example in the Oil & Gas industry, is to be promoted to a position which is not eligible for the shift payments. All managers in the employee’s new position don’t necessarily earn much more than the total income of the shift employees.

The increase on basic pay and allowances related to the promotion is less important than the value of the shift allowance and the new total income is lower than the previous one, even after taking into account new bonus opportunities for example. This means as a new manager, the employee’s pay is relatively aligned with that of his peers, but compressed compared to the previous position he was holding.

This could also apply in the case of an employee who used to be eligible to overtime payment and moves to an exempt position (not eligible to overtime any longer).

It is quite easy to deal with this scenario. Most organisations will cover ar least part of the difference as an incentive for the employee to move into a supervisor position.

The  whole difference will be probably not be compensated in the basic pay though : the organisation needs to look at the existing managers’ pay as well in order to decide the new package.

One way to offer that compensation is through a one-off payment linked to the value of the shift or overtime payment. For example, average the overtime payments received in the past 6, 12, 18 or 24 months and grant a lump sum equivalent to 6 months or one year of the average monthly payment.

The one-off solution allows to send a positive signal to the promoted employee while not destroying the balance of equity with the other, existing managers in the organisation.

Case 2 : Pay compression due to labour market demands

Market conditions mean that new hires in a team are paid almost the same or more than their managers. This famously happened in the late 1990s when fear of the “y2k bug” striked and IT specialists salaries suddenly went up the roof when the deadline of December 31, 1999 loomed.

It currently happens for in-demand positions in the GCC, for example there is a chronic lack of healthcare specialists or engineers in the country as the education system does not deliver enough graduates in those fields or the student population is not attracted to these kinds of jobs.

When such a situation arises and a supervisor ends up having too many direct reports that are paid at a comparable level to him, the organisation will often consider giving an exceptional increase to the manager.

Of course, the manager has to be a good performer and someone that the organisation really wants to retain, otherwise there is no point in implementing this approach.

But the point I want to emphasize here is that the solution is of a more permanent nature than the approach in case 1. A lump sum payment only affects the company financial results once, while a salary increase is a permanent cost that the organisation is undertaking. That’s why the performance and/or potential of the manager whose pay is compressed is so important in the decision process.

Overall, the thing to consider when pay compression happens at the individual level is whether you absolutely need to deal with it. If so, then consider whether the situation is temporary by nature (short-term, one-off solution) or is something you want to fix for the longer term.

Do you have other tips for dealing with pay compression at the individual level ?

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  1. Nellaiappan Pillai says

    Interesting cases Sandrine… Thank you for sharing..

    Case 1 : Pay compression due to overtime/shift
    – The employee who gets promotion is well aware that promotion is dealt in line with the organisational internal policies and procedures. Also, employee is to be satisfied that he/she gets improved salary and benefits in line with the new position. In long term, this is beneficial as they get increased EOS benefits as well. Professional / Personal status also improves.
    HR to communicate / promote all these positive points to the employee while offering a promotion.

    Case 2 : Pay compression due to labour market demands
    Internal Equity is the common HR challenge and it may not be completely eliminated due to supply / demand of professionals at the market. One-off solution may not be possible as impacts huge financials to the organization.
    Is this the reason HR keeps the salary range confidential?

    • Thanks for your comment Raja ! I think many companies keep salary ranges confidential for tons of reasons. For example their salary ranges may be outdated, not reviewed regularly, and/or completely out of line with market practice. Or they may pay a lot of people in the bottom or top part of the salary range and don’t want employees to know as they don’t want to handle queries. Or because they ask employees to not talk about salaries so the company itself does not communicate much about it. Or because there is a culture of saying that everything is discretionary so they don’t want to show a range because that may imply that the company has a “system” and does not actually do everything on a full discretionary basis, salary-wise. Or simply because “we’ve never shared salary ranges, so why should start now ?”….

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