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Photo of Michelle Cohen Levy
Photo of Michelle Cohen Levy

Why employers need to avoid pay compression

On Behalf of | Oct 27, 2022 | Wage & Hour Laws |

If employers aren’t vigilant about monitoring the wages and salaries earned by their employees, they can end up with a phenomenon called “pay compression.” It’s also sometimes referred to as salary or wage compression.

While pay compression in itself isn’t illegal, it can have a demoralizing effect on the workforce. Valuable employees may seek opportunities where they’re better compensated. It can also lead some employees to believe they’re being discriminated against for their race or another characteristic – whether they are or not.

What is pay compression, and how does it happen?

Pay compression is when employees’ pay doesn’t reflect their length of employment and/or their level in the company when compared with other employees. For example, a supervisor who has received paltry or no pay increases in several years may end up overseeing a new employee who earns almost as much (if not more) than they do. 

Their employer may have raised the starting salary for new employees at all levels but failed to make comparable increases to current employee pay. Often, employees discover the problem, even if they don’t identify it by name, just by talking to one another or having access to the wage or salary information of those who report to them.

How pay compression can cause legal issues

Besides causing a company to lose valued employees, pay compression, as we noted, can lead to discrimination claims. Employees may find that those of a particular protected characteristic seem to be paid less. If that’s the case, for whatever reason, they could have a valid claim.

It’s not difficult for you, as an employer, to prevent pay compression by having your human resources team or others in your organization keep a close watch on payroll data. There’s plenty of technology that can help you do that. Employees cannot legally be prohibited from discussing wages or other working conditions, so you want to catch any problems before they do. 

It’s crucial to learn more about pay compression and ensure that it’s not happening in your company. If it is, you need to take steps to address it. If you are facing a complaint or lawsuit by a current or former employee, it’s wise to seek legal guidance.