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Crumpled Bill

This morning I read a great article by Jim Kochanski and Yelena Stiles about salary compression. If you’d like to learn more about the topic then check out 1. The book “Strategic Compensation” by Joseph Martocchio also has some interesting insights on the subject.their article here. 1

I’m not going to do a deep dive on the subject of salary compression here, but in short salary compression is what happens when there is a very narrow pay spread between (less experienced) new hires and (more experienced) incumbents. The primary instances in which I observe salary compression are typically when either:

A. An organization isn’t competitive with their ranges compared against the external market (ex. the salary range for a Production Engineer goes up 5 percentage points a year for 5 years externally while ranges internally stay flat).

B. An organization starts to compete for talent in a sector where pay is significantly higher than their own industry (i.e. a company that sets salary midpoints at p25 of their market starts competing for talent in an industry that pays at p75 of the same market).

There are a dozen other scenarios that can lead to salary compression, but in my experience salary compression always boils down to not being competitive with ranges in the market for which you’re sourcing talent.

…With all that said, what is interesting to me about this article is that it closes with:

The essence of compression is a failure of organizations to make meaningful distinctions among employees and differentially recognize what people are due

Notice that they don’t say “the essence of compression is a failure to pay incumbents more than external hires” or “the essence of compression is the failure to put in place an experience based pay system.” This is poignant to me because salary compression is only really a problem if you don’t differentiate performance between employees in a visible way.

I am a big fan of the concept of meritocracy – this is basically the idea that power should be vested in individuals according to merit. Let the cream rise irrespective of seniority/experience.

…I don’t think Kochanski and Stiles were necessarily suggesting the idea of a workplace meritocracy in their article, but what they wrote here really got me thinking about the importance of differentiating and quantifying performance in the workplace. An organization that can do this won’t have any problems with salary compression because if people are paid for performance then the only correlation between experience and pay will be that necessitated by the learning curve required to perform a job at a high level. 

As always, please share your thoughts in the comments section below.

Best,

Rory

If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

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@RoryCTrotterJr

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