…So I was recently having a conversation with another HR professional about salary compression across departments and what that does to morale.
I’ve written before about my beliefs on how to solve the challenge of compression within functions: If an organization has a performance management system in place that as objectively as possible measures performance and creates meaningful differentiation in the way that it rewards poor, average, and exceptional performers, then the notion of compression becomes a moot point.
…The data on this is mixed, but there is evidence to suggest that – after controlling for having enough earnings required to cover basic needs – most people care more about relative than absolute pay. Ergo, if you pay people according to merit then they can accept differentiation in earnings relative to their peers. People fundamentally want to feel they are being treated fairly.
This approach doesn’t address the issue of handling salary compression across departments, though (just the opposite). For instance, if two departments add the same relative value to an organization, but the employees in one of the departments have a skill set that is more valued in the market do you pay that group more? In many cases you have to simply for retention purposes… but this of course leads to resentment from the population that is paid less; despite adding equal value to the organization, they are being paid poorly relative to their peers.
I don’t have any easy answers on how to tackle this challenge, but compression across departments is probably best looked at as a framing problem as opposed to a compensation problem. The market is bears what it bears – and organizations needs to pay what it dictates in order to retain top talent.
With that said, if an organization frames its comp plan design in a way that refocuses employees on their own peer groups as opposed to the broader organization structure, much of the noise caused by inequity across populations in different departments may go away.
What sort of experiences have you had dealing with compression internally? What solutions have worked for you? What hasn’t?
As always, please share your thoughts in the comments section below.