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Pay Compression and its Influence on Companies Activity

It seems that the trends in wages indicate a complex process of global integration, in which there is a convergence of the average wages towards (stagnant) salary levels in the industrialized countries, and in which disparities between workers, receiving the highest and the median, and the median and the lower wages, are growing almost all over. It goes without saying, there are some exceptions. However, this trend indicates the importance of international coordination of issues relating to wages.

Pay compression is a kind of situation that occurs when individuals with fewer years of experience receive the same, nearly equal to (compression) or even less than (inversion) individuals with more years of experience. It means that there is only a very small difference in pay between workers regardless of their education, qualification, specific skills or previous experience. The line on the convergence of wages of various categories of workers has actually bring the situation to the relative decrease in the more complex skilled work of engineers, doctors, teachers, researchers. As a result, we can say that exactly a narrowing of the pay differentials between employees with really differing levels of experience may influence on people’s wish to work in one or another area of industry.

According to Martocchio “pay inequities exist in all public and private sector organizations and may be caused by: overtime, talent acquisition, reorganizations, demotions, reassignments & transfers, demand for technical expertise and seniority” (Martocchio, 203). It arises, in particular, if the rate of wages in the labor market is growing faster than the company increases the salaries of its current employees.

There is no doubt that differences in wages are not constant. There is a tendency to converge wage levels along with the transition from low-paid work to well-paid work, with a gradual breakdown of barriers to free access to all activities of all groups. Pay compression is a problem for companies because many companies are interested in new employees, but new employees are interested in good salaries, while longer tenured employees do not want to receive similar or nearly the same salaries with newcomers, being sure that their skills and long work experience are more valuable.

It is necessary to mention in this paragraph that when pay compression has a place in one or another company its managers should undertake all necessary steps to minimize its destructive nature, because pay compression may change not only morale situation in the working team, but also to influence on the whole working procedure. The first step, in this case, is to accurately access the situation, to understand its roots and find the differences between workers, comparing their skills and experience between each other. The next step is to explain employees the situation and give them a detailed plan how the manager is going to change situation and correct it in the nearest future, it means to address the compression head-on. And the last step is to change the process for the purpose of to avoid pay compression. In addition, companies can manage also internal factors which has a direct attitude to compression, because it is always possible to change hiring practices and various kinds of salary structure guidelines, for instance.

In conclusion, we have discussed pay compression, explained its negative influence on the companies’ activity and gave recommendation how to minimize pay compression.

Work cited:
Martocchio, J. Strategic Compensation: A Human Resource. Prentice Hall, 3rd ed., 2003.