Dealing with Wage Compression Issues

Stephen Miller, CEBS, who is an Online Manager/Editor covering compensation and benefits for SHRM Online, wrote an excellent article a couple of weeks ago titled, “As Minimum Wages Rise, Prepare for Pay Compression Issues.”

The first two paragraph of his article are presented below.

Pressure to increase wages for the lowest-paid employees, driven by the need to attract workers and to stay ahead of rising local, state and federal minimum wage mandates, is “a red-hot compensation topic right now,” according to a panel of pay authorities who spoke at WorldatWork’s 2021 Total Rewards Conference, held virtually in October.

Raising minimum pay levels can require revisiting pay ranges throughout the compensation structure, the panelists noted. As a related issue, many benefits costs, such as 401(k) matching contributions and incentive bonuses, are linked to employees’ base pay and will become more expensive as wage rates trend higher.

Stephen’s article goes on to say that due to the above, pay compression issues will be present and HR and financial professionals need to have a strategy to deal with these issues to avoid losing valuable employees or having a morale problem for employees’ where their pay has been compressed. Suggested alternatives include correcting any pay compression as you are raising minimum wages or handling the compression issues over a period of time.

There have been more requests for our firm to review potential compression issues as our clients are dealing with the need to raise their minimum wage salary range structure. Stephen completes his article with an excellent “Planning Ahead” list of steps to address pay compression for organizations.


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Addressing Employee Pay Compression Issues

Several states have passed new minimum wage legislation for 2019 and beyond.  Arkansas passed new minimum hourly rates of $9.25, $10.00 and $11.00 for years 2019, 2020 and 2021 respectfully.  To compound the impact of higher minimum wage laws, the employment market is becoming more competitive in certain business sectors and organizations are increasing new hire pay to attract and retain competent employees.  Also, the U.S. Department of Labor is considering releasing a new annual salary threshold for exempt positions later this year. The above factors and several economic factors are pressuring organizations to address employee pay compression issues.  We have experienced an increase in the number of client organizations that have asked for our expertise to address systemic and episodal pay compression situations. Employees with three to five years of employment do not appreciate seeing or hearing of new employees receiving comparable or equal pay.  Employees believe that their time with an employer and performance/results should drive compensation above salaries offered to new hires in comparable positions. Addressing pay compression issues and situations includes research on organizational positions, current pay structure, employees’ time in positions, historical pay adjustments for performance, past increases to pay structures for COLA or market adjustments and other pay related decisions unique to each organization. Addressing pay compression issues can be like working on a picture puzzle and as each piece is placed, the picture begins to form and eventually, the whole picture is realized and appreciated. Learn more by visiting or or request a free consultation by visiting



Now that we’re on the backside of the celebratory 4th of July – Independence Day fireworks and picnics, it is time to get back to work with attracting and retaining employees through competitive pay and strategic total rewards benefits. During the recent 4th of July holiday, it was amazing to see how small compacted fireworks create such spectacular nighttime displays of colorful sparks. When lit, these small containers in relative size compared to the resulting expansive firework displays are a profound mystery of awe and yet a technological mastery of increasing proportion. The chemistry of fireworks is based on the theory of combustion, but a simple observation could be made based on the theory of compression.

Speaking of compression, many of our compensation clients are experiencing pay compression issues. With tighter labor markets and increasing starting wages for new hires, the pay levels between newly hired employees and employees with one to three years of tenure are getting tighter. The compression of the air-fuel mixture in an internal-combustion engine just before ignition creates powerful energy. The employee energy associated from pay compression issues can be significant until the employer resolves these issues. Identification of pay compression starts the process towards releasing the valve on negative pay comments and the potential of losing tenure employees. Employers without internal pay structures/plans will use a “time in position” percentage of market pay means to determine pay adjustments for employees expressing pay compression concerns with newly hired employees. Employers with internal pay structures/plans that are competitive with market pay means by position will use a “time in position” percentage of the internal job grade pay range midpoint for pay movement decisions that lessen pay compression problems.

The average timeframe for an employee to reach their respective position pay range midpoint is a key factor when addressing pay compression in an organization. The private sector employees on the average tend to reach their pay range midpoints within 4 to 5 years. The public sector employees on the average will reach their pay range midpoints in 8 to 10 years depending on the average annual pay percentage increases of 3 to 4% of base pay. Also, the pay range spread will be another key component in determining how quickly employees will reach position pay range midpoints.

Let’s hope that your internal pay compression situation can be resolved with firework “Sparklers” instead of huge sky-filling firework displays with M-80 sonic booms!

Happy Post 4th of July Boom!


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