Pay transparency laws — which mandate that employers have to disclose salary ranges — have several benefits, including pay equity and more successful negotiations during the hiring process.
But it can lead to more dissatisfaction and resignations, as employees “detect inequities” among themselves, according to people analytics firm Visier.
Wage compression can occur when the wages of long-term employees fail to keep pace with the market, it explained — while newer employees are paid at the market rate.
Andrea Derler, Visier’s principal of research and value, told CNBC Make It that while wage compression is not new, it will become more more widely known as open salary conversations become more commonplace.
“Wage compression was always a reality, but sometimes hidden from the employee because they lacked awareness of their peer’s salaries — pay transparency is changing this,” she added.
Pay adjustments slow resignations
Visier’s “New facts about pay” report found that a failure to identify and quickly address the effects of wage compression on a team can lead to “more and faster resignations.”
Its findings were drawn from its database of more than 18 million employee records in 75 countries.
According to a November 2022 survey from ResumeBuilder.com, around 1 in 20 workers in the U.S. will quit if they find out they’re making less than their coworkers.
To address that, companies should implement “pay adjustments,” which are different from yearly salary changes — and which are usually larger, company-wide efforts, said Derler.
Any form of recognition, or growth opportunity or appreciation may have similar effects, but … payment adjustment is an effective way to retain existing team members after the event of hiring a higher-paid team member.
“Percentage increases for employees’ salaries are determined by considering a variety of inputs, for example, whether or not the company achieved its annual financial targets but also employees’ individual or team performance,” said Derler.
The pay adjustments, however, are aimed at individuals at the local team level to account for “workers’ risk of exit,” she added.
Visier found that employees whose salaries weren’t adjusted to account for the newest highly paid team members within six months resigned 1.8 times sooner than those who received adjustments within the first month.
In addition, employees who hadn’t received an adjustment in12 months resigned 2.3 times sooner, said Visier.
“[This] suggests that it is important to reassure employees that despite the new entrant, they are still valued at the company,” Derler said.
“Any form of recognition, or growth opportunity or appreciation may have similar effects, but … payment adjustment is an effective way to retain existing team members after the event of hiring a higher-paid team member.”
Why dissatisfaction occurs
A host of factors may be behind salary differences: skills, education, experience, previous salary and negotiation skills, said Visier.
Nevertheless, it’s still important for companies to consider an adjustment for employees who have been at the company for a longer time, it added.
[New employees] still lack the internal experience in-role, as well as the overall institutional knowledge the others have. Their entry at a higher level or salary … still brings in a potentially threatening and competitive element.
“We have all experienced this: when a new team member enters a team, it affects existing team members, simply because work and responsibilities are reshuffled, and training and onboarding is in part supported by those who have been in their role for longer,” said Derler.
Even if a new entrant is more senior and hence paid more, it can cause current employees to question their own position and pay, she added.
“[This] could also have crushed existing hopes for promotions in team members who had been in the role longer — leading to questions such as ‘They enter at a more senior level than me, why didn’t I get promoted instead?'”
That’s why resignation rates are higher among employees whose salaries remained the same for a long time after the new highly paid team members entered the team, Derler said.
“[New employees] still lack the internal experience in-role, as well as the overall institutional knowledge the others have. Their entry at a higher level or salary … still brings in a potentially threatening and competitive element.”
What you can do
When you discover the difference in salary between you and your peers, you may be “disappointed,” which is understandable, said Derler.
“But try not to assume malice on the side of your employers. It may be a simple oversight or lack of information your organization has about you and your peers’ salary differences.”
Derler has three tips for those who decide to ask their employers for a salary adjustment:
1. Benchmark your salary externally
Inform yourself about how much the work in your role is worth both at your company and at other similar organizations. Gather external market value information about your role and the experience needed through platforms like Glassdoor and LinkedIn.
2. Prove your value to the company
Make a list of how your work in the past year added value to the success of your organization, your team and your manager. Instead of listing what you did, show how what you did made a positive difference.
3. Initiate a friendly negotiation with your employer
Based on the information you’ve gathered in the previous steps, come up with a percentage increase range that would feel satisfying to you. State it clearly and firmly — and support it with your list of accomplishments.
