Is Pay Compression Crushing Your Healthcare Team?
In today's job market, it's become common to offer new hires a pay rate that equals or beats the pay rates of your current employees. This is a real predicament known as pay compression.
Often, managers are facing questions from employees who have found out that new hires are being hired at, or very close to, their pay rate. Sometimes these are long-term employees. Yikes!
How do you cope with this all-too-common scenario? I will share some thoughts in this blog post.
One caveat - I would never advise you to specifically discuss one individual's pay rate with another employee, so nothing in this post should be interpreted that way. However, if someone raises a complaint, you can — and should — address it as transparently as possible. However, you should speak in generalities. This shows transparency and willingness to be open about how you come up with pay rates and that there are reasons for your decisions.
Why is Wage Compression Happening?
Before we dive into solutions, it's important to understand why pay compression is so prevalent. Here are some key factors:
Hot Job Market: When the economy is strong and unemployment is low, companies are competing fiercely for talent. This drives up starting salaries to attract qualified candidates.
Inflation: The rising cost of goods and services puts pressure on employers to offer higher wages to keep pace with the cost of living. This can quickly erode the perceived value of existing salaries.
Internal Inequity: If you haven't been consistently reviewing and adjusting salaries for your current employees, their pay may lag behind the market rate. This creates a breeding ground for pay compression when it's time to hire new staff.
Tips to Tackle Pay Compression
Communicate Proactively: It’s a good idea to let new hires and current employees know that you pay for skills, abilities, and performance, not for time in the job. This sets the expectation that tenure on the job is not enough to get more money. Yes, more time usually means skills and knowledge growth, but not always. Communicating this ahead of time and repeating this message is key.
Consider Pay Increases: Before you hire someone into a role where they are being paid more than existing staff (assuming they are of equal skill), you should strongly consider raising the existing staff members up to at least be equal to the new going rate, if not more. Otherwise, it will create frustration among the existing employees. The best option would be to raise existing employees to a point above the new going rate that you expect to pay.
Benchmark Your Pay Rates: Be sure your current pay rates are truly market based. Perhaps your current staff are truly underpaid and deserve raises.
Consider that Pay Differences Can Be Okay: If you are truly hiring better people into the role, then paying them the same or better is actually okay. If your existing employees are upset, you can have one-on-one conversations with them to explain that you've hired some more experienced staff and that sometimes you have to pay more. Again, don't discuss specific situations with the person complaining. It is a better strategic decision for your business to pay more for skills and performance than for years of service, so if there are skill differences then you can discuss the importance of that.
Give Merit Pay Early: If you have a scheduled merit pay cycle coming up, consider giving raises to your existing staff sooner than normal so you can raise their pay up now to help separate them from the new hires. Or, you can tell the existing staff that you will be giving them a raise soon that will raise them up.
Consider Freezing New Hires' Pay: One thing to consider is freezing the pay of new hires to allow current staff to have pay raises that will bring them up a bit higher. Tell them that they won't be eligible for a raise until some future date (unless perhaps they get promoted). This sets the expectation ahead of time, so they won't expect an adjustment. Oftentimes, I will recommend that you tell the new hire that you are hiring them at a very competitive rate compared to current staff and that is the reason for the freeze. Most people will be grateful for the offer and for the transparency. This doesn't address the concerns of existing staff, but it can help.
Use a Fixed Rate Strategy: Another strategy you could employ is to pay a fixed pay rate for certain job levels and only give raises once someone moves up a level. This can be a tough strategy to employ if your team is used to consistent annual raises, but it would motivate your employees to want to move up and it does give them a clear pathway to a raise. However, if you don't truly have opportunities for them to grow, this will not be received well. One downside is that paying a single fixed rate is likely to create more frustration, so I don't recommend it. However, in the government sector or in more traditional industries it can work.
Hire at a Lower Rate: Another option is that you could try to find some diamonds in the rough which would enable you to hire at a lower rate than your current staff. This would need to be paired with a strong training plan, a lot of feedback, and continuous performance guidance. The upside is that you won't have to distribute any raises to your current staff.
Highlight Things Other Than Pay Rates: There could be differences between a complaining employee and the newly hired staff that you can point to — for example, existing employees may be getting richer PTO benefits or getting special schedule accommodations that new hires aren’t getting. If the new hire is offering you schedule flexibility that you aren't getting from existing staff, that can explain why you may need to pay more for the newly hired folks.
Tough It Out: A painful, but possible, option is to accept that this is how it is and until the business can support raises, some new hires will be paid at (or near) the rate of current employees. You'll be likely to get more complaints, but if you are transparent with folks about budget constraints, and assure them that you want to address the problem as soon as revenues can increase.
Create a Clear Path to Higher Earnings: Give your existing employees a roadmap to increase their earning potential. This could involve:
Skill-Based Pay: Tie pay increases to acquiring new skills or certifications relevant to their roles.
Mentorship Programs: Pair senior employees with junior staff to foster knowledge transfer and provide development opportunities.
Project Leadership: Offer opportunities for employees to lead projects or take on new responsibilities that demonstrate increased value to the organization.
Defined Career Ladders: Outline clear steps and expectations for employees to move up within the company, with corresponding salary increases at each level.
Communication is Key With Pay Issues
No matter which strategies you choose, open and honest communication with your employees is crucial. Explain the factors that influence pay decisions, such as market conditions, experience, performance, and skills. Be empathetic to their concerns and reiterate your commitment to fair compensation practices.
Need Expert Compensation Advice?
Pay compression can be a complex issue with no easy answers. If you're struggling to manage pay compression within your organization, don't hesitate to reach out to us. We can help you develop a comprehensive compensation strategy that attracts top talent, retains your valued employees, and fosters a positive and productive work environment.
