The Hidden Costs of Wage Compression

Do your employees feel valued? If not, they may start looking elsewhere for work. Today, one of the surest ways to make your workers feel undervalued is wage compression. 

In many workplaces, wage compression has become the “silent killer” that’s destroying company culture. Here’s what you need to know about wage compression and how you can work to avoid it.

What Is Wage Compression?

Employers were already facing a staffing shortage long before the “Great Resignation.” According to Harvard Business Review, the monthly quit rate has been rising since 2009

To combat this, many companies started offering attractive compensation packages to attract top talent. However, as wages for new hires have shot up, increased compensation for existing long-time employees has not proportionately kept pace.  That’s wage compression.

The issue is more common than you may think. Pew Research Center reports that workers who changed jobs between April 2021 and March 2022 received an average pay increase of 9.7%. That’s roughly double the rate of a typical annual raise (usually 3% to 5%). 

Employers who fail to adjust their current employees’ salaries accordingly may be creating an environment of pay compression, which can leave those employees disengaged or even resentful.

The Effects of Wage Compression on Employee Engagement

Even if your employees never talk to one another about their respective pay rates (which doesn’t happen often), it’s hard to conceal or downplay the causes of wage compression. After all, many employers advertise their compensation packages as a way of attracting new workers. Long-term employees may see these ads and notice that their own pay isn’t that much higher than the latest hires.

Here are three reasons why wage compression can contribute to a toxic workplace culture.

Resentment Toward Management

Jason Greer, founder of the employee relations firm Greer Consulting, tells Fox Business that when employees uncover such wage discrepancies, they can resent senior management. When an employee has asked for a raise for years and has been told that the company can’t afford it, they are naturally disheartened to realize that new hires are being paid more money right from the start. 

Wage compression therefore fosters resentment and mistrust between employees and their management teams.

Resentment Toward New Hires

Employees may feel resentful of their management teams, but they often fear expressing their frustrations for fear of losing their jobs. So they may direct their resentment — or at least their envy — toward new hires with large compensation packages.

As a result, teams may struggle to truly gel. Wage compression can create rifts among your workers that make it difficult to collaborate or establish strong mentoring networks.


Finally, wage compression leaves your long-term employees feeling undervalued. It’s hard to give 100% to an employer who fails to recognize your years of dedication or experience. This can contribute to the rise of “quiet quitting,” where workers give only the bare minimum to their careers.

As it stands, “quiet quitters” already make up around 50% of the workforce, according to Gallup polls. Wage compression can drive these numbers even higher for your company, or it may even push your long-term employees out the door.

How to Address Wage Compression

Companies can take a proactive approach to address wage compression. Here are four tips to address wage compression in your workplace. 

Align Internal Compensation With External Trends

Again, the external trend is to offer high compensation packages to attract new talent. But make sure to align your internal compensation rates with these trends — that is, by adjusting your current employee salaries to reflect your new emphasis on employee pay.

Define Pay Grades Clearly

Some companies differentiate between Sales Associate I, II, and III but fail to make meaningful distinctions between the pay for these roles. But if you can make clear separations between each pay grade, you can give employees a goal to work toward as they progress through your company.

Pursue Pay Transparency

Your workers will talk to one another about money with or without you. Creating a culture of transparency can prevent the subject of compensation from being taboo. More importantly, being transparent about pay can deepen the trust between workers and their managers.

Offer Non-Financial Incentives

What if your company can’t afford to increase pay across the board? You can still attract and retain talent through non-financial incentives, such as career development programs, child care assistance, or even community service projects. 

Tap Into Today’s Best Practices

Employee compensation can be a balancing act. But by providing fair, attractive compensation across the board, you can acquire new talent while maintaining engagement among your long-term employees.

Sometimes, outside help can empower you with the best practices for employee compensation. Focus HR can help. To request a free consultation, contact our team today.

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