Managing Overpaid Employees and Understanding Wage Compression

This blog was brought you as a part of a new series of blogs, “The Comp Corner,” in which one of our expert consultants will answer specific questions submitted by HR professionals like you!  

Instead of trying to anticipate the challenges you're facing at work, we’re going straight to the source – and we're looking forward to fielding some of your toughest questions about pay. Click the button below to submit yours, or shoot us your question by email with subject line "Comp Corner." 

Important note: if you don't want to miss an update to our Comp Corner, make sure you're signed up to receive our Compensation Newsletter. 

Q: What do you do when you have an employee whose pay grade is above market, but with a recent market shift their job is no longer worth as much as it used to be? 

A: It can be a challenging situation when you find an employee’s pay is above the market value for their job. Once it’s discovered that a job has lowered in market value, it’s important to identify all the employees who will be affected by a possible pay grade change. Keeping employees aligned with their pay grades is critical for employee fairness and equity. It’s possible that some employees may need to be red-circled, which means they will no longer receive annual base pay increases. Instead of providing increases to base pay, the company may want to consider providing these employees with any annual increase in bonuses throughout the year. The pay grade change could also lead to conversations regarding career development opportunities for those currently being paid higher than the market demands. There is always the risk that the employer will lose employees if they decide to lower the job title’s pay grade, so it’s important to identify your company’s risk tolerance and think through the best way to make these adjustments. 

Q: What is Wage Compression?  

A: Wage Compression is when there are minimal differences in pay between employees in the same position regardless of differences in skills, knowledge, or experience. This is often seen when new employees are paid a similar rate to more tenured employees because the market is demanding higher rates. Wage compression can also be more prevalent in hourly workers and can also be caused by increases in the minimum wage. When employees discover this wage compression, it can increase turnover. But it could also have potential legal ramifications. If you are interested in how to overcome wage compression, view our wage compression blog here.