Pay compression

PAY Compression:
The Human Resource Nightmare
Michael F. Maciekowich
National Director
michaelm@astronsolutions.com

Acknowledgements
• WorldatWork (www.worldatwork.org)
• SHRM (www.shrm.org)
• PayScale (www.payscale.com
• Pearl Myer (www.pearlmyer.com
• Business & Legal Reports (www.blr.com)
• US Legal (www.uslegal.com)
• Sibson Consulting/The Segal Group

Pay Compression Defined
• Pay compression is the situation that occurs when
there is only a small difference in pay between
employees regardless of their skills or experience.
It is also referred to as salary compression.
• Pay compression is often the result of the market-
rate for a given job outpacing the increases
historically given by the organization to high
tenure employees. Therefore, newcomers can
only be recruited by offering them as much or
more than senior professionals.

Pay Compression: Root Causes
• Pay rates of new hires are greater than pay rates of
incumbents.
• Subordinate pay is greater than supervisor pay. (This
typically occurs when the subordinate is overtime eligible.)
• Inefficient merit-pay programs. (In a true merit-based
program, the merit pay received should be significantly
higher for top performers. In many organizations, that
difference is not significant enough to prevent pay
compression.)
• Pay grade overlap is too great due to overlapping pay
ranges and small midpoint progressions.

Pay Compression: Root Causes
• If an organization is unionized, there is a greater chance of
pay compression based on the structure (and number) of
unionized contracts.
• If midpoint differentials (the difference in wage rates paid
at the midpoints of two adjacent grades) are too close
together, the potential for pay compression increases.
• Supply and demand is out of sync, when the need for a
particular skill set exceeds the availability. System
Engineers come to mind as recent examples.
• The internal compensation structure becomes stale and out
of alignment with the external market data.

Consequences of Pay Compression
The obvious problem with compression is the negative impact it
has on the morale of your work force. Who wants to welcome a
new hire to the team when you learn that that person is already
earning more than you? Who wants to fully share company
knowledge and have that co-worker successful if resentment over
pay is an issue?
Too many organizations have been relying on high unemployment
rates as their de facto retention strategy. As the economy picks
up, if you have not addressed compression issues, it will be your
best performers, not your mediocre or troublesome ones, who race
to join your competitors.
Pay compression can lead to potential Equal Pay and other Labor
Law violations (Age Act, Title VII, etc) if it is discovered that the
organization has discriminated against a protected class in pay
administration.

8
Overview of Federal Legislation
Impacting Compensation
Key Federal
Legislation
FLSA
Equal Pay
Act
Equal Pay Between
Sexes for Equal
Work
Title VII
Civil Rights Act
Apply Equal Pay
Provisions
Among Protected
Classes
Race, Religion
National Origin
Age Act
Apply Equal Pay
Provisions
To Over 40 – 70 Years
Old
Americans With
Disabilities Act
APPLY Provisions of
Equal Pay Act to
Disabled Americans
Lilly Ledbetter Pay
Equity Act

First Step: Auditing Your
Compensation System

10
Recognize all Parts of Total Rewards
External Position
Equity
Internal Position
Equity
Employee Pay and
Recognition Equity
Total “Non-Cash”
Compensation –
Benefits/ Retirement
Ability to Fund all
Aspects of the
Program
• Competitiveness in
terms of Geography.
• Competitiveness in
terms of industry.
• Level of
competitiveness by
organization and
position.
•Recruitment and
Retention Trends.
• Determine
organizational value of
positions regardless of
market value.
•Determine value of
positions not matched
to the market.
•Determine the
differences among
“families” of jobs.
• Determine
internal pay levels
of employees
based on
seniority,
performance, or
other methods.
• Determine
appropriate
methods to
recognize
employee
performance and
contributions.
• Understanding
the impact of
“Generations” in
compensation
decisions.
• Addressing the rising
cost of insurance in
plan design.
• The need to have
more employee cost
sharing.
•Understanding
pressures from
organized labor.
•The need for
flexibility in
addressing
“generational”
differences in both
benefit and pension
design.
•Impact of fluctuating
stock market on
pension design
strategies.
•Funding all aspects of
the program
understanding the
impact of current
industry trends.
•Determining the
“ROI” of all programs
to demonstrate the
impact on effective
recruitment and
retention of staff
required for the
organization to
succeed.
•Proactively
developing strategies
that reduce cost
impacts while
remaining effective.

Key Steps in an Effective Compensation Audit
• Accurately assess the situation.
• Determine the specific positions that seem to have experienced
the compression.
• Was the compression created by under-paying current employees,
overpaying new hires, or did the market truly move significantly
enough to cause the compression?
• Then, evaluate your compensation mix. Are you relying too much
on base compensation? Compression is much more common in
organizations with little variable or incentive pay -- as a
percentage of total compensation -- in the compensation mix.
• Finally, reconsider skill requirements. Do you really need a multi-
skilled, home run-hitting renaissance man (or woman)? If not,
make sure you are comparing apples to apples when you compare
new hires to existing employee

Astron Solution’s Process in Auditing
for Compression
• A typical compression analysis includes analyzing each employee’s
pay as it relates to a fixed point in a pay range.
• Assumption can be made that the midpoint of a pay range equates
to 10 Years of job related experience.
• In a 50% range spread the midpoint is 25% above the maximum
of the range. This equates to 2.5% above the minimum for each
year of job related experience. (10 Years x 2.5% = 25% or the
midpoint).
• Most compression studies only focus on issues between the
minimum and the midpoint of the range.
• A simple spreadsheet analysis can be used to determine if the
current incumbent’s pay is appropriate for their job related
experience.
• A simple formula can determine the cost to place the incumbent at
the right level in the pay range in relation to the range midpoint.

Auditing for Salary Compression-Another
Approach (Sibson Consulting, a division of Segal)
Review the compa-ratios within each salary grade or band by the
employees’ time in position.
While time in a position is not the only factor that moves an employee
through a salary range, it is a good proxy to start testing for compression
within a specific salary grade or band. When shorter-service employees
appear deeper in the range (e.g., the third or fourth quartiles) and longer-
service employees appear at the beginning of the range (e.g., the first and
second quartiles), it is a sign for closer examination. Note: An internal
compa-ratio identifies the relationship of an incumbent’s salary relative to
the salary range midpoint. It is calculated as the employee's current salary
divided by the salary range midpoint for the job the employee occupies.
http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/Salary-
Compression-Lid.aspx

Auditing for Salary Compression-Another
Approach (Sibson Consulting, a division of Segal)

Challenges in Auditing for Pay Compression
• Lack of employee historical data on job experience.
• Time an expense in creating a comprehensive database.
• Deciding how far in the pay range to look at for compression.
– 1st Quarter of the range
– Midpoint
– 3rd Quarter of the Range
– Maximum
• Determine which jobs are to be focused on.
– All
– Mission Critical
– Large population
• Morale issues if compression is not completely addressed

Second Step: Potential Solutions

9 Basic Solutions (Business & Legal Reports)
1) Revisit/rebuild “grade structure.” The first thing we can do is to rebuild our grade structure, which
may be responsible for “structural compression.” More often than not a major contributor to existence of
pay compression rests with the nature of the pay ranges themselves, specifically, that they are too
narrow from grade to grade.
2) Make “equity adjustments” to accelerate pay. When you look at a group of employees at the low or
high end of the range, identify people whose performance level and rate are not in the proper
relationship. Those are the candidates for equity adjustments,
3) Make sure your ranges are pegged to the market. You want to adjust pay ranges on a regular basis;
my recommendation is to adjust every year. If you can’t do that, it’s likely that you are falling behind the
market, at least structurally.
4) Improve your pay administration. Study rates, attach names, experience levels, and performance
levels. Compared to “relevant others,” are employees paid fairly?
5) Consider promoting employees. When concerned about those clustered at the top of the range, ask, is
this a person that we can move out and up to another pay grade
6) Consider “re-assessing” some employees. If you have underperformers, people whose performance
contribution is less than it should be, consider freezing compensation. Generally, we don‘t take pay away,
but we can freeze.
7) Rewrite job descriptions. Perhaps you need to reclassify employees as duties change.
8 ) Consider merit bonuses instead of raises. This is not a solution per se, but you can use merit
bonuses to avoid aggravating the pay relationships in compression situations. The obvious benefit is that
you can allow some rates to float up, and others to remain the same to “disperse” the bunched pay
rates, all without building increases into base pay rates.
9) Take care setting pay rates for new employees!
http://compensationdailyadvisor.blr.com/2012/01/the-9-steps-to-solving-pay-
compression/#sthash.sCCivFcf.dpuf

18
Developmental/
Learning
Fully Competent for
the Level
Expert Competency
in all Aspects of the
Level
Post 12 Month –
18 Month Rate
(Level III)
$------------------------$
$14.00
$------------------------$
$14.50
$--------------Maximum
$15.00
3 Month – 12 Month Rate
(Level II) $------------------------$
$12.50
$-------Midpoint-------$
$13.50
90 Day Rate
(Level I)
Minimum---------------$
$12.00
Consider Establishing “Inter-Grade”
Career Paths

19
Consider a Simplified Incentive
Program
Financial Performance
•Utilization of Resources
• Outcome or Result
• $ Value
Customer Performance
•Customer Interactions
• $ Value
Quality Performance
•Process
• $ Value
Growth Performance
•Process Improvement
• Innovation
• $ Value
Organization
Success
Human Resources
Performance
•Teamwork/Interaction
• $ Value

Case Study: Engineering Organization
• Step 1: Updates the Current Pay/Grade Structure.
– Establish “Job Families”
– Establish Wide (50%) Ranges from Minimum to Maximum
– Widen the Midpoint Progression Percentage to at least 20%
• Step 2: Prioritize Job Families Based on a “Mission Critical” Need
• Step 3: Based on Priority Review Current Data on employee Current and Past Tenure
in their Position
– Conduct a Data Audit of Current Employee Files
– Conduct a Survey of Managers
– Conduct a Survey of Employees
• Step 4: Update the Employee Tenure History Database
• Step 5: Conduct Current to Project Salary Rate Analysis
– Assume 10 Years to Midpoint, 20 Years to Maximum
– Place Selected Employees into the Range Based on Adjusted Tenure
– Determine the Financial Impact of Making Adjustments

Case Study: Engineering Organization
• Results:
– HR was given a “Compression Budget of 1% of Payroll”
– Determination was made that Two of Five Job Families Could be
Focused on
– Determination was made to “Cap” Compression Adjustments to the
Range Midpoint
– New Hire Policy Set to Mirror Compression Formula in Jobs Impacted
– HR given .5% of Payroll to Address, on a Case by Case Basis,
Compression in Non-Impacted job Families
– Extensive Management and Employee Communication Conducted on
the Entire Compensation Program and Compression Results

About Astron Solutions
505 8th Ave Suite 2200
New York, NY 10018
800.520.3889
www.astronsolutions.com

About Astron Solutions, LLC
Astron Solutions offers compensation and human resource consulting services
including:
– Compensation Outsourcing
– Compensation Strategy Design
– Internal Pay Strategy Design
– External Pay Strategy Design
– Sales Compensation Design
– Self-Funded Incentive Compensation Programs
– Performance Management Design
– Web-Based Talent Management Solutions
For additional information please contact:
Michael Maciekowich
Astron Solutions
800-520-3889
michaelm@astronsolutions.com

Michael F. Maciekowich
Michael F. Maciekowich is a National Director for Astron Solutions. His areas of expertise include the
development, design, and implementation of executive, physician, and employee base pay, short and long
term incentive programs, sales incentive programs and performance management systems in all
industries. His primary focus is the integration of compensation and human resource strategies with
organization-specific missions, visions, values, and strategic operating plans.
Michael has over twenty-five years of consulting and industry compensation experience. Prior to Astron,
Michael was the National Director of Healthcare Rewards Consulting and the Metro New York Operations
Manager for Rewards Consulting for the Hay Group. He was also compensation consultant with a number
of consulting firms, including Towers Perrin (Senior Consultant), Hartstein Associates (Vice President),
Adams, Nash & Haskell (Vice President), The Omni Group (Vice President and Partner), and Modern
Management (Senior Consultant). In these roles, he focused on the role compensation plays in human
resources and labor avoidance strategies. He has assisted hundreds organizations in his twenty plus years
of consulting. Prior to his consulting career, Michael was responsible for compensation services at the
American Hospital Association, Honeywell International, and Zenith Electronics.
Michael is a sought-after speaker in compensation program design. He is a regular speaker for the
national conference of the American Society of Healthcare Human Resource Administration (ASHHRA)
regarding healthcare compensation and performance management strategies. In addition, he has
presented to numerous local ASHHRA and Society for Human Resource Management (SHRM) chapters.
Michael is an active member of WorldatWork (former American Compensation Association), American
Society of Healthcare Human Resource Administration, Society for Human Resource Management, and
SHRM’s Consultants Forum. He is also a member of various local and state human resource associations in
Massachusetts, Connecticut, Upstate New York, Greater New York City, and Louisiana. Michael is a
member of the International Who’s Who of Professionals. He received a lifetime achievement award from
WorldatWork. Michael received bachelor’s degrees in political science and philosophy and a master’s
degree in industrial relations from the Loyola University of Chicago.

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