At the time of this writing, the U.S. unemployment rate is at 3.6%. As a result, the labor market favors the job seeker, and the competition to secure top talent is more fierce than ever.
An increasing number of employers are offering inflated salaries to recruit external talent. However, in many instances, employers have inadvertently created massive pay gaps between new and existing employees.
The official term for this phenomenon is "salary compression." This occurs when companies aren't raising the salaries of their current employees. While, at the same time (usually due to labor market conditions), employers feel forced to offer higher wages to attract new talent.
Consequently, the pay gap between tenured employees and new hires shrinks. Needless to say, this can cause resentment among your staff and wreak havoc on your employer's brand and employee satisfaction rates.
That said, let's explore the topic of salary compression and what you can do to combat it in greater detail:
For the first time since 2011, those younger than 35 report being happier with their paychecks than those over 55. Experts suggest that satisfaction among younger workers could be because they're experiencing faster wage growth than the rest of the working population. This is especially true for Gen Z workers. Even millennials are experiencing a diminishing wage gap.
One study suggests that on average, Gen Z workers earn nearly as much as — and in some cases, more than — millennials. Not only that, but Gen Z is also receiving disproportionately high pay increases (averaging 6%). This is nearly double the annual pay raise of the average U.S. worker.
Why Is Salary Compression So Prevalent?
One reason salary compression is so prevalent is that new recruits tend to be younger workers. In fact, it’s predicted that there are around 61 million Gen Z job seekers in the labor market.
Traditionally, younger workers were paid less because of their lack of experience. However, Gen Z workers are boasting increasingly sought-after skills. For instance, social media marketing, programming, IT skills, etc. They're also more likely to switch jobs. In fact, 56% of 18–24- year-olds say they plan to switch jobs in the next year.
The combination of qualified job seekers with a tendency to change jobs within such a tight labor market creates the perfect conditions for salary compression.
It stands to reason that employers are more likely to offer competitive pay to secure top talent. In many cases, this can be close to or even more than the salaries paid to current employees.
Needless to say, when long-term staff members catch wind of this kind of pay inequality, discontentment ensues. This is no surprise when you consider only 37% of employees believe they’re paid reasonably to begin with! Consequently, this has adverse effects on employee churn and team morale. Of course, this is all the more likely when you throw increasing pay transparency into the equation…
With the rise in pay transparency, there’s a spotlight on the issue of pay compression. Interestingly, as many as 68% of employees would switch jobs to a new employer if they offered greater pay transparency. Similarly, 82% of employees want recruiters to disclose information about wages and benefits in their job postings.
With the mounting pressure for greater pay transparency, companies that pay new recruits more than existing staff will be revealed. As such, the need to address these pay gaps is pressing.
Ensure that you're offering a fair, competitive salary to new recruits AND regularly benchmark your teams’ pay against current market rates. With this information at your fingertips, it enables you to identify pay gaps so that you can make the necessary adjustments.