Question

At the annual meeting of the HR division at a financial services firm, the vice president of HR noted that pay compression was a problematic phenomenon for certain jobs for which there was high demand, but low supply. This problem was especially acute for jobs in data analytics and marketing. In addition, the VP of HR noted that the company needs to be careful about how much it spends in compensation next year, as profits were down last year. The vice president of HR has hired you as a compensation consultant to help them to formulate an action plan for dealing with this situation. What would you say in this situation about potential solutions to the problem?

a. Give a 20% pay increase to the highest 20% of workers.

b. Institute a 10% pay reduction for the bottom 20% of employees in terms of pay.

c. Reward high performance and merit worthy employees with large pay increases.

d. Give all employees a 10% across the board pay increase.

Answer 1

Pay compression occurs when the new joiners get salaries comparable to the existing workers in the same position. This creates a small difference in the salaries of the employees irrespective of their experiences or skills. It discourages people who are already working with the organization. Also, it might also affect the profitability of the company.

To help the company deal with the problem of pay compression let's analyze the problem:

a. Give a 20% pay increase to the highest 20% of workers:

Increasing the pay of top 20% of people by 20% would increase the gap in terms of remuneration between the high performing workers and the low performing workers, but this would cause the profitability of the company to take a hit.

b. Institute a 10% pay reduction for the bottom 20% of employees in terms of pay:

This seems to be a practical solution as this would make the workers feel that the system is more transparent in terms of remuneration, this solution also makes sense because adopting this option affect the profitability of the company in a negative way, in fact, it would make the company more profitable.

c. Reward high performance and merit worthy employees with large pay increases:

This wouldn't solve the problem of pay compression as these awards/accolades wouldn't be given on a regular basis and they would still not address the perception of inequality among the existing employees.

d. Give all employees a 10% across the board pay increase:

This wouldn't solve the problem as the problem of pay compression would still exist as the salary inequality would still exist between people who are already getting almost the same kind of remuneration but their skills or experiences are quite different.

Thus, only option B makes sense as it would help in eradicating the perception of inequality and unfairness among ht employees and at the same time increase the profitability of the company.