04/14/2017
The Great Compensation Divide
Here’s the scenario and it’s playing out in many companies who find it challenging to attract new talent.
Bob works for ABC company; he was lucky enough to be hired in 2009 when the economy was soft and roles were hard to come by. He actually landed the role after a series of interviews when the company had over 200 applicants apply. He is a Senior Staff Accountant who at the time brought 4 years of industry specific work experience when he landed the role. Bob felt very fortunate to accept the compensation offered which was 45K. Bob has received very positive performance reviews over the last 7 years, he was given a standard 3% increase year to year and is currently earning around 55,500.00. The company has grown, and the volume of work has doubled, and they needed to hire an additional senior staff accountant with 3-5 years of experience, same description, same role. Bob is expected to train this individual and work with them side by side.
The company has done some salary analysis and is prepared to offer a salary range of 60-70K for a new Senior Staff Accountant. The candidate pool is tight; the company is a mid-sized firm that needs to compensate competitively to secure a new employee that can work well with a small accounting team.
But first, the organization needs to address what they plan to do with Bob. He has the deep institutional knowledge, fits in well with the culture and has stayed even though he has been contacted by other firms and recruiters because he truly likes his boss and his co-workers. He has also accepted the increased workload that eventually dictated the need for additional support. How will Bob feel if he learns that his new co-worker who has half the overall work experience and no institutional knowledge is earning around 25% more (if they offered the higher end) and has not proven themselves as a key contributor in a similar role within the company?
There are a number of reasons the company may elect not to address this horizontal pay inequity. Perhaps Bob is not assertive enough to ask for a raise. Annual raises rarely keep up with inflation. If Bob is valued, a salary adjustment based on the market is in order. Bob may start looking for another position if he finds out what his co-worker is making and most employees do eventually learn about pay inequity or share this information. Why would the company wait until they are in a position to have to counter offer to compel Bob to stay? There are numerous reasons why this is a bad idea, but that’s a subject for another blog.
Companies that elect not to address this will experience higher turnover and low morale. Adopting the philosophy that if Bob does not ask, Bob does not get is not a good retention strategy. Can the company justify why a new hire is being paid over 25% more? What if the new employee brings less experience and no specific or special skills or knowledge that is currently missing with Bob?
If Bob leaves for a better offer, the cost of replacing him will be much higher than making this adjustment; further bolstering Bob’s loyalty which he has already proven. Not to mention the company, in this case, would be left with two green employees who would have to learn the companies business, workflow, policies, etc.
The market continues to remain tight; companies should be considering how they plan to address this type of pay inequity if they want to retain their most precious assets. Ignoring the problem until someone gives notice is too late. Taking a proactive approach and understanding that the cost of the increase is far less than the cost of the replacement will help managers justify a bump in compensation. Salary inequities are much more costly to fix than to prevent. And, depending on the situation it may violate equal pay laws if the employee(s) is within a protected class.
This is just one example of salary compression. It’s a major issue impacting organizations; I’m very curious to hear how others are dealing with this type of situation. Please comment and thanks for reading!
