Barry L. Brown, SPHR, CCP

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October 12, 2006
Taming the Wage Compression Beast
Barry L. Brown, SPHR, CCP President Effective
Resources, Inc.
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The situation

• The economy is strong
• Business is growing
• Competition for good employees is fierce
• Unemployment is well below 4, (i.e., everyone
  who wants to work is working)
• Salaries are growing at close to 4 - with some
  jobs moving much faster

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The beast is alive
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The beasts tracks

• Sign-on bonuses where there were none
• Employee referral bonuses where there were none
• Pay structures responding to both legal (min
  wage) and competitive pressures
• New employees hired at higher salaries than
  current employees

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The results

• Longer-term employees feel cheated and
  unappreciated
• Employees lose faith in management and find jobs
  elsewhere
• Or worse employees lose faith in management and
  stay
• Costs increase, morale drops, customer service
  falters, business suffers

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What to do

• Remedy wage compression before the hire is made
• Address wage compression when structures change
• Tame the wage compression beast in your company

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Keeping the beast away

• Get senior management to back this one!
• Do not hire an employee for more than the lowest
  paid competent performer
• Exception If the new hire will be clearly
  recognized by peers as superior, can hire at more
  than current employee(s)
• Note Current employees hardly ever recognize
  superior talent and when they do, they seldom
  acknowledge it

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The recruiting challenge

• Its easy to find good, qualified employees when
  there are no restrictions to pay
• Managers always know somebody who is perfect
  for the job, but needs to make more than youve
  ever paid for the job
• The Recruiting Challenge Recruit the best
  people you and afford, not the best people you
  can find

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Identifying the beast

• Find employees, especially recent hires, who are
  paid more than their peers
• Compare years-in-the-job and experience, but
  dont overlook skills and competencies
• Exclude those situations in which skills,
  competencies, and/or experience is clearly
  superior to peers
• Identify situations you need to correct

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Taming the beast

• Method 1 (to address structure changes) The
  Wage Compression Triangle simple, easy to
  understand, easy to administer
• Method 2 (to address wage compression from any
  cause) The Expected Rate calculation more
  demanding to calculate, more difficult to
  communicate, but more accurate when considering
  all factors

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Method 1 - Compression triangle
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The compression triangle ...
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Lookout for compression ...
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Managing compression ...
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Managing compression ...
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Managing compression ...
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Numbers for example ...
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Making the moves ...
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Wage compression !
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Managing compression ...
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Managing compression ...
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Rate comparison ...
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Method 2 Expected Rate

• Where should the employee be in their pay range
• Based on the pay range minimum
• Based on your philosophy of how long it should
  take to achieve midpoint
• Based on the time-in-job (with your company)
• Assume that hiring rate recognizes previous
  experience, skills, competencies, etc.
• Use Excel to calculate the rates

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How long to midpoint

• Companies spend a lot of time and money to ensure
  structures reflect market
• Companies almost never develop a pay delivery
  process than will enable employees to be at
  market by the time theyre fully competent

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Critical questions

• Question 1 How long does it take for a
  qualified person to become really good in a given
  job?
• Question 2 How long does it take to move from
  the hiring rate to the midpoint of your pay grade
  (or market)?

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The learning curve
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The learning curve
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The learning curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Paying on the curve
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Critical questions

• Question 1 How long does it take for a
  qualified person to become really good in a given
  job?
• Question 2 How long does it take to move from
  the hiring rate to the midpoint of your pay grade
  (or market)?

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• If there is a difference of more than 6 months
  between Question 1 and 2, youve probably got
  high turnover!

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The Expected Rate

• Assume the following
• Employee in job 2.5 yrs making 33,000
• Minimum of pay range is 28,500
• Philosophy get to Midpoint in 3 years
• Min to Midpoint is 25 change
• Excel formula
• ABS(FV(7.7217,2.5,,28500))
• 34,348.13

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Compression adjustments

• Expected Rate v. Current Rate
• Using previous example
• Exp Rate 34,348.13
• Employee rate 33,000
• Comp Adj 1,348.13
• These adjustments should be merit based and may
  be spread over more than a year to stay within
  budget restraints

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Taming the beast

• Dont let it out of its cage (i.e., dont hire at
  more than lowest paid competent peer)
• Hire the best people you can afford, not the best
  people you can find
• Plan to cage the beast when structures change
  and, budget for it
• Identify compression issues and fix them even if
  over 2 or 3 years

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Gaining approval

• Calculate the cost of turnover
• Gather facts from line management on the effects
  of turnover
• Calculate the increases necessary and provide at
  least one or two options to spread costs over a
  period of time
• Build a business case for the increases

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Questions ?
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Effective Resources, Inc.

• Barry L. Brown, SPHR, CCP
• [phone] Toll Free
• Barry_at_EffectiveResources.com
• www.SalarySurveyOnline.com
• Incentive Plans
• Employee Opinion Surveys
• Affirmative Action Plans