Pay compression is a challenge many employers don’t recognise until it starts to quietly erode morale, create tension, and impact retention. Whatever the size of your company, understanding pay compression, and knowing how to prevent it, is key to maintaining a fair, motivated, and high-performing workforce.
In this blog, we’ll review what pay compression means, why it happens, the potential risks for your business, and how you can address it effectively.
Defining Pay Compression
Pay compression occurs when the pay gap between employees in different roles becomes too narrow , typically when new recruits or more junior employees are earning close to (or even more than) longer-serving or more experienced staff.
This can happen gradually and unintentionally, often triggered by:
- Inflation and market shifts which force higher starting salaries
- Recruitment pressures in competitive sectors and locations
- Flat or infrequent pay progression for existing staff
- Inadequate pay review processes
For example, a company recruits a new customer service representative on an annual salary of £26,000 due to rising market rates. However, an employee who has been in the same role for three years is earning £25,000 a year. That small difference creates compression – and potential discontent.
Why Pay Compression Matters
Pay compression can have a significant impact on your organisation’s performance and culture. Here’s how:
- 1. Lower Morale
Existing employees may feel undervalued when new starters earn as much or more than they do, especially if they’ve taken on more responsibility or stayed loyal during tough periods. This can also cause tension and resentment between staff which can result in conflict.
- Increased Turnover
Staff who feel their pay is unfair are more likely to look for roles elsewhere, taking skills and knowledge which are valuable to your business with them.
- Undermined Career Progression
If senior roles are barely better paid than junior ones, there’s little incentive for employees to develop or take on more responsibility.
What Causes Pay Compression?
Pay compression isn’t necessarily the result of poor management, it’s often a by-product of fast-moving recruitment markets, budget constraints or changes in the wider economic landscape. Common causes include:
- Inflationary pressures and increases in the National Minimum Wage and National Living Wage which push up the salaries of new recruits and some existing staff
- Failure to review internal pay regularly as this would identify any existing differentials and aim to maintain them where possible
- Budget limitations preventing increases for staff
- Inconsistent or unclear pay policies
- Outdated salary banding or job evaluation systems
How to Spot Pay Compression
Depending on your role within a business you may not always spot the signs of pay compression. There are however a number of telltale signs that pay compression is a concern. These include:
- New starters negotiating higher starting salaries
- Long-serving employees expressing frustration
- Exit interviews mentioning, “feeling underpaid”, “unfair pay”, or similar
If you dig into the detail you can also see pay compression by analysing internal pay data. In order to get a better understanding of the situation you should compare pay across, employees who are in similar roles with different levels of experience and news starters vs. established staff. These measures will help you to see if compression is an issues. In addition, tools like a basic pay audit or job evaluation framework can help. ACAS provides a useful overview here.
Practical Ways to Address Pay Compression
By implementing annual or biannual reviews a business can help ensure salaries keep pace with market conditions and internal expectations. If you’re unsure where to start have a read of our previous blog. Some companies also operate pay bands and pay progression routes with clearly defined criteria. This doesn’t mean sharing exact salaries, but it helps to manage pay expectations and salary progression and by applying established criteria a company is open about how decisions are made.
Legal Considerations
While pay compression itself isn’t illegal, it can lead to indirect pay discrimination if not monitored. For example, if older or female employees consistently earn less than newer (often younger or male) colleagues for similar work, you could face claims under the Equality Act 2010.
Make sure your pay decisions are:
- Evidence-based
- Non-discriminatory
- Clearly documented
Pay compression is often subtle, but it can damage employee trust, engagement, and retention if left unchecked. By taking a proactive and structured approach underpinned by regular reviews, clear pay policies and practices, and honest communication employers of any size can avoid compression becoming a problem.
Do you have any questions about today’s blog, need help in becoming legally compliant with contracts/policies or can we support you in taking away any people pains to give you peace of mind?
If you answered yes to any of the above, just give us a call at CUBE HR on 01282 678321, or book in a FREE 30 Minute HR Health Check here FREE HR Health Check and we’ll happily give your business a full HR overview with our personal recommendations absolutely FREE!
Why not also check out last weeks blog A Guide to Pay Reviews
We also have a YouTube channel with loads of handy videos outlining various HR related scenarios.
