Your starting salaries should be competitive, fair, and aligned with your budget. Many factors come into play when striking this balance, including understanding and addressing salary compaction.
Salary compaction is a phrase that comes into play and occurs when there’s little differentiation in pay between employees regardless of their skills or experience level. This typically happens in rapidly evolving industries or due to abrupt market rate changes, where new hires may end up earning as much as or close to long-standing employees in similar roles.
Managing salary compaction is crucial to maintaining internal equity and motivation among your workforce.
Here are three other major considerations to consider:
1. Starting Pay Considerations & Avoiding Salary Compaction
The market rate for the position, based on compensation data and surveys collected from reliable sources, is the first consideration.
After establishing the market rate, several factors influence starting pay and can help lean away from salary compaction:
- Candidates’ experience. Has the candidate worked in a similar role or field before? If so, for how long?
- Candidates’ education. Does the candidate have degrees or certifications that would make them an asset to the company?
- Geographic location. Areas with a higher cost of living usually demand higher pay.
- Candidates’ expectations regarding pay. Do they align with what you plan to offer?
- Company budget. Is there room for negotiation?
- Employee benefits. Some candidates will accept slightly lower pay for a more generous benefits package. Others will not.
- Internal equity. If you have employees in similar positions, be sure to review their salaries to ensure pay equity. This helps you avoid salary compaction. As mentioned earlier, salary compaction is when employees with different levels of experience, skills, or qualifications receive similar pay. (i.e., the new hire being paid more than longer-service employees for the same job).
2. Pay Range
Also called a “pay scale,” a pay range includes the minimum, midpoint and maximum pay for each position. For example, a pay range may encompass the following:
- First quartile, for those who meet the minimum requirements but have little or no experience and require additional training.
- Second quartile, for those with previous experience but might need additional training.
- Midpoint, for those who are fully experienced. Note that the midpoint reflects the market rate for the position. Employers often start new hires at the midpoint, as this allows payment at market rate plus enables the new employee to grow in their role and advance up the pay scale.
- Third quartile, for those who are fully experienced and regularly perform above expectations.
- Fourth quartile, for those who exhibit deep knowledge, expertise and outstanding performance.
Candidates are likely to have their own pay range in mind, so it’s important to establish reasonable ranges.
3. Laws Governing New-Hire Pay
When setting starting rates, pay attention to applicable laws, such as the following:
- Fair Labor Standards Act (FLSA)
- Americans with Disabilities Act (ADA)
- Title VII of the Civil Rights Act
- Equal Pay Act (EPA)
- Age Discrimination in Employment Act (ADEA)
- Lilly Ledbetter Fair Pay Act
- State and local salary history ban laws, nondiscrimination laws and wage payment laws
Starting pay typically falls within the range minimum and range midpoint, depending on the candidates’ experience, credentials and other factors explained earlier. If a job offer exceeds the hiring range for the position, whoever made the offer (e.g., the hiring manager) should provide justification for their decision.
How BlueStone Services Can Help
Let us help you develop and manage an effective talent acquisition strategy and provide recruitment support for finding the best candidates for your positions, including setting competitive pay rates and avoiding salary compaction.
Contact us today to learn more about how we can support your recruitment efforts on a project or ongoing basis.
