Pay Compression

You may have people who just started working for your business that are making the same amount as employees who have been there for years. Due to inflation, the long-time employees' salaries did not keep pace with the starting salaries of today. This common problem is called pay compression.

Why should you be concerned about pay compression? If senior employees find out that newcomers make as much as they do, you'll have problems with morale. Depending on the economic climate and conditions within your industry, senior employees may choose to leave for better paying positions with other employers.

Clearly, the only way around this problem is to make sure that long-term employees are paid more than newly hired employees. If market conditions require that you give new employees more pay, you'll have to give employees that are already working for you more as well.

Some business owners have the philosophy that raises should be linked strictly to the performance of the employee and that employee's contribution to the success of the business. If that's how you feel, you probably will not put as much credence in the idea that employees with more time in the business should make more than newcomers. In that case, your focus will be on linking pay with performance.