What is pay compression?

Pay compression occurs when there is a minimal difference in pay between employees who have different levels of experience, skill, or tenure. This often happens when new employees are hired at salaries close to or even equal to those of more experienced or long-tenured employees. Such a situation can lead to dissatisfaction among long-term employees, who may feel undervalued despite their experience, as their compensation does not reflect their loyalty or accumulated expertise.

By recognizing pay compression, organizations can assess their compensation structures and make adjustments to ensure fairer pay based on experience and performance, thereby addressing potential morale issues and retention challenges.