As employers navigate the tight labor market, pay transparency continues to show up at the top of initiatives to pursue.

And for good reason. Pay transparency, whether it be via means of posting salary ranges in job listings, publicly announcing open pay communication policies internally, or obtaining pay equity certification, can help organizations differentiate themselves from the competition. 

Research from ADP shows that organizations that prioritize pay transparency see greater employee retention, increased employee engagement, higher productivity, and overall higher business performance. 

Beyond the known benefits of pursuing pay transparency, it’s also a serious legal requirement. Many cities and states across the country, including New York City, Colorado, Nevada, Connecticut, Rhode Island, and most recently California, have pay transparency laws. Namely, these states require employers to post salary ranges in job listings.

What employers may not be aware of as they usher in pay transparency policies, however, is the potential outcome of wage compression, also known as pay compression. 

What is wage compression?

Wage compression is the unintended consequence of establishing a salary range for a particular job function that does not give consideration to legitimate reasons for paying employees differently. Wage compression often occurs between veteran employees and new hires, but can also happen between managers and reporting staff.

Here’s an example:

John Apple is a Senior Business Analyst at Data Corporation. His 10 years of experience at the company have earned him an annual salary of $100,000 a year. Data Corporation is now looking to fill a Junior Business Analyst role, and to compete with the inflated labor market, is offering a salary range of $90,000 to $95,000. 

Since Data Corporation has established pay transparency policies, John Apple finds out quickly how much the junior position will be making and is unhappy about it. John immediately informs his supervisor of his concerns, to which his manager is inadequately able to assist. 

While Data Corporation’s pay transparency intentions are good, it’s created a potential pay equity situation as John Apple is being significantly underpaid, despite his tenure and experience with the company.

This scenario is the result of wage compression. In an effort to keep up with labor market pressures, Data Corporation has created an inequitable situation for John Apple by offering a salary range for the junior position that disregards John’s experience, skillset, and tenure with the company.

Solving for wage compression

Obviously, wage compression poses a serious risk to organizations looking to prioritize pay transparency and fair pay. In addition to potential reputational damage, wage compression can force tenured employees to look outward for work and possibly create legal issues with state and federal government agencies.

Fortunately, there are concrete steps employers can take to position themselves as leaders in pay equity, while also solving for wage compression.

Step 1: Establish a pay policy

Organizations making strides to incorporate pay transparency within their business have a head start on establishing a company-wide compensation strategy. In creating your pay policy, give special consideration to your current compensation practices. Ensure that your salary ranges are defined within each department, align with the current market, and account for regional differences.

Step 2: Educate staff

Compensation structure involves more than just one department at an organization. HR, accounting, benefits, and departmental heads usually play a role in determining salary ranges for respective positions. As such, these individuals must be educated on the company pay policy. 

Since managers outside of normal compensation functions aren’t privy to the latest discussions around pay transparency, it falls on the leaders and heads of organizations to facilitate collaboration between these different organizational groups. Ensure your staff has the tools to be successful in ensuring equitable pay for existing workers, as well as new ones.

Step 3: Implement software for verifying pay

An organization’s pay equity profile changes every time an employee enters or exits the workforce. Since pay is dynamic, employers need to be able to move quickly. Establishing a policy and educating staff takes time. While these steps are in motion, best practices encourage implementing a software solution that tracks compensation in real time.

Solutions, like PayParity, conduct a pay equity audit and then continuously monitor pay equity analytics across your workforce at the intersections of gender and race/ethnicity, providing you with complete visibility into your current pay practices. With these insights, you can accurately and quickly create equitable salary ranges for future job openings.

PayParity includes the Equal Pay Estimator, which ensures new salary offers are equitable and do not create wage compression issues. The tool analyzes similar job positions and compensable factors to identify internal ranges. These internal ranges are then laid against external labor market data to create competitive, equitable salary recommendations. 

Pay transparency is a step in the right direction. With the correct tools, organizations can overcome hindrances like wage compression. Contact us to learn more about PayParity and the Equal Pay Estimator. 

For more information on the value of transparency in the workplace, download our research report, Creating a Culture of Diversity, Equity, and Inclusion, conducted by the Harvard Business Review.

Download: Trusaic and HBR Research Report

Organizations that conduct a pay equity audit must communicate their progress and achievement along the way. To help you faciliate discussions around compensation, we created the Pay Equity Communications Planner.