Have you heard of the compounding effect? It can have a devastating effect over the course of a person’s career.

What is the compounding effect?

The compounding effect explains how the trajectory of an individual’s earnings throughout their professional career. The amount you earn at the beginning of your career has a direct impact on what you’ll earn over your lifetime. 

This is why starting salary is so important. A $1,000 difference in earnings at the start of one’s career can translate into over $500,000 in lost income over a lifetime of working.

To understand how the compounding effect happens, watch the short video below or keep reading.

Watch: Compounding Effect Video

Who should care about the compounding effect?

This concept is of particular interest to women, who on average earn 18% less than men, according to data from the Bureau of Labor Statistics (BLS).

Recent data from the National Association of Colleges and Employers (NACE) says that the gap between working men and women begins right out of college too. 

A report issued by NACE says “women with newly minted bachelor’s degrees earn an average of $52,266 compared to $64,022 earned by men, mirroring the overall differential in pay between men and women reported by the BLS.”

But the compounding effect doesn’t affect women only. Persons of color and other marginalized communities can be affected by the compounding effect and since 64% of workers accept the first salary offer they receive, it’s paramount for everyone to fully grasp the subtle phenomenon.

Why is the compounding effect important?

In the era of workplace equality, the attention and demand for pay equity are at an all-time high. Education is key to eliminating gender and race/ethnicity pay gaps. If the compounding effect goes unchecked, it can exacerbate pay disparities between workers.

For example, a woman whose starting salary is $10,000 below market value could lose out on millions of dollars over the following years of her career. The reason for this is because each year she’s underpaid, the lost income increases or compounds.

Luckily, there are tools that can help eliminate the negative outcomes of the compounding effect. Our Equal Pay Estimator provides real-time pay recommendations to decision-makers so that equitable, competitive salary offers are extended for every new hire. Tools like the Equal Pay Estimator ensure that every working person gets the compensation they’re entitled to.

To further understand the compounding effect, watch the video above or download the guide below.

Download: Compounding Effect Guide

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.