Supplemental materials for LEAP 2025 session Structuring Pay with Confidence: Transparency, Equity and Audits
By Brian Levine, Ph.D.
Pay compression—hiring new employees at higher pay rates than incumbents—is a common issue faced by HR professionals. It is exacerbated when labor markets are tight, as they are today. Compression devalues the contributions of incumbents and poses a retention risk, as employees perceive inequities. The dynamic is particularly concerning for companies that rely on firm-specific human capital—deep knowledge of company products, processes and people—for their comparative advantage.
Compression is also a known culprit driving gender inequities. A commonly offered rationale is that men negotiate pay more effectively than women and, therefore, get hired at higher pay rates. Female incumbents fall even further behind.
New “pay transparency” regulations in many U.S. states and emerging elsewhere serve to limit future compression opportunities. In relevant jurisdictions, organizations must post pay ranges when hiring. Seeing the ranges helps all to bargain from a comparable position and empowers incumbents to seek more equitable pay. Pay transparency should serve to reduce the gender gap and the gap between new hires and incumbent employees, reducing inefficiencies driven by decentralized managerial decisions and short-term constraints.
Organizations have increasingly relied on pay equity analyses to address areas of inequity driven by gender and race that arise with decentralized and discretionary decisions. Pay equity analysis accounts for legitimate differences between employees, in their roles and experiences, to calculate “adjusted” pay gaps in various organizational areas. Where gaps are found, the analysis provides insight on specific employees for whom pay should be reviewed and the impact of processed adjustments on the gaps. It can also identify the specific jobs for which compression is driving gaps (i.e., jobs into which female and male new hires are coming in at differential pay rates), ensuring that recruiters can review hiring processes specific to those roles.
Pay equity analysis can be tailored so unintended experience differentials are not perpetuated. Statistical models used to adjust for employee differences reveal the actual factors that come to drive employee pay inside the organization and their effects. The models can show, for example, that new hires come in at a premium relative to incumbents and that tenure at the organization is penalized. In such a case, the model can be adjusted to omit the offending factor.
The revealed factors that are valued by an organization can also be leveraged where employees raise questions about how they are positioned in their pay ranges. Managers can reference the most critical pay drivers and, before any conversation takes place, ensure they can adequately defend and explain the position of the employee.
Pay compression has largely been a symptom of short-term focus—a desire to quickly onboard expensive, critical talent, with limited budget available to increase pay for incumbent peers. It has had negative effects on the ability of organizations to ensure equity and align pay differentials with the most productive employee attributes.
The convergence of new regulations and an increased focus on pay equity should serve to diminish the extent of such inefficiencies in the future as organizations are more effectively evaluating their practices.
Brian Levine, Ph.D., is a partner at Merit Analytics Group.
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