Upcoming Legal Changes May Result in Salary Compression

With the new requirement raising most exempt employees’ minimum salaries to $47,476 per year beginning December 1, and the NY minimum wage going to $9.70 an hour beginning December 31, wage compression is becoming a real concern to companies throughout the region. Suddenly, New York employers are facing serious salary compression, where employees in lower-level jobs will be paid almost as much as those in higher-level jobs, including managerial positions. A manager earning $35,000 annually and working 50 hours per week will need to be paid an hourly rate of about $12.23 per hour if the employer does not want to increase what that manager earns. With a minimum wage of $9.70 per hour, that manager is going to feel underpaid and/or underappreciated. These intersecting laws are going to cause increases to personnel costs, and smart companies will do this in the most strategic way possible to avoid negative consequences.

Most organizations that have experienced salary compression in the past did so because raises have been flat for most of the last decade, and managers throw money at new hires, thinking that is what is needed to get “the best.” Those new hires may get a salary higher than their colleagues who have been around for a while, but managers fail to correct the inequity. No matter what the cause, wage compression can be toxic.

Experts in the field generally state that wage compression is in the red zone if direct reports’ salaries are more than 95 percent of supervisors’ salaries. Areas where direct reports’ salaries are 80 to 95 percent of super- visors’ salaries should be watched carefully. In the example cited above, 95 percent of the supervisors’ salary is $11.01, only $1.31 above minimum wage. In fact, the minimum wage will be only nine cents below 80 percent of the managers’ wage. As companies try to figure out how to adjust compensation for employees, developing a compensation policy is key.

Some steps that companies can take to make sure the salary compression caused by these changes does not become worse over time include controlling pay through policy and budget- ing. If organizations fail to face this issue head-on, different departments will take different approaches, causing ill will, problems when employees move among departments, and internal competition, which does not help the organization.

Since the differences in pay among employees need to be finely calibrated, control is needed in the event of turnover. Managers will usually want more experienced, higher-cost candidates. Instead, when a new job opens, try to promote someone from within, rather than hiring from the outside. Absent that, look for external candidates who are ready to move up into the job as a promotion rather than an experienced candidate looking to bump her pay. This will limit the organization’s need to pay the new hire an experience premium, which others in the department will not share. Consider requiring a review of equity adjustments for incumbents if new hires are brought in at higher salaries. This should encourage man- agers to think hard about how important prior experience in the same job really is.

Another cause of salary compression occurs when one organizational unit is relatively liberal with salary increases and promotions, while other parts of the organization that have the same jobs are not. Therefore, controlling this tendency is crucial. Instituting transparency and calibration can mitigate this problem. Transparency can take the form of a simple scorecard showing the rates of increases and promotions in each unit. Calibration can involve managers sharing plans with peer managers, as well as approval for any actions before they take place so that a senior leader can spot any actions that will cause inequities, including compression. Together, these tools act as a norm and, over time, lead to decisions that are more consistent and responsible.

While salary compression is not illegal, it is often accompanied by pay inequities that could violate equal pay laws. In situations where salary compression causes salary inversion—where newer staff make more than experienced staff—it could create a pay equity problem if the experienced staff are a protected class. Furthermore, salary compression can be a serious problem that eventually causes an organization to lose some of its most talented employees. Although many organizations face a situation today that they have no control over, there are actions they can take now and in the future to keep it from reoccurring. Now is the time for organizations to address anticipated salary compression arising from changes in the law, as well the homegrown kind, as this problem costs more to fix than to prevent.

Jacqueline Kelleher is an attorney with the law firm of Stafford, Owens, Piller, Murnane, Kelleher & Trombley, PLLC, who represents employers before administrative agencies and advises on day to day questions.