Understanding wage compression
Wage compression erodes the pay differential between employees at different levels, often making it seem unrewarding to pursue promotions or stay long-term. This can affect morale, retention, and overall workforce dynamics.
Healthy pay structure
- Clear differentials by level
- Progression rewards experience
- Promotions feel valuable
- Retention of senior staff
Wage compression
- Small gaps between levels
- Experience not rewarded
- Promotions less attractive
- Senior staff turnover
Causes of wage compression
Several factors can lead to wage compression in Australian workplaces:
Common causes
Impact of wage compression
Wage compression can have significant effects on your workforce:
- Reduced motivation: Experienced staff feel their contribution isn't valued
- Higher turnover: Senior employees leave for better-paying opportunities
- Promotion resistance: Employees don't want supervisory roles for minimal pay increase
- Recruitment challenges: Hard to attract experienced candidates at compressed rates
- Cultural issues: Perceptions of unfairness affect teamwork and morale
Annual wage review impact
The Fair Work Commission's annual wage review typically increases minimum award rates. If you only adjust pay for award-minimum employees without reviewing above-award rates, wage compression will gradually worsen. Budget for proportional increases across all levels when minimum rates rise.
Managing wage compression
Prevention strategies
- Percentage increases: Apply same % across all levels
- Pay band structure: Clear ranges with meaningful gaps
- Annual reviews: Assess compression risk each year
- Adjustment pools: Budget for equity corrections
Correction strategies
- Pay audits: Identify where compression exists
- Targeted adjustments: Address most affected roles first
- Market benchmarking: Compare to industry rates
- Non-monetary rewards: Consider benefits/flexibility
Key takeaways
Wage compression reduces the pay differential between employees at different levels, often resulting from minimum wage increases that aren't matched by above-award adjustments. It can harm morale, increase turnover, and make promotions less attractive.
Address wage compression proactively by applying percentage-based increases across all levels, maintaining clear pay band structures, and conducting regular pay audits. Track employee classifications and pay rates with workforce management software to identify compression issues before they affect retention.
