Wage compression is a compensation issue that can damage employee morale, harm retention, and even pose legal issues.
It’s particularly risky in global teams where inconsistent pay practices across regions can quickly escalate into bigger organizational challenges. And it’s getting riskier, with pay transparency policies exposing pay issues that were previously hidden.
The good news? It’s a preventable problem.
In this in-depth guide, you’ll hear from industry experts about how to identify and address wage compression in your organization. You’ll also learn how companies can adapt their approach to global compensation to avoid the problem altogether.
The article features expert insights and practical tips from:
- Elena Bajada, Managing Director at executive search firm Major, Lindsey & Africa
- Jason Greer, Employee and Labor Relations Expert
- Terri Gallagher, Workforce Futurist and CEO of Gallagher and Consultants
What is pay compression?
Pay compression – also known as wage compression or salary compression – occurs when employees with different levels of experience, skill, and qualifications earn very similar or identical salaries to one another.
This means a new hire in a company may receive a similar salary to a more experienced colleague or a peer who has been with the company for a long period of time.
A similar concept is salary compaction, where the differences in pay between job levels are too small to be meaningful.
Pay inversion is a more extreme scenario, where new or less experienced hires earn more than their longer-tenured or more experienced colleagues. Read on to understand how these types of issues arise.
How does pay compression happen?
Wage compression often happens when internal pay structures fail to keep up with the pace of changes in the market. “In my field, it’s a global reality that salaries at the junior end have increased so significantly that more senior roles just can’t keep up,” says Elena Bajada, Managing Director of legal executive search firm Major, Lindsey & Africa.
Some of the other factors that contribute to wage compression include:
- The market rate for salaries increasing: This may lead to generous starting compensation for new hires but for long-time employees, the market changes are not reflected in their salaries.
- Minimum wage increases: These can result in junior team members’ wages increasing, narrowing the gap between their salaries and those of more senior colleagues.
- Lack of clarity or structure in compensation: Some companies favor a flat pay structure and avoid hierarchical approaches like salary banding, but this can result in wage compression because it doesn’t account for role complexity, performance, or tenure.
- Inconsistent pay practices over time: When pay practices change, salaries that were determined under an outdated set of pay practices are not usually updated to reflect the change in approach.
- An internal focus on attraction over retention: In a competitive labor market, companies may prioritize attracting new talent with generous compensation over rewarding long-time employees with a salary increase.
These factors can influence compensation management in any industry or size of organization – and it’s not a new problem. A 2022 study from global recruitment agency Robert Half revealed that 56% of companies had experienced pay compression in the previous 12 months.
Although it’s a common problem, there’s evidence to suggest it may be more common in certain types of companies than in others. “Salary compression is less typical in public companies, where they have structures for compensation bands”, Bajada points out, referencing her firm’s 2024 In-House Counsel Compensation Survey. The study reveals that, on average, lawyers receive significantly higher compensation at publicly traded companies than at companies that are privately owned.
What are the consequences of wage compression?
“I’ve been warning my clients about wage compression for years,” Greer says.”If you don’t take care of your employees today, don’t be surprised if you don’t have any employees.”
The consequences of salary compression really can be that serious. When employees realize their newly-hired peers or less-experienced colleagues are being paid nearly as much – or more – than them, morale and motivation can nose-dive.
“It’s a scenario that creates what I call ‘zombie employees'”, Greer shares. “After a period of time, they get tired of the fact they’re not getting raises, but choose not to go elsewhere. So they show up, they clock in, and they do the minimum of what they’re supposed to do in order to keep their job.”
For Greer, this all comes down to the implicit dynamics of the employer-employee relationship. “The psychology of employment is, if I show up and I give you the best that I have for 8, 10, 12 hours, you’re going to reward me on that other side,” he explains. And when that sense of reward stops? “Employees might stay,” Greer says. “But mentally and emotionally they’re gone.”
This decline in employee morale can have serious consequences for employers. As Greer puts it: “It drives down productivity. And if there’s enough of us in the organization driving down our productivity, the organization starts to plummet.”
For Bajada, the impact on employee retention – particularly among senior team members – shouldn’t be overlooked when it comes to thinking about wage compression. “Experienced employees look to go somewhere else that offers better compensation,” she points out.
While some employers may feel confident that they can tempt seasoned employees to stay by making a generous counter-offer, research shows that this strategy is rarely effective. According to talent acquisition technology provider, Eclipse Software, 80% of candidates who accept a counter-offer from their current employer leave within six months.
Wage compression can also create budget strain for companies. “Generous salaries for new hires can really create financial imbalance within an organization, Bajada explains. “to bring in one person who disrupts the way a team is set up from a compensation perspective is really detrimental.”
The impact of pay transparency on salary compression
The rise of pay transparency legislation around the world means that employees will soon have greater visibility than ever before of their colleagues’ salaries.
The EU Pay Transparency Directive requires all EU companies to start sharing information on salaries by June 2026. Meanwhile, in the US, pay transparency laws are already in place in 10 states, including California, New York, and Washington. The Salary Transparency Act – introduced to Congress in 2023 – could soon make it a legal requirement for all US companies to disclose salary ranges for open vacancies.
Although the formalization of pay transparency is an emerging trend, the concept of employees having access to their colleagues’ salary information is far from new. As employee and labor relations expert, Jason Greer, says: “The law has finally caught up to wage transparency, but people have been discussing their wages for the better part of 30 years.”
Greer points out that these conversations aren’t just happening among peers. “Millennials – and especially Gen Z – have changed the game, because now they’re taking it to social media,” he points out.
For employers, this creates a strong imperative to address wage compression in their organizations. As Greer puts it, “The day and age of being able to get away with this is over because you are one TikTok away from the rest of the world knowing how you treat your employees.”
But salary information isn’t just being disclosed on social media. Websites like Glassdoor invite employees to reveal their salaries to provide recruiters and job hunters with accurate salary benchmarking data. “There are metrics out there that didn’t exist a few years ago, and people can get a real idea of the salaries within their companies,” says Bajada
While the rise of pay transparency means employees are more likely to know whether they’re being underpaid, Bajada argues that it also makes employers more likely to do the right thing: “I think when salary brackets are clearly explained and available to all, that builds trust and reduces frustration – because people know that anyone being hired is being brought in on an equitable scale,” she explains.
For Bajada, pay transparency isn’t part of the wage compression problem – it’s part of the solution. “I think that transparent communication is a way forward in moving away from salary compression,” she says.
How to identify pay compression
So how can you tell if you have a wage compression problem in your organization? When it comes to spotting the tell-tale signs of wage compression, it’s equally important to both analyze your internal data and look at what’s happening in the external market.
Examining your company’s payroll data
If your organization has a wage compression problem, the answer is likely to lie in your payroll metrics.
The centralized reporting and analytics in global payroll platforms like Multiplier can be invaluable, providing data-driven insight about compensation trends across regions.
For workforce futurist, Terri Gallagher, the power of this data can’t be overstated. “Leveraging global market rate intelligence and real-time compensation benchmarking helps companies make informed wage decisions and prevent salary inflation.”
When looking at your company’s raw salary data, there are two key methods for shedding light on a potential wage compression problem:
- Compare new salary offers to the pay of existing employees. If new hires are being offered the same or higher pay as current employees with similar titles and responsibilities, wage compression may be at play.
- Look at the distribution of employees within specific salary ranges. If employees are clustering at the top or above the range, this could be a sign of wage compression.
Undertaking wage analysis and benchmarking
Greer recommends the additional step of conducting a wage analysis survey. This allows employers to get a feel for current market rates and assess how their approach to compensation stacks up. “Do it within 100 miles of wherever your company is based because you have to know what your competitors are paying,” he advises.
When it comes to compensation, it’s crucial to remember that employees think locally, even when they work for multinational companies. As Greer points out, “You might be global, but to your employees, you’re local”. For companies designing compensation strategies for a global workforce, Greer therefore recommends a hyper-local focus. “I really press upon employers to make sure that looking within the radius of where their employees are coming from,” he says.
To understand local expectations, companies should benchmark against their competitors. Echoing Greer’s advice, Bajada says: “It’s really critical for employers to look at how competitors pay.”
She also recommends that companies evaluate their total compensation packages, rather than focusing solely on salaries. “Companies need to ensure that the packages they offer are of real value to the people who are joining,” she points out. This is where Multiplier’s localized benefits can come into play, allowing companies to offer country-specific and global benefits, tailored to the needs of an international team.
How to fix pay compression
If you identify a wage compression problem in your company, it’s vital to address it. Greer’s advice? “Talk to your employees to figure out where they are, and then ask the big fundamental question, ‘What can we afford?’.”
Depending on your organization’s answer to that question, here are some of the solutions you might want to consider to address wage compression.
Update salary ranges to reflect market rates
If your wage analysis and benchmarking exercise revealed that your salary ranges are below market rate, a straightforward solution – if your budget allows for it – is to update all the salary ranges within your company to reflect the current market rate.
Bajada also recommends reviewing the salaries of longer-tenured employees in senior positions, as their compensation tends to be the most affected by wage compression. “Adjusting senior salaries is really important to making sure that loyalty does pay in any way that it can, particularly in industries with talent shortages,” Bajada explains.
Reward performance and proactivity
Bonuses or other incentives tied to strong performance, particularly in revenue-generating roles, could help to increase productivity and restore morale for high-performing team members. “As a financial strategy for addressing wage compression, linking compensation to individual and team performance can be an effective option,” says Bajada.
For Greer, rewarding proactive employee behavior is a compelling long-term solution. “Incentivize your employees. Tell them: ‘Get your certifications, and I will pay you more for your certifications. Get your education. I will pay you more for your education.”
These behavior-based incentives can help create meaningful change in the employer-employee dynamic when it comes to salary increases. “Now you have an employee who is actively bought-in”, Greer explains.
Introduce non-financial incentives
If budget constraints make it challenging to address wage compression with financial strategies, consider what other incentives could boost employee morale and loyalty. Get creative and explore different options the organization could offer instead of or in addition to base pay increases.
As Bajada explains, there’s a vast range of options available. “There’s professional development opportunities, wellness initiatives, flexible work arrangements,” she says. “And then there are fringe benefits like on-site child care, subsidies for transport – anything that can boost employee loyalty and without necessarily increasing payroll expenses.”
Revisit your workforce strategy
A more long-term, strategic way to address wage compression is by reviewing the organization’s approach to managing work.
For Gallagher, this is fundamental to addressing the salary compression issue in organizations. “I don’t think wage compression is a pay issue,” she says. “I think it’s a workforce strategy issue.”
Gallagher believes that a big part of the solution is redesigning work itself. “If wage compression is a problem, you should look at the work itself, as well as the workforce mix. How are you getting work done? And is the workforce being distributed in the best way?”
One way companies can free up time to focus on these strategic workforce decisions is by implementing an automated global payroll solution like Multiplier. These platforms reduce the administrative burden for payroll and HR teams by automating payments, ensuring compliance with local tax and labor laws, and centralizing workforce data.
As a result, leaders can shift their attention from payroll processing to the bigger-picture workforce planning that Gallagher recommends.
Redesigning work itself
While it’s vital to address wage compression when it happens, it’s also possible to avoid it altogether. As Bajada puts it: “It’s all preventable if you put the right measures in place.”
That starts with designing clear, competitive salary bands, regularly benchmarking pay against the local market, and ensuring internal pay equity across tenure and roles.
It means investing in performance-based incentives, upskilling opportunities, and total compensation packages that reflect what employees truly value. And when budgets are tight, it means getting creative with non-financial benefits that boost morale and retention.
But ultimately, as Gallagher says, “The future belongs to those who break out of wage compression cycles by redesigning work itself.” Organizations that look beyond pay—rethinking how work is structured, how teams are built, and how talent is nurtured—are the ones best positioned to thrive. Wage compression isn’t just a compensation issue; it’s a strategic challenge. And it requires a strategic response.
Pay compression FAQs
Q. Is pay compression illegal?
No, wage compression isn’t illegal. However, wage compression and pay inversion both involve an element of legal risk. In countries with compensation discrimination legislation in place – like the Equal Pay Act in the US – employees may take legal action against their employer if they believe the wage compression in the company amounts to discrimination.
Q. Is there a formula for calculating pay compression?
Yes, a common method for calculating wage compression is dividing the midpoint of the salary range for a particular role by 2 and then multiplying it by 100. This produces a percentage figure indicating how much a particular salary is above or below the midpoint of the salary range.
Performing this calculation for the salary you plan to offer a new hire and the salary of an existing team member in the same role will allow you to assess whether wage compression might be at play.
If the existing team member’s salary produces a result of 102%, for example, their salary is 2% above the midpoint of the range for that role. If the salary you were planning to offer the new hire produces a result of 101%, this could suggest that wage compression is an issue.
