Salary compression: the compensation horizon summed up in two words.
In the past 12 months, I have had more conversations about salary compression (also known as wage compression) with financial institutions than in the previous five years, and I anticipate more conversations will unfold as we move into 2021. It is “compensation season” after all, and this time of updating compensation programs in anticipation of budgeting will bring into focus those challenging compression issues.
In its simplest form, salary compression is when current employee compensation is less than what an organization needs to pay to bring in new hires with comparable or, in some cases, lesser knowledge, skills and experience. This causes disgruntlement on the part of existing employees. Employees talk and compare notes.
Yes, it is shocking but true — employees talk about their compensation! And while you might be tempted to prohibit the discussion of compensation among your employees, don’t attempt to do so. Discussing compensation is a protected activity under the National Labor Relations Act.
Rather, you should take a step back and evaluate your compensation program and its administration. You truly want to answer the following questions:
- What is the financial institution’s compensation philosophy? To lag, meet or lead the market?
- How does your compensation structure align with your philosophy?
- How does your structure align with the market?
- How often do you conduct a competitive market analysis to ensure understanding of market trends?
- If you intentionally allow your compensation structure and pay practices to be below market, what other compensation components (think total rewards) are available to employees to offset paying below market and encouraging them to stay?
- Will that strategy last in the long term?
- If you identify salary compression, what will be your approach to alleviate compression if it exists? Or will you elect to let it ride?
My recommendation: Be proactive and intentional in managing your compensation programs. For those whose culture can support it (it may take a couple of years to get there), embrace transparency where possible and in the appropriate manner. Transparency will take the mystery out of compensation for your management team and employees and increases awareness of your financial institution’s compensation philosophy and approach to administration. Awareness and understanding can help manage the expectations of your employees.
The best way to be intentional and proactive is to start with data. And the first step — here comes the soapbox — is to participate in wage and salary surveys. The more robust and comprehensive the data that goes into a survey, the more confidence there is in the data as an output and a resource. What surveys, you may ask? Wipfli’s Community Bank Executive and Board Compensation Survey (a shameless plug, I know), your banking association survey, your local SHRM or Chamber surveys, and related surveys.
The key is to start with data. Ensure understanding of current market conditions. Current market conditions may mean different things for different levels of the institution. For example, for an executive position, the competitive market might be a geographic region, whereas for a personal banker position, the market will be local. To address and resolve compensation issues, first seek to understand your current situation in relationship with the market.
By understanding market conditions, you are able to evaluate how your pay practices at the individual employee level stack up against the market to identify pay that may be out of alignment and to surface salary compression issues.
Only thereafter can you create the strategy to relieve compression. For example, you may find you need to release compression in only the first four levels of your structure. Interestingly, these positions also tend to represent the largest portion of your employee base (e.g., tellers, customer services representatives, universal bankers, loan assistants). I know I wouldn’t want the largest segment of my workforce — which is also typically the most customer-facing — feeling disgruntled.
I urge you caution in creating an environment where it would make more sense for an employee to leave your financial institution to seek higher levels of compensation because you are paying a new hire more than an existing talent, all things being equal.
Unfortunately, there is truth to being worth more on the external market than at your existing employer. Beware of perpetuating that reality.
And don’t even get me started on when you promote an employee to a new position and don’t pay them for the value of the position because you are “testing” to see whether they will be able to perform well. This is clearly another reason current employees may lag the market, which in turn feeds the compression issue when hiring new employees.
If you are struggling with these issues, I’m here to help!
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