Understanding and combating pay compression at work

Executive overview

Pay compression occurs when new hires earn the same or more than experienced employees, eroding pay gaps that should reflect seniority, skills, and tenure. It drives turnover, kills motivation, and cannot be hidden — banning pay discussions violates the NLRA.

The fix is transparency, not secrecy. Publishing salary ranges sets expectations, discourages inflated negotiations, and signals respect for existing staff.

Transparency directly reduces pay compression and improves retention.

Why pay compression happens

• New hires have more bargaining power and demand higher starting salaries
• Long-tenured employees accumulate small raises while market rates climb
• A 2022 Labor IQ study found new hire salaries averaged 7% higher than equivalent internal roles
• Gap reached 20% in high-demand fields like finance and tech

Why it matters

• Undervalued employees leave — replacing them costs time and money
• Suppressed motivation reduces overall company performance
• Pay discussions are legally protected under the NLRA; banning them creates legal liability
• A St. Louis employer was ordered to reinstate a fired employee, change its policy, and issue full back pay

Using transparency to address it

• Only ~17% of job postings include salary information, but that share is rising
• New York City and California now legally require salary ranges in job postings
• Posting ranges discourages candidates from negotiating inflated salaries above market
• If posted salaries need to increase, existing employees should receive matching raises
• 58% of employees (2021 survey) would consider leaving for an employer with better pay transparency
• Employees feel respected when they understand how their salary is calculated