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Salary Compression

Salary compression occurs when a new hire is given higher base pay than existing peers of the same level.

Imagine you have three engineers making around 150k. A fourth engineer is about to be hired, but wants 175. This fourth engineer may be a savvy negotiator. They may have an offer from a much larger company worth 190k. The reason is actually irrelevant. Salary compression happens if that person is hired.

Dealing with it

If you want to avoid salary compression, You have two basic options when it comes to a hiring decision:

  1. Adjust all existing employees to 175 and hire that person at 175k.
  2. Don’t raise the offer and risk losing the employee to another company.

This may seem expensive. It turns out that good employees usually are expensive. Grade A players typically demand Grade A salaries. Repeatedly having to deal with Salary compression means that you likely have issues with your pay scales, or you are miscalibrated for your market.

People will talk

You never want to assume that salaries are secret. Company policies that try to enforce secrecy or asymmetric information are misguided, unfair, propagate wage gaps and in some circumstances illegal.

I actually do recommend publishing both bands and actual salaries. Having everything above board and transparent reduces the stigma and it does help racial and gender wage gap issues.

This is not viable for some companies however. Regardless, people will know what other people make.

Management Debt

If you hire the engineer at 175, and don’t adjust the others, you are incurring Management Debt (like Technical Debt, but, you know, for managers). You have solved an immediate need, but have created future problems for yourself.

Both Management Debt and Technical Debt are like real debt. In small amounts, they can be powerful. The real life analogy of good debt is a mortgage in a stable or growing housing economy. Hiring an engineer that helps you close a deal that allows you to raise anew round, is good use of management debt. You kick the can down the road and then use the money from the new round to correct your salary tabes.

Debt becomes Bad Debt when it overwhelms you. Drowning in credit card bills is the typical analogy. If you make three hires that each make more than the last, you original hires will leave because you haven’t adjusted them. They are punished for simply being early. Two of the quit to work elsewhere and now you have even more setbacks.

Pay your people

Management is hard enough without having a backlog of debt to clear. Salary compression is not usually cheap to resolve, but it is does have a straightforward solution.

Choosing to ignore scary compression is always an option, but one that you will have to deal with eventually.

Delaying tactics work short-term, but don’t let your debt snowball out of control.

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