New-Hire Salaries are Rising — Along with Concerns About Pay Equity

New-Hire Salaries are Rising — Along with Concerns About Pay Equity
May 15, 2023 9 mins

New-Hire Salaries are Rising — Along with Concerns About Pay Equity

New-Hire Salaries are Rising – Along with Concerns About Pay Equity Hero Image

Above-average starting salaries for new employees are leading to 'pay compression.' And it could pose a threat to pay equity.

Key Takeaways
  1. Across many industries and regions, new hires are earning higher salaries than tenured employees in similar roles.
  2. Higher starting salaries can create or exacerbate internal pay equity concerns.
  3. Increased collaboration between HR, finance and people managers can help recruiters make better compensation decisions.

The annual employee pay and performance review period is an opportunity for organizations to take stock of their workforce. Yet numerous market and workforce dynamics have challenged companies over the past few years. Tight labor markets, the widespread turnover seen in the “Great Resignation,” the popularization of quiet quitting and inflation concerns are driving wage growth. This results in many employers offering above-average salaries to new hires to compete for talent — salaries that, in many cases, are higher than the pay of incumbent employees at the same job level and function. Known by reward professionals as “pay compression,” the trend of hiking starting salaries without reviewing and adjusting existing compensation can lead to or exacerbate pay challenges from employees.

To add to this, pay transparency trends increase the likelihood that current employees know what salary ranges are being offered to new hires and where they stand in comparison. Therefore, pay compression can also lead to other significant workforce issues, including higher attrition if employees begin to feel they are underpaid or undervalued.

“Pay compression can affect any level of worker within any organization depending on a company’s actions regarding its skills or talent needs,” says Tim Brown, a partner in Aon’s Human Capital Solutions practice. “It’s important that in the competitive job market, employers still establish salary bands that are in line with current pay structures and then adhere to them for new hires and current employees alike.”

As you embark on your compensation and performance review planning journeys, consider the following trends and actions to avoid pay compression and its consequences.

Pay Compression is Rising Across the Globe

Pay compression is showing up more frequently across a greater number of roles within organizations in many countries and industries. Analysis by Aon of compensation data from the Radford Global Compensation Database finds pay compression developing in each of the regions studied: Canada, China, Germany, the UK and the U.S. The table below shows the difference in base salary premiums received by new hires (defined as being hired less than 18 months ago) and employees that have been with their employer for three to five years across five different career levels. For each country and job level, we benchmarked the average salary for newer employees and employees who have been at their employer for three to five years against the average salary of every employee in our database. The average salary is represented by 100 percent — any percentage below or above 100 reflects lower or higher salaries.

new-hire-salaries-table

In the U.S. and UK, talent hired in the last 18 months across all five major job levels listed are receiving a higher premium on average in nearly every job level compared to employees with three to five years of company tenure. Across all five countries, there are premiums in almost every job level for new hires.

When new hires receive a higher premium than their counterparts with tenure at their company, pay compression issues develop. We see this trend expanding to and within companies in different regions and industries. Pay compression is a growing problem that threatens many companies of all sizes, but employers can take action to reduce and prevent pay compression and inequity challenges.

Four Ways to Address Pay Equity and Compression Issues

Pay compression and pay equity concerns among employees can negatively affect a business. However, if done right, the employee performance review period is an opportunity for organizations to review their internal pay equity practices, identify whether pay compression is a problem and adjust if necessary.

Poor communication between internal HR and hiring managers — who are responsible for making pay offers and monitoring pay equity — can often lead to problems that go unnoticed by either part of the business.

To reduce the threat of pay compression issues disrupting an organization, employers should consider:

1. Offset any Pay Imbalances within your Organization

Offering larger merit increases to high performers, as well as employees whose salary is lower in the pay range, will help maintain pay equity and ensure pay gaps are driven by performance outcomes rather than a tight labor market. HR should provide a merit matrix or grid to align pay and performance and allocate specific pay adjustments, including underpaid and overpaid employees.

2. Bring HR and Finance Teams Together to Discuss Budget Concerns

Companies may need to hold back some of their merit budget to make pay adjustments. Consider whether your merit budget can sufficiently address pay equity or if you need financial support from other parts of your organization. Using pay increase guidelines can help generate discussion and raise awareness of these issues.

3. Prioritize Internal Equity with Every New Hire

Employers can tackle the problem of pay compression by hiring employees based on advanced measurement and seeking pay recommendations from non-managers. For example, request initial pay increase recommendations from someone in the finance department or executive management.

4. Conduct a Pay Equity Analysis

Pay equity audits ensure that inequities don’t creep or grow within your organization. We recommend employers conduct a pay equity audit at least once a year. However, you may need to conduct them more frequently if you experience rapid hiring or growth.

Make Addressing Pay Compression a Priority

Pay compression and associated risks related to pay equity should rise to the top of your priority lists as the pressure for transparency and the competitive labor market continue. Staying alert and thoughtful in your compensation decisions will position you for success in both attracting and retaining the talent you need to support a resilient future workforce.

To speak with a member of our team about pay compression and pay equity, please write to [email protected]. To learn more about and participate in the Radford Global Compensation Database, please visit radford.aon.com.

Quote icon

It’s important that in the competitive job market, employers still establish salary bands that are in line with current pay structures and then adhere to them for new hires and current employees alike.

Tim Brown
Partner, Talent Solutions, North America

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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