Every so often, we come across one article or another giving career advice on attaining the highest possible salary. One such tip includes finding a new job every two years, citing studies that those who do end up making 50% more over their lifetimes.
The problem, the actual cause of that 50% depression in lifetime wages, has a name: wage compression.
This disease afflicts most organizations and happens for multiple reasons, but the symptoms are always the same: new employees enter their jobs with a wage that is close to or higher than similar employees with more time in the same position. So it follows, logically, that employees who join new companies more often will experience higher wage increases during the transitions, as compared to people who take their 2% each year.
Wage compression is generally caused by candidate pool fluctuations that occur during economic shifts. During hard economic times, companies have the opportunity to hire people for lower wages, since the candidate pool is large. As the economy bounces back, the candidate pool shrinks and more qualified candidates are able to require higher starting wages.
During this cycle, if the company doesn’t increase each employee’s pay levels in accordance with their performance level and the market rate, they all end up with similar wages, regardless of their time in the position. From the other side, without accurately graded positions and a clear salary admin strategy, negotiating salaries with new hires is a shot in the dark.
As you can guess, any top-performing employees with tenure will inevitably look to move companies and take advantage of the high bump in wages associated with that transition, rather than the standard 2% they’d receive by staying.
A competitive pay rate is the most basic of job satisfaction factors. Employees view their salary as a reflection of their self worth and how much the company values them. It is imperative that companies maintain competitive salary ranges and regularly analyze for wage compression to avoid high turnover costs and the revolving door syndrome!