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As labor market shifts give rise to more pay inversion, employers must seek solutions or face an increasingly disengaged workforce.
Keywords: pay inversion; pay compression; pay equity; compensation strategies
Consider the employee who has worked hard for 20 years in an organization, received high evaluations and been a contributing corporate citizen, when suddenly the company hires a new, less experienced and less qualified worker and pays him or her a higher salary. Research has found that people's feelings about and responses to injustice are often gauged not by the absolute magnitude of the outcomes so much as by their perception of the contributions they have made and are currendy making.1 Unfortunately, many companies are creating a serious form of inequity within their organizations: pay inversion.
Pay inversion occurs when new employees who are similarly or less qualified than current employees are paid more for the same job. Note that our definition of inversion excludes paying new hires more because they have greater experience or skills or clearly exhibit the potential to rapidly outperform current employees. Similarly, pay compression occurs when similarly or less qualified new hires are paid less than current employees but still more than is merited, given their qualifications.
Although the dollar difference between compression and inversion is often small, inversion can be much more damaging to productivity than the absolute dollar difference warrants. When new employees seemingly "cut in front" of current employees in the "pay line," current employees will likely feel more upset, betrayed and demotivated than when pay is compressed.
In this article, we examine pay inversion and the dilemma it creates for many firms. We explain the conflict by outlining the realities of the current labor market, which-according to economic theory-argue for inverted pay and the tenants of motivational theories, which argue for pay based on performance and/or experience. We then suggest specific compensation strategies that acknowledge inversion and use motivational principles to minimize its potentially negative impact. For the purposes of simplicity, we focus on pay inversion. However, the principles apply to pay compression as well, especially when the salary for the new, less qualified hire is only slightly less than that of the current employee.
Pay Inversion: Economic Versus Motivational Theory
Inversion and the concomitant problems...