Everything HR

Under Pressure: Wage Compression from Pay Increases

January 18, 2018

With significant increases to minimum wage in certain provinces, many employers are becoming more concerned about the negative effects on their businesses that come along with the growth of their employees’ pay. One of these concerns is wage compression. Wage compression is a situation that develops when gaps between wage scales shrink despite a lack in change of qualifications, skills, or experience. With wage compression, employees who have worked for an organization for a longer period of time, have greater responsibilities, or have a better performance record make similar wages to new hires, employees who are lower on the company hierarchy, or employees who have not performed as well as their co-workers.

In small to medium-sized businesses and in industries that typically pay at or close to minimum wage, like retail and hospitality, wage compression may be more significant, as wage gaps between employees may be small to begin with. For organizations in this situation, a substantial minimum wage increase could drastically change the wage landscape. With Alberta and Ontario implementing aggressive minimum wage increases to reach the $15 per hour mark, employers may need to address employees currently making about $15 per hour who also want to see their pay rate increase so they can ‘stay ahead’ of the minimum wage earners. So, how should employers handle these situations?

While it would be great to offer every employee affected by wage compression a raise, it is not a realistic option for most businesses. As a result, these significant increases in minimum wage are understandably causing additional stress to business owners and those responsible for managing payroll. On the other hand, it is not difficult to understand the possible frustration of an employee who has received multiple merit-based pay increases over several years who now has to work with someone who was just hired two weeks ago and is already making the same wage.

Wage compression is a concerning reality for business, with such drastic increases to minimum wage affecting pay scales. Finding a solution that works for every employee is always tough. Through careful evaluation, consideration, and communication, employers can reduce the negative effects of wage compression. An employee’s wage is always a sensitive topic, so careful preparation should occur before employers speak to employees. Hopefully, through an honest and direct approach, employees will feel that their concerns are heard and will see a future with the organization.

Download our FREE Wage Compression Guide to help determine whether this issue exists within your organization and learn how to deal with employees who are unhappy with the minimum wage increases.

  Download Now


Harvard Business Review
