Today’s labour market is moving fast. Organisations are navigating hybrid work, shifting skill demands, rising costs, and higher expectations for fair and transparent pay. In this environment, one issue shows up more often than many leaders expect: pay compression.
Pay compression can quietly undermine morale, retention, and performance, especially when hiring pressure forces organisations to move quicker than their pay practices.
What Is Pay Compression?
Pay compression happens when there is too small a pay difference between:
- new hires (often less experienced), and
- tenured employees (more experienced, higher capability, higher contribution).
It typically occurs when market pay increases faster than an organisation’s internal salary progression.
Example:
An employee joined years ago on a market-aligned salary and has received standard annual increases over time. Meanwhile, the external market has moved sharply. To hire today, the organisation must offer a new candidate a starting salary close to what the long-serving employee earns, sometimes even more.
When this happens, employees can feel that experience and loyalty are not valued. In severe cases, it can create pay inversions, where new hires earn more than established employees in similar roles.
Common Causes of Pay Compression
1) Rapid market movement and skills scarcity
When critical skills are scarce, organisations often increase starting salaries to secure talent. If internal pay for current employees is not adjusted at the same pace, compression builds quickly, especially in roles where demand has surged.
2) Policy or regulatory changes
Minimum wage increases and other policy shifts can lift entry-level pay quickly. If pay ranges and progression for employees slightly above the minimum are not reviewed, differentials shrink and fairness concerns rise.
3) Weak or inconsistent pay structures
Compression is more likely when salary ranges are unclear, job levels are not well defined, or pay decisions are heavily negotiated case-by-case. Over time, this creates uneven outcomes and makes it harder to defend pay decisions.
Why It Matters
Lower morale and reduced trust
When experienced employees see new hires earning close to them, it can signal that tenure, expertise, and performance are not rewarded. This erodes confidence in leadership and weakens engagement.
Higher turnover risk
Pay compression is a retention trigger. Employees who believe they are underpaid relative to the market and relative to newer peers are more likely to leave, taking capability and institutional knowledge with them.
Culture and performance impacts
Compression can create internal tension. Employees compare pay, question fairness, and reduce discretionary effort. Managers also struggle to motivate when pay does not clearly reflect growth and contribution.
Increased governance and reputational risk
Unmanaged compression can lead to inconsistent pay outcomes across groups and levels. That increases risk, internally through employee relations and externally through employer brand and compliance scrutiny.
Pay Compression in African Markets
Pay compression can be amplified in African contexts where economic conditions shift quickly and talent mobility is high. Inflation, currency volatility, and cross-border competition for in-demand skills can force rapid hiring adjustments. At the same time, many organisations are still evolving their job architecture and pay structures, making it easier for compression to take hold.
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Pay compression is more than a compensation issue. It is a fairness, retention, and performance issue. Leaders who address it early protect culture and credibility, strengthen talent outcomes, and keep pay aligned with both market reality and internal job value. When hiring costs rise, the answer is not to slow down hiring. It is to ensure your pay structures and progression rules can keep up with the market in a disciplined, transparent way.
