Pay compression occurs when employees have little or no difference in pay despite factors that should make a difference—such as seniority or level at an organization, experience, or skills. In other words, employees who should be better compensated find themselves being paid the same or less than new hires, direct reports, or entry-level workers.

Pay compression may happen due to various reasons, such as the organization’s inability to keep up with market rates or a lack of differentiation between employees’ skill sets. 

In many cases, pay compression occurs when new hires are offered higher salaries than experienced employees. In this scenario, the new hires are often paid more because they have more bargaining power and demand higher salaries.

Related Terms: Pay Equity