Wage Compression

## Wage Compression

Wage compression occurs when pay differences between employees of different experience levels, skills, or tenure shrink to the point where they no longer reflect meaningful differences in contribution.

### Causes

- **Market-driven**: Starting salaries rise faster than incumbent raises.
- **Minimum wage increases**: Raises the floor without adjusting middle-level pay.
- **Pay transparency**: New hires negotiate based on published ranges.
- **Budget constraints**: 3% annual raises don't keep pace with 10%+ market jumps.

### Impact

- Senior employees become demoralized when new hires earn nearly the same.
- Increased turnover among experienced staff.
- Loss of institutional knowledge.
- Legal risk if compression correlates with protected characteristics.

### Solutions

- Market adjustments for tenured employees.
- Regular compensation reviews tied to market data.
- Broader salary bands with clear progression.
- Equity refreshers and retention bonuses.