Wage compression occurs when there is a minimal difference in pay between employees with varying levels of experience, skills, or responsibilities within an organization. This situation often arises when new hires or employees with less experience are paid close to or the same as more experienced staff. Wage compression can lead to dissatisfaction among long-term employees who feel their compensation does not reflect their greater experience or contributions to the company.
For example, if a company hires a new employee with a few years of experience at a salary that is nearly identical to what a long-serving employee with significantly more experience earns, this can create wage compression. The result may be decreased morale and motivation among existing staff, who might feel undervalued despite their loyalty and expertise.
Addressing wage compression typically involves a comprehensive review of pay structures and adjustments to ensure fair compensation relative to experience and performance.
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