[Blog 54] The Chief Guru Chronicles 203: Salary Compression in Singapore
Salary compression is a pressing issue that has been observed in many companies today. This phenomenon can occur if new hires are brought in at salaries higher or equal to those existing employees doing the same job; or a lower grade employee is being paid more than one of a higher grade in the same role. This situation is often a cause for dissatisfaction among longer-serving employees, who may be working alongside or even mentoring these higher-paid new hires. It may lead to several unfortunate consequences, such as deteriorating employee morale and speed up the revolving door of talent.
In Singapore, salary compression has become increasingly more prevalent in industries with high demand for skilled workers. This trend is make worse by the tight labour market situation in Singapore and the scarcity of top talent. In such an environment, it is common for employers to offer higher salaries to new hires to entice them to join their company. However, this approach can lead to salary compression if existing employees are not given salary adjustments to match the market rates to ensure pay equity and fairness.
For many employees, the prospect of switching jobs can be tempting, especially if they feel that their compensation does not commensurate with their skills and experience.
In an employees market, it is common to hear anecdotes of highly sought after talents coming to employers with salary demands that go through the roof and walking away from offers that do not meet their expectations. To meet these demands of highly coveted talents, companies usually have little choice but to sweeten the pot.
According to a survey conducted by Willis Towers Watson in 2021, the average salary increase for employees in Singapore was 3.2%. In terms of salary increases offered to job switchers, the same survey found that the average increase was 12.7%. This suggests that employees who switch jobs are likely to see a significant bump in their salaries compared to those who remain with their current employer.
Implications of Salary Compression
Salary compression can have significant implications for your company. Existing employees can feel demoralise as they perceive that their loyalty does not pay. Those who remained are also negatively affected subconsciously when they see their colleagues and friends leave. It would seems things appear better for others. The change in work team members and the adjustment needed to integrate new ones can be a hassle and affect workforce productivity.
Moreover, salary compression can be particularly detrimental to your company’s ability to attract and retain top talent. Employees who feel undervalued and underpaid are more likely to look for better opportunities elsewhere, leaving your company with a higher turnover rate and increased recruitment costs.
Fortunately, there are several solutions that your company can adopt to mitigate the effects of salary compression. These include:
- Conducting regular salary reviews: Regular salary reviews can help ensure that your company’s compensation structure is competitive and aligned with market rates. This can help prevent salary compression and ensure that your employees feel valued and fairly compensated.
- Offering non-monetary benefits: In addition to salary adjustments, consider offering non-monetary benefits, such as flexible work arrangements, training and development opportunities, and employee recognition programs. These benefits can help improve employee engagement and retention rates.
- Implementing performance-based pay: Performance-based pay can help ensure that your company’s top performers are rewarded for their efforts. This can help prevent salary compression, as top performers will be compensated based on their skills and experience.
- Establishing clear salary bands: Establishing clear salary bands can help ensure that there is a structured approach to compensation within your organization. This can help prevent salary compression and ensure that all employees are compensated fairly based.
- Off-Cycle Salary Reviews: Conducting off-cycle salary reviews can help address salary compression for employees who are significantly underpaid compared to the market rates. These reviews can be conducted outside of the regular performance review cycle.
- Quick Promotions: Quick promotions can be used to address salary compression for high-performing employees who have outgrown their current roles. By promoting these employees to higher positions, they can be given a salary increase that aligns with their new job responsibilities and market rates. Quick promotions can also help improve employee morale and retention rates.
- Internal equity: This refers to ensuring that employees within the company receive fair and consistent compensation based on factors such as job responsibilities, skills, experience, and performance. This can be achieved by establishing clear salary structures, conducting regular market research to stay updated on industry benchmarks, and implementing policies that promote transparency and fairness in compensation decisions.
- Prudent salary management: Will involves carefully analysing and balancing the company’s financial resources with its compensation strategies. It requires a thorough assessment of the budget, market conditions, and the company’s overall compensation philosophy to ensure that salary adjustments and promotions are sustainable and aligned with the company’s long-term goals.
- Function-Specific Salary Structures: Creating function-specific salary structures can help ensure that employees in similar roles are being compensated fairly based on their skills and experience. These structures can be tailored to specific functions or departments within the company and can help prevent salary compression. By establishing clear salary bands within each function, employees can see a clear path for career growth and salary progression.
In conclusion, salary compression is a pressing issue that can have significant implications for any company. By adopting a proactive approach to compensation management, companies can ensure that their employees feel valued and fairly compensated, which can lead to improved employee engagement, retention rates, and overall business success.
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