Wage compression: Practical steps to manage its effects

In a recent Brightmine webinar, HR consultant Dean Morley explored the increasingly ubiquitous phenomenon of wage compression. Here he sets out practical steps that organisations can take to address its effects.

Wage compression has shifted from a background reward concern to a strategic risk that employers can no longer afford to ignore. It is now visible across people-intensive sectors - Higher Education (HE), hospitality, health care, retail, manufacturing - anywhere organisations rely on large operational workforces and operate within tight financial envelopes.

Though national minimum wage (NMW), and for some living wage, increases are key drivers of wage compression and collapsing differentials, they are not the only factor. The following comments and insights draw on my recent Brightmine webinar, along with the underlying case study from a London-based university. While the case study is HE-based, the drivers, risks and practical actions apply equally across other sectors. Wage compression is predictable, measurable and - crucially - addressable when organisations act early, use the right diagnostics and are prepared to make systemic reward changes.

The drivers: Predictable and accelerating

Five drivers appear consistently:

• NMW increases outpacing pay awards, resulting in the deletion of lower pay points and eroding differentials.
• Flat-cash or bottom-loaded awards, which unintentionally compress structures, as lower-paid staff receive proportionally larger increases.
• Recruitment pressures, forcing organisations to hire new starters on salaries close to - or above - existing staff.
• Progression and promotion freezes, removing the mechanism that normally maintains spacing.
• Affordability constraints, preventing whole-structure uplifts even when leaders recognise the issue.

These drivers are structural features of any sector where wage floors rise faster than organisational pay awards.

What compression looks like inside an organisation

Compression becomes visible long before it becomes measurable. Examples include:

• supervisors paid the same as team members;
• staff asking, "Why take on more responsibility?";
• new starters leapfrogging existing staff; and
• morale, retention and credibility issues.

These symptoms were present in the case study, where the university faced financial constraints, low pay awards (1% vs sector 2.5%), NMW pushing lower levels upwards, no professional services pay scales and outdated faculty scales.

The impact was predictable: turnover nearly four times the sector average, loss of internal equity, unattractive supervisory roles, recruitment failures and disengagement. Compression is not just a pay issue - it is also a leadership, culture and retention issue.

A practical framework for fixing compression

The university case study offers a clear replicable model built around four core components: diagnostics, structure, bottom-end correction and progression.

1. Diagnose compression properly

Most organisations underestimate compression because they rely on anecdote rather than data, and/or only focus on the lower end of their pay scales. The case study used a simple diagnostic: plotting every employee against benchmarked minimum/median/maximum points to identify bunching, overlaps and inversion.

Diagnostics should also include turnover patterns, recruitment failures and exit interview themes. Compression becomes actionable when leaders see the data.

In the case study, as well as "typical" lower-end wage compression, it was also evident many employees in more senior roles were below minimum benchmark levels, in part due to directing large parts of pay settlements towards lower-paid employees. In turn, positively, this meant all lower-paid employees were above NMW. However, most were then also at the very top, if not well above, their pay benchmark maximums.

2. Restore structure through job levels

The first structural step was introducing a job level matrix (JLM), which covered all levels (aka grades) and roles. The new job levels provided clear and distinct responsibility and contribution differentials between each level (even though actual pay was still compressed).

This overall JLM also provided employees with transparent career paths, within both the academic and professional service roles. Importantly, based on common descriptors of responsibility and contribution, the JLM also provided clarity on the equivalent seniority of academic and professional services roles.

3. Build market-aligned pay scales

The second structural step was then to benchmark each job level to the Brightmine sector median. Based on the university's reward strategy, the pay scale maximums were set at the appropriate market medians, with the pay scale minimums generally set at the previous level's maximum.

In addition to the standard maximums and minimums, the university also introduced discretionary "adding value" ranges that provided a 5% overlap with the next level's pay scale. This was to enable and recognise employees who were already starting to make contributions and take on responsibilities associated with the higher level.

These structural changes put in place a new reward framework that ensured external competitiveness, internal consistency and clear progression routes - but the university recognised it still needed to actually change pay to make any real difference to employees.

4. Fixing the "bottom end" first

This was identified as the fairest and most cost-effective initial decompression tool. At all pay levels, the university identified staff who were below their new respective minimum, and modelled costs to bring them to this point.

This group of individuals were then prioritised in the annual pay awards to bring their pay up to the new minimums. However, where increases were large, to avoid all the available pay budget being spent on this group, a staged approach was used to spread increases over two years.

5. Introduce progression routes

While these structural changes and bottom-end pay increases made some progress towards reducing compression and resolving differentials, without a progression scheme, the systemic pay changes sought would not happen.

To address this, in line with the new pay scales, the university introduced a new progression scheme. Within each of the job levels, criteria were introduced for Developing → Competent → Adding Value (D/C/A).

"Developing" were the entry-level criteria for each level, which individuals could achieve through the normal promotion processes. "Competent" and "Adding Value" then provided clear progression routes within each level. In turn, these new D/C/A criteria were also aligned to appraisal expectations, which enabled line managers to discuss an individual's progression aspirations within their teams.

This transparent progression and promotion route reduced stagnation, supported pay and career development, and restored fairness.

In addition, where there was also a separate general pay award, this was scaled to support further pay progression: for example, given the reward strategy was to bring all employees up to the market median (equating to their pay scale maximum), 2.5% for staff between minimum and median; 1.5% for staff between median and maximum; and 0% for those above maximum.

Why this approach works

Three features make this model effective:

1. It restores both internal and external relativities. Job levels and market-aligned pay scales rebuild credibility and retention.
2. It balances affordability with fairness. Fixing the bottom end first avoids expensive whole-structure uplifts.
3. It creates long-term sustainability. Progression routes prevent future compression and support talent development.

The results were significant: a decompressed and affordable structure, clearer career pathways, improved transparency and stronger attraction and retention. For example, the initial progression scheme enabled almost 50% of academics to achieve either progression or promotion in the first two years.