Market Pay Impact on New and Existing Employees

As long as salaries are within the right range, pay compression isn’t a big deal. 🛑 Pay compression, when new hires are paid as much or more than tenured employees in the same role, isn’t just a minor issue. It’s a major trust-killer that quietly fuels resentment, disengagement, and turnover. Imagine working at a company for years, gaining experience, delivering results, only to find out that the new hire you’re training is making the same (or more) than you. Would you feel valued? This is what pay compression does. And it’s happening more than ever due to rising market rates, competitive hiring pressures, and reactive salary decisions. 1️⃣ Why Pay Compression is a Problem -Demotivates Tenured Employees – If experience and loyalty don’t translate into better pay, why stay? -Leads to Quiet Quitting & Turnover – Employees will either check out or walk away when they feel undervalued. -Creates Internal Pay Inequities – If salaries aren’t adjusted for existing employees, fairness gaps emerge. 2️⃣ When Higher Pay for New Hires is Justified Not all pay gaps are created equal. Sometimes, hiring a new person at a higher salary is the right decision, as long as it’s intentional. ✅ Pay Differentiation (OK and Justifiable): If a new hire brings significantly more experience, specialized skills, or market-driven expertise, it’s reasonable to place them higher in the salary band than an existing employee with less tenure or scope. Example: You hire a software engineer with 10 years of experience in AI, while your current team mostly has 5 years of general engineering experience, paying them more makes sense. ⚠️ Pay Compression (Problematic and Risky): When new hires and tenured employees in the same role have similar experience, responsibilities, and performance but get paid unequally without a clear reason or adjustment plan. Example: A company raises entry-level salaries to attract talent but doesn’t adjust pay for existing employees, even though they do the same work. 3️⃣ How to Prevent & Fix Pay Compression -Proactive Pay Audits – Regularly review salaries to ensure tenured employees aren’t left behind. -Market-Based Adjustments – If hiring wages increase, adjust pay for existing employees accordingly. -Clarify Pay Bands & Growth Potential – Employees should know how they can grow into higher pay ranges through skill-building, tenure, or performance. -Enable Managers for Pay Conversations – Employees will notice pay differences. Educate your managers to explain pay structures, expectations, and career paths transparently. 🔑 Key Takeaway: It’s okay to pay for experience, but it’s not okay to ignore existing employees when market rates shift. If you’re hiring new talent at higher salaries due to market shifts or experience differences, but not evaluating pay equity for your existing team, don’t be surprised when those employees leave for companies that will.

Ignoring Pay Compression Will Cost You I’ve witnessed firsthand how pay compression can erode employee morale and lead to regrettable turnover. Examples of pay compression: #1 - The pay of an employee is very close to or above the pay of more experienced and higher performing employees in the same job title. #2 – The pay of an employee is very close to or above their first level supervisor. Why does this happen? Rapid hiring, external labor market changes, or failing to regularly adjust compensation structures. Addressing pay compression is not just a matter of fairness. It is essential for retaining top talent. When long-term employees see new hires earning similar or even higher salaries, it can foster resentment and a sense of undervaluation. By solving these pay inequities swiftly, you can maintain a motivated workforce and minimize turnover costs. Conducting a pay compression audit annually is crucial. However, if you’ve increased hiring significantly then more frequent reviews may be needed. Pay Compression Considerations: 1.        External Market Comparisons: Review the current external market pay rates for similar jobs within your industry, location, and organization size. 2.        Internal Equity: Review the salaries of employees to ensure that those doing substantially similar work are considered when developing a new hire’s job offer. Don’t forget to include in your review consideration for those employees that have similar experience, skills, performance, and/or tenure. 3.        Performance Metrics: Ensure that pay reflects performance. Are high performers being rewarded more than those that are average or low performers? Are your high performers feeling underappreciated? 4.        Pay Transparency: Deliver consistent communications to employees about what their pay is based on and why.  Write compensation guidelines and processes and follow them consistently. Transparency can mitigate frustration and enhance trust. 5.        Legal Compliance: Ensure that your compensation practices comply with labor laws and regulations. This is more complex now than it was a few years ago so prioritize resources to understand and meet your obligations. 6.        Budget Considerations: Evaluate the financial implications of proposed pay adjustments. Can you sustain these changes in the long term? Include a pay equity budget along with your annual salary increase budget.  Investing in equitable compensation practices is not just a financial decision. It is a strategic decision that supports the long-term success of an organization and its employees. Each payday is a reminder to employees about why they go to work. Be sure that reminder a positive one and not one that reminds them that they aren’t appreciated or valued. #compensation #paycomression #payequity #paytransparency #fairpay #hr #humanresources #rewards #totalrewards #compensationconsultant

I spoke to a loyal employee of 7 years, and they're being underpaid. Here's why.... 🌟 Market value vs. internal value New employers pay for your market worth - what someone with your skills can command today. Existing employers often base increases on internal benchmarks (which tend to be lower). 🌟 The ‘Loyalty Penalty’ Businesses know that replacing you costs more - recruitment fees, training, lost productivity - yet many still reward new hires more than long-term staff. 🌟 Incremental vs. Negotiated Pay Internal pay rises are often tied to annual increases (typically 3–5%), while job movers negotiate from scratch - sometimes securing 10–20% jumps. 🌟 Perception of Value There’s an unfortunate bias: new hires are often seen as a fresh investment, whereas long-term employees can be taken for granted. So, what can you do if you don’t want to leave? ✅ Regularly benchmark your salary – know your worth in the market. ✅ Be vocal – don’t wait for a pay rise; make your case proactively. ✅ Consider internal moves – Promotions or lateral moves can unlock better pay. Have you experienced this ‘loyalty penalty’?  Or have you successfully secured a big pay rise without moving?  #Careers #PayRise #JobMarket #SalaryNegotiation

Compa ratios of tenured employees vs. new hires: do candidates get preferential treatment? When I was a software engineer, I used to joke with my coworkers that the easiest way to get a raise would be to resign, re-interview with the same company, and then re-negotiate a new cash & equity package (not to mention a fresh sign-on bonus). Is this fact or a fallacy? Do candidates get preferential treatment over loyal, tenured employees? One way to analyze this is under the lens of compa ratios. Let’s take a look. __________________ The Results: Our data science team took a look at compa ratio distributions for companies in Pave’s dataset where we have access to reliable salary ranges. And they broke down the results into two mutually exclusive groups: [A] “New Hires” – employees who joined within the last 12 months  [B] “Tenured Employees” – all employees who have more than 12 months of tenure In theory, employees from group B have been at the company (and also in their current levels) longer and thus had more time to progress to higher compa ratios in their salary range. But in practice, this theory breaks down. According to Pave’s analysis of 66k real-time incumbent datapoints, it is Group A–the “New Hires”–that somewhat consistently has the higher compa ratio across nearly all IC levels. __________________ Takeaways: 1️⃣ 𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗲𝘀 𝗵𝗮𝘃𝗲 𝘁𝗵𝗲 𝗺𝗼𝘀𝘁 𝗻𝗲𝗴𝗼𝘁𝗶𝗮𝘁𝗶𝗼𝗻 𝗹𝗲𝘃𝗲𝗿𝗮𝗴𝗲 𝘄𝗵𝗲𝗻 𝘁𝗵𝗲𝘆 𝗮𝗿𝗲 𝗰𝗮𝗻𝗱𝗶𝗱𝗮𝘁𝗲𝘀, 𝗮𝘁 𝘁𝗵𝗲 𝗽𝗼𝗶𝗻𝘁 𝗼𝗳 𝘁𝗵𝗲 𝗼𝗳𝗳𝗲𝗿 𝗹𝗲𝘁𝘁𝗲𝗿. Some may view this as inconsistent or unfair with existing, tenured employees. Others may view compa-ratio-flexing as the elbow grease required to win great talent. 2️⃣ 𝗖𝗼𝗺𝗽𝗮 𝗿𝗮𝘁𝗶𝗼 𝗱𝗶𝘀𝗽𝗮𝗿𝗶𝘁𝘆 𝗯𝗲𝘁𝘄𝗲𝗲𝗻 𝗻𝗲𝘄 𝗮𝗻𝗱 𝘁𝗲𝗻𝘂𝗿𝗲𝗱 𝗲𝗺𝗽𝗹𝗼𝘆𝗲𝗲𝘀 𝗮𝘀 𝗮 𝗻𝗲𝘄 𝗮𝘀𝘀𝗲𝘀𝘀𝗺𝗲𝗻𝘁 𝗼𝗳 𝗺𝗮𝗿𝗸𝗲𝘁 𝗱𝗲𝗺𝗮𝗻𝗱. If you break down the “compa ratio disparity” benchmarks between new hires and tenured employees across the dimensions of job family and/or location, it can offer a new metric to help assess the hottest or coldest jobs. For instance, Pave’s Data Science team analyzed the AI/ML Engineering job family and found that the median compa ratio is 1.05 for “New Hires” and 0.97 for “Tenured Employees”. This is yet another signal of the rising market demand for AI/ML talent. 3️⃣ 𝗢𝗳𝗳𝗲𝗿 𝗹𝗲𝘁𝘁𝗲𝗿 𝗽𝗿𝗮𝗰𝘁𝗶𝗰𝗲𝘀 𝘃𝗮𝗿𝘆. I meet some companies who have a philosophy of bringing in candidates from “min to mid” (i.e. 0.85 to 1.0) compa ratio. Other companies believe that in practice, it should be “whatever it takes” (i.e. min to max). The findings of this post suggest that there is more of a bias towards the latter than the former, but we can take a more detailed look at the breakdown between these philosophies in a future post. #pave #compa #benchmarks

One of the biggest challenges startups face as they mature, is salary inversion. Inversion is when salaries offered for new people being hired into a role outpace the salaries of the people already doing the role. Imagine this: you joined the company two years ago as a Product Manager on $150k. The company: • Isn't really using market data • Doesn't have strong compensation practices • Pay isn't really tied to market. Then the company starts to get serious about compensation. It begins to use a set of salary bands for PM's and hires them in at $180k. But you're still down on $155k... (let's assume you've had a pay adjustment). You've got more experience in the environment and you're being paid less than someone who just got here. You're probably also ready for promotion by this time. I see it time and again — tenured people left behind by new people. Left unaddressed, resentment starts to breed. People start to feel that if they quit and re-applied, they'd get paid what they're worth. And it's kind of true. It's critical to run a pay equity review as soon as you establish a compensation foundation. Close the compensation gaps across between your existing people and the rate you hire new people. Bring your tenured, loyal people with you, or risk losing them. How does your company handle this balance? — If you’re a Head of People interested in learning more about startup compensation, follow me Matt McFarlane for more.

At the beginning of my career, I lost some good employees when I rejected their hike, but later I paid the price, and it was too big. Companies are often willing to offer hefty salaries to attract new talent, while ignoring hard work of their existing employees. 𝗧𝗵𝗲 𝗚𝗿𝗲𝗮𝘁 𝗣𝗮𝘆 𝗣𝗮𝗿𝗮𝗱𝗼𝘅: New hires get big offers:// 50% hikes or more to attract fresh talent. Loyal staff get left behind:// 30% hikes or less, despite their dedication and hard work. Retention takes a hit:// When employees feel undervalued, they're more likely to leave. 𝗧𝗵𝗲 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗲𝘀: Demotivation:// Feeling undervalued can lead to decreased productivity and morale. -Lack of trust:// Employees may question the company's commitment to their growth and well-being. 𝗧𝗶𝗺𝗲 𝗳𝗼𝗿 𝗖𝗵𝗮𝗻𝗴𝗲: Fair compensation:// Companies should prioritize fair pay for all employees, regardless of whether they're new or tenured. Recognize loyalty:// Rewarding dedicated staff for their hard work and commitment can boost morale and retention. Your Thoughts: Have you experienced this pay disparity? Share your stories and thoughts! Sanumon MB🐦 #FairCompensation #EmployeeRetention #LoyaltyMatters #CareerGrowth #WorkplaceWellness #LinkedIn

The Stipend vs. A 5-Year Salary? The image highlights a stark reality: market conditions are causing new hires (sometimes classified as interns receiving stipends) to earn the same or more than employees with significant tenure. This phenomenon is known as pay compression. Causes: Why Companies Do ThisMarket Forces: In tight labor markets, companies must offer higher starting salaries to attract new talent at current market rates.Outdated Structures: Internal compensation structures and annual raise budgets often fail to keep pace with rapid external market inflation. Hiring vs. Retention Budgets: Organizations sometimes allocate larger budgets for external recruitment than for internal salary adjustments for existing staff. Perceived Risk: Companies pay a premium for new hires to compensate for the risk of leaving a known job for a new opportunity.The Unfairness to the Experienced EmployeeIs this right or wrong? While not inherently illegal, it creates significant problems: Undervalued Experience: The employee with up to five years of experience possesses invaluable institutional knowledge, established skills, and proven performance that the intern lacks. Paying them the same devalues their loyalty and investment in the company.Morale & Productivity: Perceived unfairness quickly erodes morale, engagement, and productivity among long-tenured staff. Turnover Risk: Experienced, high-performing employees are more likely to leave to find a new employer who will pay them their true market value, leading to costly turnover for the original company. Ultimately, this practice prioritizes immediate talent acquisition over long-term employee retention and internal equity.Have you or someone you know experienced pay compression in your workplace? #FutureOfWork #SalaryEquality #PayCompression #LinkedInPost #TalentRetention #HRInsights #Compensation #CareerGrowth

Take care of your people, my simple example. The real cost of turnover is often overlooked. As leaders, we must pay attention to the real costs, not just the dollars, but those pesky indirect costs when someone leaves. Let's take Sally, she makes $100k, she has been with the company for 5 years. We have Harry, he makes $95k, he has been with the company for 3 years. And then we have Betsy, she was just hired at $120k—the current market rate. We all know that new hires are at market and existing employees are often left behind getting those 2-4% per year will never keep them at market. Fast forward, Sally realizes she is underpaid and starts looking for a role and finds out the market rate is much higher. She takes the job as $20k is worth the risks of a new company, new boss, etc. You have now just lost 5 years of experience over $20k. Many leaders will ignore that sentence, they will justify the turnover. Worse, they will pretend that Sally wasn't good at her job and then justify that $120k to replace her is worth it—still ignoring the 5 years of institutional knowledge and completely forgetting ramp time, etc. The moral of this example is simple. Take care of the people that are vital and contain the experience because $20k more is actually getting you some less valuable. Oh yeah, buckle up, Harry's also leaving as soon as he finds a new job.

Part 3: Salary Inversion Prevention Proposals Once salary inversion happens, fixing it is costly. So, preventing it will be a better idea. Proposal #1: Treat Hiring Decisions as Pay Strategy Decisions Before approving an offer, consider: • Is this offer higher than what existing incumbents earn? • Will people question the fairness of this offer internally? • One year from now, will this decision be challenged? If the answer is yes to these questions, the offer should be reviewed. This indicates a pay governance issue. Proposal #2: Maintain Clear & Enforced Salary Ranges Salary ranges are controls. Create a salary guideline with: • A defensible minimum • A realistic midpoint • A clear ceiling To reduce inversion risk, junior hire offers should generally sit below the midpoint. Proposal #3: Adjust Senior Pay in Parallel with Market Movement If the market is moving up, senior pay cannot remain flat. When market corrections are made for new hires, incumbents (esp senior employees), must be reviewed first or at least concurrently. Proposal #4: Use Market Tools Without Breaking Proposal #2 When a stronger offer is needed to attract critical talent, consider: • Sign-on bonuses • Temporary incentives • Retention allowances Don’t solve a temporary problem by permanently inflating base salaries. Proposal #5: Run Regular Salary Compression & Inversion Audits At least once a year, review: • Junior vs. Senior Pay Ratios • New Hire Pay vs. Incumbent Pay • Alignment between tenure, contribution, and pay As the saying goes, prevention is better than cure. Proposal #6: Communicate Progression & Correction Paths Be clear about: • How pay progression works • What is being reviewed • When corrections are expected A strong pay strategy is one that the organisation can defend, sustain, and explain. I hope these proposals are useful to those with the responsibility and influence over pay structures. Happy New Year 2026! xoxoxo

Employees whose pay was increased soon after the addition of a higher-paid coworker tended to stay in their jobs a lot longer, whereas those who had to wait for a raise were more likely to quit. When pay was adjusted within a month of the new addition, existing employees remained with their companies for an average of another two and a half years. In contrast, when pay adjustments took six months, employees stayed on board for an average of just one and a half years, and when pay increases took an entire year, employees quit an average of just 13 months after the new hire joined. In other words, employees resigned more than two times sooner if their employers took a year to adjust their pay. In a second round of analyses on the Visier Community Data, we found that high performers were disproportionately represented among resigning employees. While normally, about one in four resigning employees are high performers, in the aftermath of the addition of a higher-paid new hire, that number increases to more than one in three. In other words, hiring new employees at higher salaries than existing employees doesn’t just lead to generally higher turnover rates for current employees — it increases attrition specifically among the employees who add the most value to their organizations. https://lnkd.in/dVkXEkTj