HRM 7600 Module 5 Pay Compression and Pay Transparency Example

Fifty Cents for Five Years: Fixing Pay Compression Before Pay Ranges Go Public

Student Name

Master of Business Administration, Thomas Edison State University

HRM-7600: Human Resource Management - Talent Management

Mentor Name

Month Day, Year

Fifty Cents for Five Years: Fixing Pay Compression Before Pay Ranges Go Public

DeNisi and Griffin (2020) describe compensation as one of the most powerful tools an organization has to attract, retain and motivate employees, and as one of its largest costs. A pay system must be externally competitive, internally consistent and perceived as fair. This paper examines a problem in which those goals have come apart. Rock River Precision, a composite contract manufacturer of medical device components near Rockford, Illinois, employs 420 people, including 96 CNC machinists. To fill openings in a tight labor market, it has raised starting pay several times, and new machinists now start at $26.00 an hour. Machinists with three to five years of service earn an average of $26.50.

The Problem: Pay Compression

Pay compression occurs when the pay of experienced employees is close to that of new hires, usually because market rates for new hires rise faster than the raises given to incumbents. At Rock River, the gap between a new hire and a machinist with three to five years is fifty cents, less than 2 percent, even though experienced machinists set up complex jobs, train new hires and produce far less scrap. Exit interviews show that four of the eleven experienced machinists who left last year named pay relative to new hires as a reason.

The Pay Structure

The company's machinist range runs from $24.00 to $32.00 with a midpoint of $28.00. A compa-ratio, an employee's pay divided by the range midpoint, shows where people sit.

A healthy structure would show compa-ratios rising with experience and performance, typically from about 0.90 for new employees to 1.05 or more for proven ones. Rock River's ratios are almost flat. The range itself is not the problem; the company has simply placed nearly everyone in the lower half.

Why It Matters Now: Pay Transparency

Illinois requires employers with 15 or more employees to state a good-faith wage or salary range, plus a general benefits summary, in every job listing from January 1, 2025, under an amendment to its Equal Pay Act. Once Rock River posts its machinist openings with a range of $24.00 to $32.00 and a typical starting offer of $26.00, every incumbent will be able to see how little experience is rewarded.

Research suggests the consequences. Card et al. (2012) found that University of California employees who learned, through a newly searchable salary database, that they were paid below the median for their unit and occupation reported lower job satisfaction and a greater likelihood of looking for another job, while those above the median showed little change. Cullen (2024), reviewing evidence on transparency policies, reports that revealing pay among coworkers has narrowed wage gaps but has also produced counterproductive peer comparisons and led employers to bargain harder, lowering average wages. Transparency, in short, rewards structures that are already defensible and exposes those that are not.

Options

Rock River has three realistic options. It could do nothing and accept continued turnover among experienced machinists. It could give every incumbent a flat raise, which is simple but does not reward experience or skill differently. Or it could adopt a step structure within the range tied to time and demonstrated skills, moving each machinist to the step that matches his or her service and certifications. DeNisi and Griffin (2020) note that pay structures communicate what an organization values, and a step structure would communicate that experience and skill matter.

Recommendation

The company should adopt a five-step machinist structure: $26.00 at hire, $27.00 after one year and a basic setup certification, $28.00 at three years with multi-axis certification, $29.50 at five years and $31.00 for lead machinists who train others. Moving current employees to their steps, assuming four of the most senior qualify as leads, adds about $117 an hour across the group, or about $290,000 a year once overtime and payroll taxes are included, roughly 5.5 percent of machinist payroll. The cost of losing experienced machinists, including recruiting, training and scrap from inexperienced setups, ran to about $35,000 each last year, so preventing eight or nine departures would cover it.

The trade-off is a permanent increase in labor cost in a business that competes on price for contract work, and less flexibility to set individual rates. Rock River should communicate the new structure before its first posting under the transparency rule, so employees learn of it from the company, not from a job advertisement.

Measures

Rock River should track compa-ratios by experience band, voluntary turnover among machinists with more than three years of service and scrap rates on complex jobs. Within a year, turnover among experienced machinists should fall below five departures, and compa-ratios should rise with service.

Conclusion

Rock River's compression problem arose from sensible decisions to compete for new hires, but it left experienced machinists underpaid relative to their value. Pay transparency will make the problem visible to everyone. A step structure tied to experience and skill restores internal consistency at a cost the company can justify.

References

Card, D., Mas, A., Moretti, E., & Saez, E. (2012). Inequality at work: The effect of peer salaries on job satisfaction. American Economic Review, 102(6), 2981-3003. https://doi.org/10.1257/aer.102.6.2981

Cullen, Z. (2024). Is pay transparency good? Journal of Economic Perspectives, 38(1), 153-180. https://doi.org/10.1257/jep.38.1.153

DeNisi, A. S., & Griffin, R. W. (2020). HR (5th ed.). Cengage Learning.