Pay Compression: The Silent Retention Risk Organisations Can’t Ignore
Pay compression is becoming a serious retention risk. Learn what causes it, how to spot it early, and practical, strategic solutions that work.
Holly Coe, Senior Reward Consultant at InnectoWednesday 18 February 2026
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The world of pay and talent is shifting beneath our feet. Skills shortages, hybrid working expectations, transparency regulations, the rising cost of living, and internal equity pressures are combining to reshape the employer–employee relationship.
If these pressures were tectonic plates, one of the clearest surface-level effects would be pay compression - a challenge that is no longer just a technical HR issue, but a major retention risk for organisations.
Why Pay Compression Matters
Pay compression happens when employees doing similar work are paid almost the same, despite differences in experience, performance, or responsibility. It erodes trust because employees don’t compare policies or pay bands, and they compare themselves to peers, new hires, or colleagues in adjacent roles. When these comparisons don’t make sense, frustration grows, engagement drops, and turnover rises.
There are some telling statistics:
- Around 69% of organisations experienced pay compression in the last year.
- Over half had to increase salaries for existing employees just to close internal gaps.
- 52% now prioritise tackling compression more than in previous years.
(Source: Robert Half)
What Drives Pay Compression?
We regularly see four recurring patterns often underpin the problem:
- Too many grades or levels – Overlapping pay bands create confusion about role value and progression.
- Narrowing gaps between managers and their direct reports – When team members earn close to, or sometimes more than, their managers, career progression and leadership incentives blur.
- Rapid wage spikes – Market pressures, scarce skills, AI roles, or national wage increases can push salaries up quickly, creating immediate internal inequities.
- Static or outdated pay structures – Old pay bands fail to keep pace with new hires, who may start at or above midpoints, further pressuring internal equity.
These drivers often interact, amplifying the effect. The solution isn’t a single fix - it’s a combination of practical, strategic, and sometimes radical approaches.
Solutions That Work
1. Practical fixes: getting the basics right
- Audit your current pay landscape by identifying clusters around midpoints.
- Refresh market data regularly and ensure pay ranges still reflect reality.
- Apply targeted adjustments to at-risk roles rather than broad, sweeping increases.
2. Strategic fixes: a bigger toolkit
- Equip managers to confidently discuss pay, performance, and potential.
- Focus on non-financial levers that deliver real value, such as career paths, upskilling, and flexibility.
3. Radical fixes: rethink the model
- Shift from paying for tenure or titles to paying for skills and contribution.
- Explore variable or performance-linked pay to add flexibility and differentiate roles.
- Streamline levels to clarify responsibilities and strengthen pay differentiation.
Tackling the Problem
Stage 1: Spotting the Symptoms
The first step in tackling pay compression is recognising it. Early signs often appear in plain sight: high turnover in key roles, rising payroll costs without clear justification, or recurring employee complaints about fairness and pay differences.
At this stage, it’s not about solutions yet—it’s about diagnosis. Start by conducting a pay equity audit across teams and grades. Look for patterns where employees cluster around the midpoint of pay bands or where long-serving staff earn roughly the same as new hires.
Also, analyse progression speeds: are employees moving through bands at a pace that matches performance and experience? Slow or uneven progression is a classic early warning sign of compression. Spotting these symptoms early allows you to plan targeted interventions before employee trust and engagement are eroded.
Stage 2: Validating Assumptions
Once you’ve spotted potential issues, it’s time to validate what you think you know. You may suspect that slow progression, inconsistent hiring decisions, or rapid market-driven pay increases are at play - but assumptions alone aren’t enough.
Quantify the problem: measure clusters of pay relative to tenure, performance, and role level. Map hiring trends and any short-term market premiums that may have disrupted internal equity. By combining data and analytics, you can confirm the scale of compression, identify the most affected teams, and understand the underlying causes.
At this stage, you begin turning anecdotal insights into hard evidence, creating a foundation for solutions that are precise, sustainable, and defensible.
Stage 3: Mapping the Problem
Now that the problem is clear, it’s time to dig deeper and map its severity and hotspots across the organisation. Which roles, teams, or pay bands are most affected? How urgent is the risk in each area, and what impact is it having on engagement, retention, or performance?
With this insight, organisations can move beyond short-term “band-aid” fixes like across-the-board salary increases. Instead, implement meaningful, targeted interventions -whether that’s recalibrating pay bands, adjusting progression frameworks, strengthening manager–employee pay differentials, or introducing strategic variable pay solutions.
The goal is to stop compression from recurring, restore trust, and align pay with performance and market value, and turning what could have been a retention risk into a competitive advantage.
Quick Wins to Protect Against Compression
- Protect manager–team pay gaps - keep direct reports below 90% of their manager’s salary.
- Build a business case for adjustments - focus on ROI, retention, and clearer career pathways.
- Tighten hiring discipline - avoid “hire at any cost” offers that instantly create new compression.
Final Thoughts
Pay compression is rarely caused by a single factor and is seldom solved by a single action. The key distinction is whether the compression is temporary or systemic.
Organisations that diagnose the type and source of compression first avoid costly, short-lived fixes. By combining data, strategy, and practical interventions, businesses can protect trust, retain top talent, and turn pay into a competitive advantage, rather than a risk.