Publication: SAM Advanced Management Journal
Publication Date: 22-JUN-05
Format: Online - approximately 4486 words
Delivery: Immediate Online Access
Author: McAfee, R. Bruce ; Glassman, Myron
Article Excerpt
In the competition for new employees, companies sometimes will offer a higher salary to the new hire than they are currently paying to better-qualified current employees in similar positions. In short, their pay scale is inverted. While various rationales are offered for this practice, such as market pressures or a dearth of suitable prospects, firms should be aware of potentially harmful fallout. This may include higher direct and indirect costs, low employee morale, negative effects on society, and questions about management's ethics and competency.
**********
Mary, a health care employee, joined the firm 10 years ago and has become a highly skilled employee. She has always received high performance evaluations and is viewed as one of the best employees on the staff. Another member of the department retired, and Mary's manager went outside for a replacement. They hired a new employee who had just graduated from a program no better than the one Mary attended. The new person's job duties were identical to Mary's, but the new person wasn't as proficient as Mary, so Mary was asked to train and mentor her. Nonetheless, this new employee was offered a salary 10% higher than Mary's.
This example describes an ever-growing phenomenon, pay inversion. This is different from salary compression because the less-qualified new hire is making more than a more qualified current employee. In a 2002 study, the Institute of Management and Administration asked HR professionals to list their top compensation problems ("How to handle," 2002). Salary compression was mentioned most often (25%), followed by retention and recruiting (18%), hot skills (15%), and offering competitive pay (15%). Since these last three issues may also be linked to pay inversion, the problem may be greater than the compression figure (25%) alone suggests.
Although the difference between compression and inversion may be a few hundred dollars, it is not unreasonable to expect current employees to react much more negatively to pay inversion because they are going from "earning more" to "earning less" than the less-qualified new hire. Inversion is expected to have a much greater negative impact on employees than compression because it is likely to be seen as being more unfair. While employees may be able to shrug off compression, they may have much greater difficulty ignoring inversion.
Labor shortages resulting from baby boomer retirements will further exasperate the pay inversion problem. Horrigan (2004) cites statistics showing that as the 76.4 million baby boomers start reaching age 65 in 2011, fewer workers will be available to take their place. Jones (2002), Reinhardt (2003), and Hoffman (1999) believe construction, engineering, health care, and fast food will all be affected. Even before the baby boomers start to retire, the Bureau of Labor Statistics' projections show the U.S. could have a shortage of more than 10 million skilled workers by 2010 (Greenwald, 2003). Greene (2003) reported that some firms such as P&G, Home Depot, and Eli Lilly are already experiencing the problem.
Pay inversion is defined here as the hiring of new employees for a specific job who have fewer credentials or lower overall job performance, or both, at a higher compensation level than that of current employees. This definition acknowledges that new employees for a specific job may be more competent and have better credentials than current ones and, hence, their higher pay would not constitute pay inversion as defined above. This definition also takes a broad view of compensation and recognizes that pay is only one aspect of total compensation. Various perks such as stock options, meal allowances, vacation schedules, office choice, and a company car are all part of compensation. Also, while older employees may be more likely to be affected by pay inversion, younger workers may also be affected. As such, the term "current employee" is used rather than "older employee" unless age is a specific issue.
This article discusses the typical reasons given for pay inversion, analyzes the arguments against it, and offers several ways of addressing the problems it creates.
Why Firms Engage in Pay Inversion
A typical explanation for why firms practice pay inversion is that the "market" demands it. Basic economics says that when employees are in short supply, an...
NOTE: All illustrations and photos have been removed from this article.
More articles from
SAM Advanced Management Journal
ADA's reasonable accommodation: myth or reality., 22-SEP-07
Corporate social responsibility: an exploratory study in the United Arab Emirates., 22-SEP-07
Improving organizations by coaching individual development using the resource-based business strategy., 22-SEP-07
Looking for additional articles?
Click here to search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Click here to search our complete database of Industry & Market reports by text, subject, publication name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company analysis or best practices in managing your organization, Goliath can help you meet your business needs.
Our extensive business information databases empower business professionals with both the breadth and depth of credible, authoritative information they need to support their business goals. Whether it be strategic planning, sales prospecting, company research or defining management best practices - Goliath is your leading source for accurate information. |
