Why New Hires at Your Company Are Getting High Pay but Older Employees Aren't Getting Raises

Maddening, isn’t it? You’ve been working at your company for a few years, doing a fine job, and maybe you’ve even been promoted a time or two, with commensurate bumps in pay. But hold on a minute: According to the office grapevine, someone who just joined your team a few weeks ago is making more money than people who’ve been there, doing good work, for much longer —maybe including you. What’s going on?

Labor economists call it “salary compression,” which is what happens when companies keep a tight rein on raising employees’ salaries but, at the same time, are forced to pay higher wages to attract new talent. The gap between longtime employees’ and new hires’ pay keeps shrinking, often to the vanishing point and beyond.

As of the second quarter of 2019, says a new report from the Conference Board’s Labor Market Institute, this trend shattered all previous records. For instance, “the [salary] gap between the wages of 20-to-24-year-olds and 25-34-year-olds” —who have been working longer— “recently declined to its smallest size in 36 years,” the study notes.

That’s not to say that salary compression is anything new. Employers have resisted boosting salary budgets for existing employees beyond an annual average of 3% or so since the Great Recession ended a decade ago. At the same time, demand for talent has raced steadily ahead. What has changed in the past year or two is that everyone can get a far clearer idea of what other people make than in the past —not only from salary research online, but because coworkers are more willing to discuss pay with each other than they used to be.

Aren’t employers worried that thus-far-loyal talent will demand more money, or go elsewhere? “Companies do see the problem, especially as the job market has gotten tighter and tighter and there are more opportunities out there,” says Gad Levanon, head of the Labor Market Institute. “But profits are also being squeezed in other ways now, and increasing salary budgets [for current employees] would add to that strain. So companies are between a rock and a hard place.”

Let’s say you’ve realized that the newly-hired person in the next cubicle was brought on board at some number that makes your next raise look puny. Of course, you need to study up online and compare your compensation with that of other people doing your job (or a comparable one) in the same industry and geographic area. If you find you are indeed underpaid, talk with your boss about it, and see if there are ways you can remedy that —maybe by taking on special projects or aiming for higher targets.

It’s possible, though, that no matter what you offer to do, your leader’s (not uncommon) reply will be, “Gee, I’m really sorry, but more money just isn’t in the budget. My hands are tied.”

In that case, Levanon has a suggestion: “Go and get an outside offer, and be prepared to take it. This happens all the time. It’s one reason the [Bureau of Labor Statistics’] ‘quits rate’ has been trending up to pre-Recession levels.”

If that’s your plan, you’d be smart to act quickly, because this effervescent job market could lose its fizz any day now. ADP’s latest Workforce Vitality Report, for this year’s third quarter, notes that annualized U.S. employment growth began to look a little sleepy in September. November’s jobs numbers suggest that was a temporary blip, and “job switchers continue to enjoy [average] wage increases of 5.1%,” observes Ahu Yildermaz, co-head of the ADP Research Institute. But, partly out of concern about salary compression and its effect on morale (and retention) of the employees they’ve already got, “employers appear to have reached the limit of what they are willing to pay workers to entice them to switch jobs.”