Salary Inversion: Meaning, Calculator, Examples and FAQs

Salary inversion is a significant and often debated issue in compensation management. The conversation is about whether the phenomenon is fair and how it affects workplace dynamics and employee morale.

In this discussion, we'll explain pay inversion, examine its causes, address common questions, and highlight its differences from pay compression, along with real-life examples. We'll also explore how it impacts an organization and provide steps to combat it, with the help of Salary.com's Pay Equity feature.

But first, let's establish a basic understanding of wage inversion to better address these issues.

Salary inversion meaning

Salary inversion in HRM refers to a situation when less experienced employees earn more than their more experienced counterparts. This often happens when a company is struggling financially and needs to cut costs, leading to layoffs or salary freezes for senior employees. Also, rapid technological advancements can sometimes make older skills less valuable, which results in lower salaries for experienced workers.

Use Salary.com’s Pay Equity tool to compare jobs with similar skills and responsibilities within your organization, regardless of their location or category. This helps address pay inversion by spotting pay gaps, ensuring fair pay for the same position, and correcting imbalances.

What causes salary inversion?

Pay inversion can be a demotivating factor for a tenured employee and can lead to turnover. Here are some common causes:

• Market forces

  Salary inversion occurs when new hires are paid more than tenured employees because of changing job market conditions. This leads to dissatisfaction among longer-serving staff.

• Economic conditions

  Economic changes, like inflation or growth in the labor market, can lead to wage inversion. When the economy is strong, companies may raise wages for new hires. If existing employees’ pay doesn’t go up, newly hired employees might earn more, causing an imbalance.

• Minimum wage increases

  When the minimum wage goes up, employers must increase pay for lower-paid workers. If they don't adjust pay for higher-level employees, less experienced workers might end up earning as much or more than their more experienced colleagues.

• Outdated pay structures

  Wage inversion also happens when outdated pay scales don't match current market rates. A new hire may get higher salaries, while an experienced employee remains on lower pay, creating an imbalance.

• Poor performance management

  If performance reviews and raises aren’t handled well, top employees might not get the raises they deserve. New hires may earn more due to competitive salaries, creating an imbalance with experienced employees.

• Limited budget

  With a tight budget, a company may not raise current employees' salaries often. If they offer higher pay to new hires, this can result in new employees earning more than those who have been with the company longer.

• Over-hiring

  Over-hiring can cause pay inversion if new employees are paid more to fill jobs quickly. If current workers’ pay isn’t adjusted, new hires may earn more, which leads to dissatisfaction among long standing employees.

Salary inversion vs salary compression

The difference between salary inversion and salary compression is that salary inversion happens when less experienced employees earn more than more experienced ones, causing dissatisfaction among the experienced staff. On the other hand, salary compression occurs when pay levels are too similar across different job levels, making it hard to reward high performance and attract top talent.

In short, wage inversion means less experienced employees earn more than experienced ones, while wage compression means similar pay across levels, making it hard to reward performance and experience. Tip: The salary compression formula is: current salary/salary range midpoint.

Salary inversion examples

To fully understand the concept of pay inversion, here are two examples:

Scenario 1

In a tech company, Alex, a software engineer with 5 years of experience, earns PHP 90,000 per month, while Jamie, a new hire with 2 years of experience, earns PHP 95,000. This is unfair because the newer employee is paid more than the more experienced one.

To address this, the company should review its salary structure and increase Alex’s pay to be equal to or higher than Jamie’s. It’s also important to clearly communicate these changes to employees to maintain satisfaction.

Scenario 2

In a growing marketing firm, there's a wage inversion issue with three employees: Alex, who has been with the company for 4 years, Casey, a recent hire with the same job and qualifications, and Jordan, another recent hire.

Currently, Alex earns PHP 80,000 per month, while Casey earns PHP 85,000 and Jordan earns PHP 82,000. This pay gap is making Alex feel undervalued compared to Casey and Jordan. This dissatisfaction could hurt morale and increase turnover.

How to battle pay inversion in your organization

To address pay inversion and create a more equitable and motivating work environment, follow these steps:

1. Conduct a compensation audit: Review your current pay structure to find any differences and compare it to industry standards. When conducting an audit, ensure you communicate clearly that your organization supports fair and equitable pay for everyone. Salary.com can help with this process.

2. Re-evaluate compensation philosophy: Set clear rules for fair pay based on job roles, experience, and performance.

3. Implement a transparent compensation communication strategy: Share your pay philosophy, salary range, and promotion criteria with employees and address their concerns quickly.

4. Track the pay structure and conduct periodic audits: Regularly check your pay structure and conduct continuous pay analysis to spot and fix any pay issues. Stay updated on industry trends and make pay equity adjustments as needed.

FAQs

Here are some commonly asked questions about salary inversion:

Is salary inversion legal?

Wage inversion itself is not illegal, but it can lead to pay inequities that may violate equal pay laws, especially if based on gender, race, or other protected traits. Many organizations should regularly review their pay practices to ensure there are no discriminatory gaps, thereby avoiding a potential discrimination lawsuit.

You can avoid pay gaps by doing a pay gap assessment. This analysis helps you check if your pay practices and levels match your business goals and DE&I initiatives.

Is pay inversion good for you?

If you’re an employee facing pay inversion, it can be very demotivating. It can lower staff morale, create feelings of unfairness, and even hurt your career growth. When newer employees earn more than longer-serving ones, it can feel unjust and devalue experience and tenure.