Businesses across finance, technology, housing and specialist markets face growing competition for talent. What they may not realise is that salary compression is silently undermining their efforts to attract, retain and reward staff fairly. As a recruitment partner to some of the world’s leading employers, Goodman Masson has seen first-hand how salary compression can impact hiring outcomes and retention rates. Learn why it happens, and how it can be mitigated through better compensation strategies driven by market intelligence.

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Salary compression occurs when there’s a narrow pay gap between employees regardless of their experience, tenure, or performance. This issue typically arises when pay increases for existing employees do not keep pace with external salary inflation or adjustments made to attract new hires. The result is a misaligned pay structure that can demotivate teams, create internal friction, and lead to unnecessary attrition.

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There are several root causes of salary compression, that are compounded by a lack of data or strategy:
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• Changing Wage Regulations
  Increases to national and local minimum wages can close the gap between junior and mid-level salaries. This can mean entry-level staff earning only marginally less than more experienced colleagues. In the UK for example, increases will come into effect in April 2026, and while the US federal minimum wage is unchanged since 2009, many states and cities set higher minimums.
  
  

• Reactive Hiring Practices
  Employers under pressure to fill vacancies may offer higher starting salaries to secure candidates, particularly those with niche or in demand skillsets, while existing staff miss out on timely pay reviews.
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• Inflation-Driven Pay Increases
  Cost-of-living pay rises often apply uniformly across the business, flattening pay differentials between roles and levels.
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• Lack of Transparency
  While 61% of organisations report using salary ranges to determine pay, they often don’t communicate them to employees. Without clear and accessible promotion and pay progression frameworks, salaries can become misaligned over time.
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• Geographical Pay Gaps Shrinking
  Remote and hybrid working has made location-based pay less relevant, prompting companies to adjust compensation upwards in historically lower-paid regions.

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Global legislation is also raising the stakes around salary transparency. Transparency is crucial in addressing salary compression by shedding light on pay disparities and prompting the implementation fairer, more structured compensation practices.

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To date, 14 U.S. states and Washington D.C. have implemented transparency regulations that cover around 40% of American workers. And, from June 2026, the EU Pay Transparency Directive will require employers to disclose the criteria used to determine pay and career progression. Employees will be entitled to request this information, and companies will be expected to demonstrate pay equity across similar roles.

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Yet many organisations still lack a cohesive compensation strategy. While 80% have performance management systems in place to inform pay decisions, nearly a third admit those systems don’t cover all elements of compensation, that is base salary, bonuses and equity, and other benefits. Without a holistic view, businesses risk making fragmented decisions that lead to long-term salary compression.  

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Salary compression undermines the very fabric of an effective workforce strategy. Employees talk. They benchmark themselves against colleagues and external roles. When high performers or experienced team members see minimal difference in pay versus new joiners, morale dips, loyalty weakens, and turnover rises.

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Many professionals now expect annual salary benchmarking and structured progression, particularly in sectors like tech, where transparency and equity are highly valued. Worse still, when businesses ignore salary compression, they risk triggering a domino effect: raising one salary to correct an issue creates pressure to adjust others, destabilising budgets and fuelling further compression.

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One of the most effective ways to prevent salary compression is through consistent salary benchmarking. This involves comparing internal salaries against up-to-date market data for similar roles, sectors, and regions

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Salary benchmarking offers an objective baseline to:
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• Set appropriate starting salaries and contractor day rates

• Structure fair and transparent progression pathways

• Identify compression risks across teams

• Justify pay decisions internally and externally

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At Goodman Masson, we’ve developed comprehensive salary guides across accounting and finance, technology, banking & financial service and housing sectors to support this process. These guides offer tailored insights and market averages that help HR teams and hiring managers make informed decisions rooted in real-time data.

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Explore our latest industry specific salary guides.

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Or discover how Goodman Masson used salary benchmarking to manage salary expectations in support of an intense search for specialist Treasury talent.

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Addressing salary compression isn’t about raising every salary. Instead, it means implementing a structured and transparent compensation strategy that supports both business sustainability and employee wellbeing.

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Here’s how to get started:
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1. Audit Your Current Pay Structure
   Review current salary bands, identify compression risks, and assess where disparities may exist. Pay attention to long-tenured staff, internal promotions, and gender pay gaps.
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2. Introduce a Clear Compensation Strategy
   Develop a framework that includes starting salary guidelines, progression steps, and criteria for bonuses and equity. Make sure it aligns with business goals and market conditions.
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3. Communicate Salary Ranges Internally
   Salary ranges don't need to be public, but they should be visible to everyone internally. Employees are more likely to trust and stay with employers who are open about how pay decisions are made.
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4. Prioritise Pay Equity in Performance Reviews
   Align salary increases with performance, tenure, and role complexity. Ensure reviews address all elements of compensation, including bonuses and additional benefits.
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5. Prepare for Regulatory Change
   Start aligning your internal policies with pay transparency standards. Even if your business isn’t directly affected by upcoming laws, proactive compliance builds trust and readiness.
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6. Use Market Data Regularly
   Annual salary benchmarking isn’t enough. In a high-inflation, competitive market, data should be reviewed more frequently to avoid falling behind or inadvertently creating compression.

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Salary compression might be a hidden issue, but for employers it represents a strategic risk to hiring, retention and culture. The good news? It’s preventable. With regular salary benchmarking employers can avoid the talent drain that comes from misaligned pay structures.

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Goodman Masson partners with organisations across the UK, US and globally to support strategic hiring and retention. Access our market-leading salary guides or contact us today for tailored advice on salary benchmarking.

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