Pay Compression can be defined as narrow pay differentials that create pay inequities between supervisors and subordinates or between experienced employees and newly hired employees in the same job.  Although there are many factors that contribute to pay compression, the overriding factor is poor administration.  Attention must be given by the HR professionals to on-going administration of all pay changes including hiring rates, promotional increases, merit increases, and increases resulting from minimum wage or market changes.

Proper equity analysis must be performed for possible changes to improve pay equity.  Not doing so can result in internal inequities that can range from individual to systemic issues leading to employee dissatisfaction.  Pay compression can cause employee morale issues and effect employee perceptions regarding "fair pay".