In this series, business journalist Timothy Goh offers practical answers to candid questions on navigating workplace challenges and getting ahead in your career. Get more tips by signing up to The Straits Times’ Headstart newsletter.
A: Salary compression occurs when the pay gap between new hires and long-serving employees in the same team or role becomes unusually small, often leaving existing and equally experienced staff feeling undervalued.
It is a common but uncomfortable reality, said Ms Michelle Koh, managing director at executive search firm The Edge Partnership.
“The challenge is that with external hires, they may carry fresh perspectives, new networks or specialised skills that existing employees in the same role do not have and hence, companies are prepared to pay more,” she said.
“There is also always a time lag – employee salaries move incrementally through annual reviews, but the market can shift sharply, especially when there is a talent shortage or sudden surge in demand for certain skills.”
Ms Koh said there are cases where hiring managers turn down candidates who could do the job well, simply because they command pay that would unsettle their existing team.
“In their own way, they are trying to protect internal equity, even if it means losing a suitable candidate and taking a longer time to fill the role,” she added.
Ms Koh said she has spoken to employees who know a new colleague is earning more, but are reluctant to switch jobs for a 10 per cent to 20 per cent pay rise if they are otherwise happy where they are.
“The real risk is when that goodwill runs out… We are seeing more companies carry out regular salary benchmarking and internal equity reviews to address pay gaps,” she added.
Ms Isabel Lim, a certified senior professional at the Institute for Human Resource Professionals, said that when organisations hire externally, it is common practice to benchmark offers against current market rates to stay competitive.
“Over time, this may result in an unintentional gap between what new hires are offered and what long-serving employees earn, even when their experience levels are comparable,” she said.
“This gap is not necessarily a reflection of how much a loyal employee is valued, though it is understandable why it may feel that way.”
Ms Lim said that “progressive” organisations recognise this and do not wait for employees to raise concerns or for issues to surface during exit interviews.
Instead, they take a proactive approach through regular compensation reviews, ongoing market benchmarking, transparent pay frameworks, and open conversations around career development.
“Ultimately, retention is not just about salary, but also about ensuring employees feel respected, fairly treated, and have a sense of ownership in their work,” said Ms Lim.
