Pay compression is the situation that occurs when there is only a small difference in pay between employees regardless of their skills or experience. It is also referred to as salary compression. Pay compression is the result of the market-rate for a given job outpacing the increases historically given by the organization to high tenure employees. Therefore, newcomers can only be recruited by offering them as much or more than senior professionals.
Pay inequities exist in all public and private sector organizations and may be caused by: overtime, talent acquisition, reorganizations, demotions, reassignments & transfers, demand for technical expertise and seniority. Some organizations conduct compression studies to achieve certain levels of internal equity, so that people in relatively similar jobs in the organization receive equal pay.