How to Fix Pay Compression and Pay Inversion | MorganHR

To fix pay compression and pay inversion, use targeted adjustments, not bigger across-the-board raises. You test for each problem separately, correct inversion first, re-test compression, and then change the hiring and promotion habits that caused both.

Most employers know they have a problem and still cannot say which one it is, where it sits, or what it would cost to fix. This guide walks through each step with a worked example.

Not every pay complaint is compression or inversion. Some come from a gap in trust or communication, which we cover in Salary Squeeze or Expectation Gap? Fixing the Real Pay Problem. The two tests below tell you which one you have.

Pay Compression vs. Pay Inversion, Defined

The two terms are often used loosely, and many people call both problems “compression.” MorganHR separates them, because they are measured differently and fixed differently.

Key Takeaways

• Compression is an employee paid too close to their manager. Inversion is a new hire paid more than existing employees with the same title.
• Both are pay relationship problems, so a general raise fixes neither. Everyone moves up and the gaps stay the same.
• Fix inversion first, then re-test compression. Raising existing employees to correct inversion moves them closer to their manager.
• Both return unless hiring offers, promotion increases, and salary range updates follow the same rules.

What Causes Pay Compression and Pay Inversion?

Both build slowly, through decisions that each looked reasonable at the time. The cause matters, because it determines how to fix pay compression or inversion and keep it fixed.

Causes of inversion

• Hiring rates move faster than existing pay. You pay the market rate to land a candidate, while the people already in the job have received annual merit increases that trailed the market.
• Merit budgets are flat. The July 2026 Mercer QuickPulse survey of 1,001 U.S. organizations projects 2027 merit budgets of 3.2% and total increase budgets of 3.5%, in line with the prior three years. That leaves very little money for anything other than merit (Mercer).
• Salary ranges are not maintained. When ranges go two or three years without an update, new hires come in above the people who were hired under the old numbers.

Causes of compression

• Promotion increases are too small. A promotion that puts a new manager just above the people they now lead creates compression on day one.
• Manager pay is not re-priced. Individual contributor pay often follows the market more closely than supervisor pay does, so the gap narrows from below.
• Inversion gets fixed in isolation. Raising existing employees to restore order within a title moves them closer to their manager.

Pay transparency does not cause either problem, but posted ranges make both visible. We covered that in Pay Transparency Is Exposing Internal Pay Problems Faster Than Ever.

How to Measure Pay Compression and Pay Inversion

You cannot fix pay compression or inversion until you know where it sits. Run two tests. Both need the same inputs: current salary, job title, hire date, time in role, and reporting relationship.

The Compression Test: Employee vs. Manager

Divide each employee’s salary by their manager’s salary.

• 90% or more: compression risk. Watch it, and check it before any adjustment to the employee.
• 100% or more: compression issue. The employee earns as much as or more than the person they report to.

For how pay metrics like this one connect to turnover, see Which Compensation Metrics Actually Predict Employee Turnover?.

The Inversion Test: New Hire vs. Existing Employees

Within each job title, compare the pay of anyone hired in the last 12 to 18 months with the pay of existing employees. Flag every case where the newer hire earns more than someone with more time in the role. Adjust for documented differences, such as relevant experience gained elsewhere.

A Worked Example

A company has four Senior Accountants who report to an Accounting Supervisor paid $90,000. The most recent hire came in at $80,000, the rate the market required.

The compression test finds one risk: A earns 91.1% of the supervisor’s salary.

The inversion test finds two inversions. The new hire earns $500 more than B and $2,000 more than C. A is not inverted, but leads the new hire by only $2,000, or 2.5%, after six years.

How to Fix Pay Compression and Pay Inversion

Fix inversion first, re-test compression, fix compression, and then prioritize what the budget can fund. The order matters, because every inversion adjustment changes the compression numbers.

Step 1: Fix Inversion Within the Job Title

Decide how existing employees should be paid relative to a new hire. This is a policy choice that should come from your compensation philosophy. The minimum fix is to bring every inverted employee level with the new hire. A fuller fix restores a pay progression that reflects experience.

For illustration only, assume the company sets these salaries so pay rises with time in role: $82,450 at two years, $85,000 at four years, and $87,550 at six years. Your own spacing will depend on your salary ranges and how quickly people become proficient in the job.

The inversion fix costs $15,500. The minimum fix, bringing B and C level with the new hire, would cost $2,500.

Step 2: Re-Test Compression

Run the compression test again on the new salaries, against the supervisor’s $90,000.

Fixing inversion turned one compression risk into three, and moved A to within 3 points of a compression issue. This is why the two problems have to be modeled together.

Step 3: Fix Pay Compression Between Employee and Manager

To bring the highest-paid employee back under 90%, the supervisor needs to earn at least $87,550 ÷ 0.90, or $97,278. The company sets the supervisor’s salary at $97,500, an increase of $7,500, or 8.3%. A is now at 89.8% of the supervisor’s salary, and all four employees are clear.

A pay increase is not the only fix for compression. If the manager is already paid correctly for the job, the answer may be a review of job levels, or a smaller progression in Step 1. Then repeat the test one level up, between the supervisor and their own manager.

Step 4: Add Up the Cost and Prioritize

The full fix in this example costs $23,000: $15,500 for inversion and $7,500 for compression. That is 5.6% of the group’s $409,500 payroll. Most employers cannot fund every gap at once, so fund them in this order:

1. Compression issues and inversions. An employee at 100% or more of their manager’s salary, or a new hire paid above an existing employee, is the hardest situation to defend.
2. Critical and hard-to-fill jobs where losing an experienced employee would cost far more than the adjustment.
3. Compression risks between 90% and 99%, starting with the highest.
4. Everything else, phased over two cycles if needed, with the schedule written down.

Treat this as its own budget line. The gap between Mercer’s projected total and merit budgets is 0.3 percentage points. On a $20 million payroll, that is $60,000 to cover promotions, market adjustments, compression, and inversion together. If your analysis shows a larger need, leadership should see that number before the merit budget is set, not after.

How to Keep Pay Compression and Inversion From Coming Back

A one-time correction lasts about as long as it takes to make the next above-market offer. Five habits keep the fix in place.

• Check existing employees before every offer. Compare the offer with the pay of current employees in the same title. If it would create an inversion, decide then whether to adjust them, and budget for it as part of the hire.
• Check the manager before every adjustment. Before approving an increase, divide the new salary by the manager’s salary. If the result is 90% or more, deal with it in the same decision.
• Set promotion increase guidelines. Write down the expected increase by level and where a newly promoted manager should be paid relative to the team. For the difference between the two types of increase, see Merit Increases vs. Promotions.
• Update salary ranges every year and use a merit matrix. Current ranges keep new hires and existing employees on the same scale, and a matrix that favors strong performers who sit low in the range closes gaps a little each year. Our merit matrix guide shows how to build one.
• Run both tests before each merit cycle. A problem found in the fall can be funded in the budget. A problem found in an exit interview cannot.

How to Communicate a Compression or Inversion Adjustment

Tell employees what the adjustment is, why they received it, and that it is separate from merit. An unexplained raise invites the wrong conclusion, and an unexplained absence of one does more harm.

• To employees who receive an adjustment: “We reviewed pay for your job against the market and against others in the role. Your pay was below where your experience should place you, so we are correcting it. This is separate from your merit increase.”
• To employees who do not: Explain the criteria, not other people’s pay. “We reviewed every job using the same tests. Your pay is positioned where our guidelines place someone with your experience.”
• To managers: Give them the criteria, the talking points, and the answer to “why not me?” before any employee hears the news. Our post on manager training for difficult compensation conversations covers how to prepare them, and MorganHR’s CompAware program delivers that training.

Run a pay equity review on the proposed adjustments before they are final. A fix for compression or inversion should not open a gap somewhere else. How to Conduct a Pay Equity Analysis: 8 Steps walks through that review.

How MorganHR Helps Mid-Market Employers Fix Pay Compression and Inversion

MorganHR runs both tests across your full employee population, models the adjustments together so one fix does not create the other problem, and delivers a costed, prioritized plan your leadership team can approve. For organizations that manage merit in SimplyMerit, managers see where each employee sits in the range before they recommend an increase.

Compression and inversion are one part of a broader pay program. Our 13-step mid-market compensation strategy shows where they fit.

Contact MorganHR to scope a compression and inversion analysis before your next merit cycle.

Frequently Asked Questions

What is pay compression?

Pay compression is when an employee’s pay is too close to their manager’s pay. MorganHR treats an employee at 90% or more of their manager’s salary as a compression risk, and at 100% or more as a compression issue.

What is pay inversion?

Pay inversion is when a new hire is paid more than existing employees who hold the same job title. It usually happens when market hiring rates rise faster than the pay of people already in the job.

What is the difference between pay compression and pay inversion?

Compression is vertical, between an employee and their manager. Inversion is horizontal, between a new hire and existing employees in the same title. Many people use “compression” for both, but they are measured and fixed differently.

How do you calculate pay compression?

Divide the employee’s salary by their manager’s salary. A result of 90% or more is a compression risk. A result of 100% or more is a compression issue.

How much does it cost to fix pay compression and inversion?

The cost is the sum of each adjustment needed to restore the right pay relationships. In the worked example above, fixing inversion for three employees cost $15,500 and the resulting compression fix cost $7,500, for a total of $23,000. The cost across a whole organization is a much smaller share of total payroll, because most jobs are not affected.

Will a larger merit budget fix pay compression or inversion?

No. A general increase raises everyone’s pay by a similar percentage and leaves the relationships between employees unchanged. Both problems need targeted adjustments funded separately from merit.

How often should employers check for compression and inversion?

At least once a year, before the merit budget is set. Also check for inversion before every offer, and for compression before every individual pay adjustment.

Math check on the worked example

Sources

• Mercer QuickPulse US Compensation Planning Survey, July 2026: 1,001 organizations, 3.2% merit and 3.5% total projected for 2027. Opened November 11, 2026.
• Compression and inversion definitions and the 90% and 100% thresholds: provided by Austin, November 11, 2026.
• Internal links: Salary Squeeze, pay transparency, compensation KPIs, merit increase vs. promotion, merit matrix guide, manager training, CompAware, pay equity analysis, mid-market compensation strategy.