Pay compression at public universities: the business school experience.

by Nancy A. Bereman , Mark L. Lengnick-Hall

Pay compression, the narrowing over time of the pay differentials between peopl in the same job
or between people in different (usually adjacent) jobs in an organizational hierarchy, has become
a significant issue in public higher education over the past decade. In 1986, Howard Bowen and
Jack Schuster identified a widening of the salary differentials between disciplines and
disproportionate salary increases at the lower ranks as a major negative influence on faculty
morale(1). The academic labor market, with its differentiation of individuals by rank and
segregation of academic disciplines with differing market supply and demand characteristics,
provides an excellent opportunity to study pay compression.
The reaction of individuals to pay compression is based upon subjective perceptions of equity.
Most definitions of pay compression in the literature capture only this perceptual facet of the
construct, ignoring or downplaying th objective nature of narrowing pay differentials over time
that can lead to perceptions of inequity(2,3). Interestingly, pay compression can be perceived t
exist even when there is no objective basis for the perception. However, perceived pay
compression is more likely to result in organizations that are, i fact, experiencing the objective
narrowing of pay differentials over time.
Three possible pay compression scenarios can result: (1) objective pay compression exists in
conjunction with subjective (or perceived) pay compression, (2) objective pay compression
exists without subjective pay compression, or (3) objective pay compression does not exist, but
subjective pa compression occurs. In the first case, objective pay compression leads to the
subjective perception of pay compression (i.e., pay inequity). This is most likely to occur in
organizations where employees have access to salary data (e.g., public institutions). In the
second case, objective pay compression does not lead to subjective pay compression. While
objective pay compression exists, employees either are not aware of it (most likely in secret pay
systems) or do not perceive it to be inequitable. The third case illustrates a perceptual inequity
that is not correlated with an objective inequity, which is most likel to occur in secret pay
systems, but may occur even when employees are aware of others' salaries. It may represent a
reaction to other organizational characteristics in addition to the pay system.
To complicate matters, pay compression is not necessarily a "problem", any more than turnover
is necessarily a "problem". That is, pay compression does not necessarily produce undesirable
organizational consequences. All of this suggests that pay compression is a much more complex
phenomenon than is typically described in compensation textbooks. It has both objective and
subjective components, and can have either positive or negative consequences fo an
organization, depending upon the particular situational/contextual variables that exist. Since
objective pay compression may not have a direct and immediate effect on organizational
behaviors and attitudes, it is useful to observe patterns of compression over time and across
occupations.
Pay compression in academia
In the academic labor market, the causes of "objective" pay compression seem fairly well-
defined - demand/supply imbalances in some disciplines produce ever-increasing salary offers
that often outstrip the merit increases that universities can offer their current faculty. This seems
to be confirmed by a 1990 survey of senior administrators at 364 colleges and universities(4)
conducted by the American Council on Education which indicates that colleges an universities
are experiencing greater difficulty in hiring for faculty positions, although mainly in a few fields
and specialties. Sixty-three percent of the institutions reported having greater difficulty than in
the past in getting top applicants to accept positions offered to them (in 1987 only twenty-five
percent responded in this manner). Institutions reported taking a number of actions to counter
labor market difficulties that they are experiencing including the following: forty-one percent of
institutions surveye have hired faculty in high-demand fields at a salary above their salary scale
(or their generally-accepted salary ranges) and twenty-five percent have hired new, junior faculty
in a few fields at a salary that is above that of other senior faculty in the same department. If the
results of this survey are accurate, then pay compression between ranks in academia is on the rise
and wil likely contribute to increased faculty dissatisfaction. As already documented(5),
perceptions of pay compression among business school faculty are indeed associated with lower
pay satisfaction especially among the senior ranks
While the literature on the academic pay-determination process is fairly plentiful(6), studies
identifying the extent of pay compression between ranks across disciplines are sparse and ...