Two-tier compensation has been a traditional payroll structure in many different types of industries going back decades, but it has come under quite a bit of scrutiny among workers in the current labor climate. Building Indiana was curious about all the attention the topic has been getting, so we took a dive into what it is and why some folks either love it or hate it.
What is Two-Tier Compensation?
Most people have likely encountered this type of payroll method throughout their careers. Two-tier compensation is when senior employees that have been with the company for longer have higher pay and usually additional benefits over new hires. There may or may not be a threshold of a certain amount of time before a newer worker can reach the higher pay point or have access to certain benefits.
So, for example, a newly hired worker may start out with a salary of $28,000 annually. After three years, their pay gets increased to $40,000 and they can start investing in the company retirement plan. But that’s not always the case.
It’s important to note that two-tier structures can be applied differently in certain scenarios. In some cases, a new worker will eventually be able to achieve the full salary and benefit status of a senior worker. In other situations, they may not. If a company is sold, for example, a new owner may opt to form a contract with existing workers to maintain their current compensation establishing different rates for new hires. In this case, the newer workers will only be compensated under the new terms in what is effectively a permanent difference based on hire date.
This type of structure is most often found in union or industrial operations, but it can also be seen in many other sectors such as retail or transportation. The process differs from a wage progression schedule wherein a person earns more incrementally as they accrue seniority. A two-tier system is more like a steep shelf than incremental growth.
Why Do Some Folks Love It?
Lower compensation rates for newer employees are tested way to save on labor costs. For industries with high turnover, this can be a major money saver that helps offset some of the financial risks in hiring an unproven person.
It may also be a preferred option during tough times. If a company were struggling financially, setting up a lower tier for newer workers is likely a better way to save money than reducing the pay of existing employees. It may also be a way for a struggling company to bring on the people it may need to complete more work.
Why Do Some Folks Hate It?
Most of the arguments against a two-tier structure stem from the fact that disparities often have a negative impact on the workforce. Experts say the method goes against the mantra of “equal pay for equal work” and can breed discontent. Anytime something reduces solidarity and camaraderie among workers, it’s likely going to negatively impact the business.
While some companies may implement a two-tier system to onboard more workers, the opposite effect may actually occur. Reduced pay and benefits may fail to attract talent and could possibly damage morale among existing employees, leading to turnover.
On the union side of things, officials may perceive two-tier systems to be a subversive way of undermining their organization’s power. New people joining the workforce with less pay and benefits may not be as inclined to join a union, which reduces membership. Also, existing union workers may view the two-tier method as a company’s way of selling out their future coworkers.
Finding Your Right Answer
While there’s no clear right or wrong answer on the topic of two-tier compensation, the current national trends of labor shortages have brought the issue to the forefront. Broadly speaking, workers don’t like it very much and some companies do – which is a real concern when almost every business is competing for workers. There have even been several high-profile strikes that have cited two-tier compensation as a key issue that organizations want to change.
As Building Indiana has mentioned repeatedly over the years, keeping employees happy is a very smart way to keep a company growing. As such, for the topic of two-tier compensation, leaders should be advised to review their policies and establish an open dialogue with their workers about the best pathway forward for their business models. Through collaboration, the right answer will be found.
