I received a call a week later: “We now want a two to five year paralegal who has gone to trial. Salary is $65,000-$80,000 per year.” Quite a twist! The firm did not want new employees to make a salary more, close to equal or equal to current employees.

For those who have not hired lately, let me clue you in: The unemployment rate is 3.7% across the country, the lowest in 30 years. Below 4% and it’s a candidate tight market. At this writing, the unemployment rate in the legal field is below 1% or, specifically, 0.06%. No number of Indeed ads are going to shake loose candidates unless you are offering the sun, the moon and partnership. Basically, most firms are posting and praying.

Part of the problem is salary compression: When the pay of an employee is close to the pay of more experienced employees in the same job or when employees in lower-level jobs are paid almost as much as those in higher levels. Pay inversion is when newer or less experienced employees make beyond those more experienced.

Let’s look at the Los Angeles paralegal market. Starting salaries are around $60,000-$67,000. A few years ago, it was around $50,000. Given a standard 3% increase for that entry level paralegal to reach five years of employment at the same firm, their salary today would be $59,653 or equal to the entry level paralegal at $60,000-plus.

For those saying, “I would never allow a five-year paralegal to be paid $60,000.” OK, I buy that. However, what adjustments did you make along the way? $10,000? $20,000? $25,000? Let’s say you went the full bola: $25,000. That would bring that paralegal to $85,000 or market bottom.

During the pandemic, many firms paid higher salaries that still remain. For those firms that got through the pandemic with little turnover, you are probably now in a pickle.

Let’s go back to my friend’s firm’s requirement, “trial experience.” Unless you were in a locked down courtroom with judges, bailiffs, attorneys and clients in hazmat suits, no one went to trial. Who was going to chance COVID?  The two to five year paralegal with trial experience right now barely exists, yet more experienced paralegals with trial experience can earn less.

According to PayScale’s white paper: “How to manage pay compression with agile compensation,” employees are placing pressure on organizations, particularly when comparing themselves to peers in similar roles. Pay compression (known as wage or salary compression) often occurs gradually over time, rather than as deliberate strategies.

The following cause salary compression or inversion:

• Market forces
• Inconsistent pay practices over time
• Unintentional biases
• High demand for specific skills
• Inability to raise salaries of current employees

Other factors include:

Demand exceeds supply: Employees get more dollars by changing employers than remaining loyal. In other words, pay compression happens when firms increase salaries to attract new hires and don’t give adjustments for current employees.

“Pay what employees are worth at least for significant and profitable roles. Consider the thousands of dollars spent on recruiting, agencies, morale dip, revenue and productivity loss while positions remain unfilled.”

No structured, too-broad pay grades: Muddled compensation structures do not allow growth. In many firms (OK, most), paralegals are paralegals, legal assistants, legal assistants with no designated tiers — i.e., entry, midlevel, senior, etc. — and only one range, causing pay compression. If they feel their careers (and paychecks) have stagnated, employees look outside for advancement.

Unique pay ranges and promotions to the next tier for new expertise results in less turnover. Tiered programs work wonders.

Rapid inflation: Inflation can be temporary, making permanent hikes unnecessary. Offset inflation with food, gas or utilities stipends, separate from base pay — only if inflation remains.

Job descriptions: These can be unclear, outdated, ignored or nonexistent. If a new hire is earning more than an experienced employee, is it the same position? Or two different roles?

Hourly workers may make more than salaried contributors: Hire hourly workers to cut overtime. Consider title changes, career coaching, additional PTO, professional development, larger bonuses, better benefits. Better titles are short-term morale boosters, but if employees are still not happy, titles are nice things to take when they leave.

SOLVING THE PROBLEM

Ignoring salary compression has serious consequences, including: 

• Decreased morale and engagement
• Search for more growth
• Turnover
• Inability to attract best candidates
• Legal ramifications

Consultant David Wudyka clarified pay compression in his webinar, “How to Find and Fix the Pay Errors You Don’t Even Know You’re Making.” Here are some things to address the problem:

• Revisit/rebuild grade structures responsible for “structural compression.” Pay compression rests with too narrow pay ranges.
• Make equity adjustments: Identify performances and rates not in proper relationship — good causes for adjustments.
• Make ranges at market: Adjust regularly, i.e., every year. If not, you are probably falling behind the market.
• Consider promotions: Move top performers to another pay grade. If someone could contribute higher responsibility, you can solve the compression problem.
• Consider reassessing: For underperformers, consider freezing compensation. You don’t want to take pay away, but you can freeze. Perhaps lower responsibilities are called for.
• Consider merit bonuses instead of raises. Bonuses allow some rates to float up, and others to remain the same to disperse bunched pay rates without building increases into base pay. Bonus quarterly.

Pay what employees are worth at least for significant and profitable roles. Consider the thousands of dollars spent on recruiting, agencies, morale dip, revenue and productivity loss while positions remain unfilled.

You may get away with $80,000 for two to three years’ experience, but not $65,000. Let’s say salaries are brought up to $87,000 — $7,000 more per year. If paralegals bill at $200 per hour, and the position remains unfilled for six months while digging in your heels, as much as $30,000 loss per month can happen. Open six months, and you lose $180,000 revenue, all for an extra $7,000.

PayScale suggests: “Don’t default to annual base pay increases of three percent or so applied indiscriminately across the workforce. Look at key positions and market worth, how minimum wage or inflation impacts locations, job descriptions and performance. Adjust compensation accordingly.”

Firms taking proactive approaches to pay compression make it more likely to be where the best talent will land. You can’t afford to lose the best hires or have even minor turnover. Competitive pay is a huge selling point resulting in the most engaged, loyal and productive employees. Remember that old adage, “Do the right thing.”

As law firm leaders, our challenges extend beyond identifying capable potential employees; we must also ensure the seamless and comprehensive transfer of knowledge when new talent joins the firm. Leveraging technology creatively and strategically can be a powerful tool in building a culture of learning, creating longevity in existing employees, and in smoothing the on-ramp for those who come next.