It is one of the more uncomfortable conversations a manager can have.
An employee walks into your office and says:
“I found out the person we just hired is making more than I am.”
Maybe they have been with the company for five years. Maybe they helped train the new employee. Maybe their performance is strong.
And maybe what they heard is true.
The instinct may be to become defensive, avoid discussing compensation, question how they found out, or immediately promise to “look into a raise.”
None of those should be the first response.
Because this is becoming a very real compensation challenge for employers: the price of hiring someone today may be different from the price of hiring someone three, five, or seven years ago.
Mercer has specifically identified this issue as a “loyalty penalty.” Its research notes that new hires continue, on average, to earn about 2% more than employees who stay, while traditional merit increases often fail to keep longer-tenured employees aligned with a changing external market.
That doesn't mean every existing employee should automatically receive a raise every time someone new is hired.
But it does mean employers need a much better answer than:
“That's just what we had to pay to get them.”
First: Understand What Is Actually Happening
There is a name for this: pay compression.
It happens when the difference in compensation between employees becomes smaller than intended — and, in some cases, disappears altogether or reverses.
A long-term employee earning $90,000 may suddenly discover that someone hired into a comparable role is making $95,000.
That does not automatically mean the company made a bad compensation decision.
The new employee may possess a scarce skill. The position may have been extraordinarily difficult to fill. The external market for that particular job may have changed. Their responsibilities may be subtly but materially different. Geography, credentials, experience or another legitimate factor may explain the difference.
SHRM has cautioned employers against automatically making sweeping salary adjustments whenever this occurs. The first question should be whether the situation represents an isolated market-driven decision or evidence of a broader compensation problem.
That distinction matters.
One difficult-to-fill position requiring a premium is different from discovering that half of your employees with five years of tenure could leave tomorrow and immediately command 15% more somewhere else.
The first may require a conversation.
The second requires a compensation strategy.
The Market Doesn't Care What You Paid Someone Five Years Ago
This is one of the hardest realities for both employees and employers.
Compensation is not determined exclusively by tenure.
It is influenced by the market value of the position today.
Companies experience this with virtually everything they purchase. The cost of technology changes. Insurance changes. Construction costs change. Vendor pricing changes.
Talent does too.
If you hired an employee for $70,000 several years ago and the market now requires $85,000 to attract someone capable of doing that job, you cannot simply advertise the position at $70,000 because that feels internally fair.
You may never fill it.
But there is another side to that equation that employers cannot ignore:
If the external market says the job is worth $85,000 today, what does that tell you about the employee already successfully doing it for $72,000?
That is where companies need to be intellectually honest.
The market adjustment necessary to recruit someone is also market intelligence about the value of the people you already employ.
It doesn't necessarily require an immediate dollar-for-dollar adjustment.
But it shouldn't be ignored.
Why “We'll Just Give Everyone a Raise” Isn't a Compensation Strategy
Suppose a 200-person company needs to hire one highly specialized employee and has to go $15,000 above its original compensation target.
Matching that adjustment across an entire department — much less an entire organization — could turn one $15,000 recruiting decision into hundreds of thousands of dollars of recurring payroll expense.
That is not always economically possible.
And not every employee is actually underpaid simply because another employee earns more.
Compensation should account for the position, scope, performance, skills, experience, market conditions and total rewards — not just tenure or comparisons between two individuals.
This is why employers need to separate three very different questions:
Was the new hire's compensation necessary to compete in today's market?
Is the existing employee appropriately compensated for their own position and contribution?
Has the company's overall compensation structure fallen behind the market?
Those questions sound similar.
They aren't.
And answering them separately can prevent an emotional compensation conversation from becoming an automatic compensation decision.
So What Do You Actually Say to the Employee?
Start by acknowledging the concern without discussing another employee's confidential compensation.
Something along these lines:
That changes the conversation.
You're not debating whether Employee A deserves $100,000 and Employee B deserves $90,000.
You're answering the question the employee is really asking:
“Am I being valued appropriately?”
And that is a question employers should be prepared to answer.
Don't Hide Behind “The Market”
There is an important difference between explaining market conditions and using them as an excuse.
Saying:
“We had to pay more because that's the market now.”
will understandably lead an employee to think:
“Then aren't I part of that same market?”
And they have a point.
A better conversation explains that compensation decisions are based on several factors and then brings the discussion back to the employee's individual situation.
Where are they within the salary range?
How has their compensation progressed?
How is their performance evaluated?
Have their responsibilities expanded?
Are they approaching the next level?
What additional skills or responsibilities would materially change their compensation?
When is their compensation next being reviewed?
The employee may not leave the conversation with the raise they hoped for.
But they should leave understanding how compensation decisions are made.
That distinction is incredibly important.
Mercer recommends that employers be able to explain how an employee's pay compares with internal ranges and external benchmarks, how increases are determined, and what employees can do to advance their compensation.
Sometimes the Employee Is Right
This is the part employers cannot talk their way around.
Sometimes a new hire's compensation exposes a problem that was already there.
If you repeatedly need to offer $100,000 to recruit people into positions occupied by strong employees earning $80,000, eventually the issue isn't recruiting.
Your compensation structure is behind the market.
SHRM recommends reviewing compensation structures when compression becomes recurring rather than treating every case as an isolated exception.
And waiting until those employees resign is often the most expensive way to discover it.
The company may then find itself paying market compensation for the replacement anyway — plus recruiting fees, lost productivity, onboarding costs and the loss of institutional knowledge.
That is why compensation shouldn't only be reviewed during annual merit season.
Certain positions move faster than others.
A company may be perfectly competitive across 90% of its organization while being significantly below market in accounting, maintenance, technology, construction, property operations or another particularly competitive function.
Those are the positions worth monitoring more frequently.
You Also Have More Levers Than Base Salary
Another mistake is treating compensation as though there are only two options:
Raise base salary or do nothing.
There are considerably more tools available.
Depending on the employee and organization, employers can consider market adjustments, performance bonuses, retention bonuses, additional PTO, flexible schedules, enhanced retirement contributions, equity or long-term incentives, professional development, title progression, expanded responsibility or a clearly defined promotion path.
SHRM specifically notes that employers facing compression can consider tools such as hiring bonuses rather than permanently increasing starting salaries, spot bonuses for existing employees, and longer-term incentives.
This is particularly useful when the recruiting market temporarily spikes.
A $10,000 signing bonus and a $10,000 increase in annual base salary are not economically equivalent decisions.
One is a one-time recruiting expense.
The other becomes part of payroll every year and can compound through future percentage increases.
That distinction is easy to overlook when companies are under pressure to fill a position quickly.
One of the Least Discussed Solutions: Fix the Offer Before It Creates Compression
Compensation conversations shouldn't begin after an employee discovers the discrepancy.
They should begin before the new offer is approved.
Before approving an above-range or unusually aggressive offer, companies should ask:
Where will this person sit relative to employees doing comparable work? Will this person earn more than someone responsible for training or supervising them? Is there a legitimate, explainable reason? Does this offer create compression elsewhere in the department? Would a signing bonus, incentive or another component solve the recruiting problem without permanently distorting base compensation? If this is now the market rate, which existing employees should be reviewed?
Mercer recommends putting checks and scrutiny around starting salaries before they are implemented, precisely because hiring decisions can unintentionally create internal inequities.
That is much easier than repairing trust afterward.
Managers Need to Be Trained for This Conversation
One poorly handled conversation can turn a compensation concern into a resignation.
Managers should never respond with:
“I agree you're underpaid, but HR won't let me do anything.”
Or:
“If it were up to me, I'd pay you more.”
Or:
“You really shouldn't be discussing salaries with other employees.”
None of those answers solves the issue.
SHRM specifically recommends training managers to handle pay-compression conversations rather than allowing them to improvise.
Managers need enough information about the organization's compensation philosophy to explain it credibly.
Because pay transparency isn't only about publishing salary ranges.
It is about being able to defend the decisions inside those ranges.
The Bigger Risk Isn't Employees Talking About Pay
Employers sometimes worry about employees discovering what coworkers make.
I would argue the greater risk is discovering that the company itself cannot explain why two people are paid differently.
Employees have more access to compensation information than ever before. Job postings increasingly disclose salary ranges. Recruiters contact passive candidates with compensation information. Salary databases are readily available. Employees talk.
Trying to keep compensation differences invisible is becoming less realistic.
Mercer puts it well: organizations need to proactively establish their compensation narrative rather than allowing employees to construct one from incomplete information.
The goal shouldn't be to ensure that nobody ever questions compensation.
The goal should be to build a compensation structure that can withstand the question.
Fair Does Not Always Mean Equal
This may be the most important distinction.
Two employees can have different compensation packages and both be compensated fairly.
One may possess a particularly valuable skill.
One may have greater responsibility.
One may consistently outperform expectations.
One may have been recruited during an unusually difficult labor market.
One may receive more variable compensation while another has a higher base.
There can be legitimate reasons for differences.
But there should be reasons.
Because “that's what it took to hire them” may explain the recruiting decision.
It doesn't necessarily explain the compensation strategy.
The strongest organizations can do both:
Pay enough to compete for the talent they need today — while making sure the employees who helped build the company yesterday don't inadvertently pay a loyalty penalty for staying.
And when those two priorities collide, the answer isn't automatically giving everyone a raise.
It's knowing your market, understanding your internal equity, reviewing compression before it becomes systemic, giving managers the tools to have an intelligent conversation, and being prepared to make targeted adjustments when the data tells you they're warranted.
Because sooner or later, someone is going to ask:
“Why does the new person make more than me?”
The question isn't whether that conversation will happen.
It's whether your organization has a good answer when it does.
This article first appeared in TALENT + STRATEGY Real Estate, the newsletter written by Katlyn Turley, President of H Two National.
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