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Vol. 2 | Pay Compression in Vietnam When New Hire Salaries Catch Up with Existing Employees
As part of the Vietnam Salary Survey 2026 campaign, we continue our special 10-part series: “Vietnam Compensation Strategy: 10 Key Issues that Define HR Decision-Making.”
In Vol. 1, “Understanding Vietnam’s Labor Market in 2026,” we explored how Vietnam’s labor market is becoming increasingly fragmented across industries, regions, and job functions — making broad assumptions about “market salary levels” far less reliable than before.
In this edition, we examine another compensation issue that is quietly emerging across many organizations: Pay Compression.
Although often overlooked in its early stages, pay compression can gradually weaken internal equity, employee retention, and the overall effectiveness of compensation strategy if left unmanaged.
What Is Pay Compression?
Pay compression occurs when the salary gap between newly hired employees and longer-tenured employees narrows significantly - despite differences in experience, contribution, or organizational tenure.
Many companies continue to conduct annual salary reviews and maintain regular merit increase processes. Yet over time, they begin to observe an unintended outcome: Employees who have spent five or more years within the organization are earning salaries increasingly close to those of newly hired talent.
In global compensation management, this phenomenon is commonly referred to as Pay Compression.
Two situations tend to drive this issue most frequently.
- Salary Range Adjustments
As labor markets become more competitive, companies revise salary ranges upward to remain competitive in hiring.
New employees are then recruited at higher minimum salary levels aligned with the updated range. Existing employees, however, often remain unchanged because their salaries still technically fall within the approved structure.
While operationally reasonable in the short term, this gradually compresses the salary gap between incumbent employees and external hires.
- Minimum Wage Increases
A similar dynamic occurs when statutory minimum wages rise.
Companies adjust salaries for employees below the revised threshold, but employees already positioned slightly above the minimum level may receive limited adjustment despite having accumulated years of experience and organizational contribution.
As external salary floors rise faster than internal salary progression, compression gradually develops across the lower and middle portions of the salary structure.
Why Pay Compression Is Especially Common in Vietnam
Several structural characteristics of Vietnam’s labor market make pay compression particularly difficult to avoid.
The first is the continued upward movement of minimum wages.
With the exception of the COVID period, Vietnam has maintained relatively consistent annual minimum wage increases, typically ranging between 5–7% since 2022.
In labor-intensive industries, many organizations apply broad salary adjustments in response to these increases. While this approach helps maintain external competitiveness and avoid severe compression at lower levels, it also places increasing pressure on overall payroll costs and reduces flexibility for differentiated performance-based increases.
The second factor is the widening gap between external hiring premiums and internal salary growth.
According to ICONIC’s 2026 Vietnam Job Seeker Survey, professionals changing jobs commonly expect salary increases of 10–20%. Meanwhile, annual internal salary increases at many organizations remain within the 5–7% range.
This creates a structural challenge: companies often need to offer materially higher salaries to attract experienced talent from the market than they are providing to existing employees with comparable capability levels.
Over time, this dynamic systematically accelerates internal pay compression.
A Gradual Issue with Strategic Consequences
One of the reasons pay compression is difficult to manage is that it rarely emerges as an immediate problem.
The issue develops gradually, often over several compensation cycles, making it less visible in the early stages — particularly within white-collar and indirect functions where salary levels are relatively higher.
However, after several years without intervention, organizations may find that compensation differences between long-tenured employees and recent hires have narrowed far beyond what was originally intended.
At that stage, the issue often surfaces indirectly through:
- Increased salary adjustment requests
- Declining perceptions of internal fairness
- Reduced engagement among experienced employees
- Higher retention risk among key talent
By the time these signals become visible, restoring internal balance becomes significantly more complex and costly.
Managing Pay Compression More Strategically
Addressing pay compression does not necessarily require broad, organization-wide salary corrections.
While large-scale adjustments may restore internal alignment quickly, they can also create substantial pressure on payroll budgets. Conversely, failing to address compression altogether may lead to long-term retention and engagement risks.
As a result, many organizations adopt a more calibrated approach that integrates salary positioning into annual compensation review processes.
A commonly used methodology in Total Rewards management is to segment salary ranges into positioning zones such as:
- ① Min – P25
- ② P25 – Median
- ③ Median – P75
- ④ P75 – Max
Under this framework, employees positioned closer to the lower end of the range receive relatively higher merit increase opportunities, while employees already positioned near the upper end receive comparatively lower adjustments.
Over time, this weighted allocation approach allows organizations to gradually restore healthier internal salary positioning without creating sudden budget spikes.
Where compensation budgets are constrained, organizations may further prioritize adjustments based on:
- Performance differentiation
- Critical skill availability
- Role impact on business continuity
- Retention vulnerability
This allows companies to manage pay compression more selectively and strategically, rather than relying on uniform salary adjustments across the workforce.
Why Market Data Matters More Than Ever
Effectively managing pay compression requires more than internal analysis alone.
Organizations first need a clear understanding of how external salary levels are evolving across:
- Job functions
- Industries
- Experience levels
- Geographic markets
Without reliable market benchmarking, companies risk making compensation decisions based on outdated assumptions or incomplete visibility into actual hiring conditions.
The Vietnam Salary Survey 2026 provides organizations with detailed market benchmarking data to support:
- Salary structure reviews
- Compensation planning
- Internal equity analysis
- Workforce budgeting
- Talent retention strategy
Participating companies receive access to summary reports and SalaryHub benchmarking tools that enable flexible analysis of market salary data by role, industry, and location.
📍 Next Issue Preview (Vol. 3)
“Beyond Market Noise: Building Reliable Salary Benchmarks”
Salary information from job boards, social media, and recruitment platforms often appears higher than actual market practice. Yet many companies continue to rely on these sources when making compensation decisions.
In the next issue, we will explore why publicly available salary data can become distorted, the risks of relying on incomplete market signals, and how organizations can build more reliable salary benchmarks for better compensation decision-making.
