Whether serving as a consultant or leading an internal HR function, many compensation professionals are familiar with what some call the “compensation two-step.” It is one of the most common and uncomfortable pay practices still found in organizations today.
The two-step approach is used when an employee’s pay falls significantly below the target rate for their role. Rather than moving the employee directly to the appropriate level, the company increases compensation in stages over time. In some cases, this process extends beyond two adjustments, stretching over multiple review cycles.
At first glance, the practice may seem practical or financially prudent. In reality, it often highlights a deeper issue in the organization’s compensation strategy.
The Core Dilemma
The primary concern with the two-step approach is straightforward. The employee is already performing the job, and the job description presumably reflects responsibilities that justify the full target rate. If the role requires that level of contribution, the compensation should reflect it.
Delaying the adjustment creates a disconnect between the employee’s value and their pay. It also increases the risk that the employee will discover their true market worth elsewhere. When organizations extend the process even further, they make it more difficult to ever reach competitive market positioning.
While fairness and perception are important considerations, the larger issue is strategic. The real question is not how to manage the two-step process, but how to prevent the need for it in the first place.
Three Root Causes of the Pay Gap
In most organizations, significant compensation gaps are not the result of a single decision. They typically emerge from a combination of structural and strategic issues.
1. Infrequent or inconsistent compensation studies
Organizations that wait too long between market reviews or change methodologies from year to year often create inaccurate pay benchmarks. Limited or outdated data can cause certain roles to be underpriced or overpriced relative to the market.
When pay ranges do not reflect current market realities, employees can quickly fall behind. Over time, this leads to situations where large, staged adjustments seem necessary.
2. Hiring at the bottom of the range without true merit progression
Many companies follow a policy of bringing new hires in at the lower end of the pay range, with the expectation that they will progress toward the midpoint or higher through merit increases. This approach only works when merit increases are meaningful and tied to performance.
In practice, many organizations rely on small, across-the-board increases. Annual adjustments of two to four percent may keep pace with inflation, but they rarely reflect the employee’s growing contribution. The result is a widening gap between the employee’s pay and their actual value, either internally or in the external market.
One effective solution is the use of defined pay zones within each grade. These zones align compensation with levels of skill, mastery, and impact. They create clearer expectations for progression and help maintain equity across the organization.
3. Weak or incomplete job architecture
A well-designed job architecture allows high-performing employees to master their current responsibilities and move logically into the next level when appropriate. Problems arise when there are large pay gaps between levels or when a critical level is missing altogether.
In these cases, an employee may outgrow their current role in terms of contribution, but there is no suitable step forward. The only option becomes a large pay increase within the same level, or a significant adjustment to reach the next level. Both scenarios often trigger the need for a two-step solution.
Addressing the Real Issue
The compensation two-step is rarely the problem itself. It is usually a symptom of outdated market data, rigid hiring practices, or incomplete job structures. Organizations that focus only on managing the staged increases miss the opportunity to correct the underlying causes.
A more effective approach includes:
- Regular and consistent market benchmarking
- Merit programs that meaningfully reward performance
- Clearly defined pay zones within each grade
- A logical and complete job architecture that supports career progression
When these elements are in place, compensation gaps become far less common. Employees are paid appropriately for their contributions, and organizations avoid the uncomfortable conversations that the two-step often creates.
A Strategic Imperative
Compensation is more than a budget line item. It is a strategic tool that communicates value, drives performance, and shapes employee behavior. When pay structures fall behind the market or fail to reflect contribution, organizations are forced into reactive solutions like the two-step.
Leaders who invest in consistent market analysis, thoughtful job design, and performance-driven pay programs position their organizations to stay competitive without relying on staged catch-up increases. The result is a compensation strategy that is fair, transparent, and aligned with long-term business goals.
For more information about our approach to building scalable and efficient job architecture and compensation infrastructure, please contact us at info@locushumancapital.com.