Is This The Worst Thing You Can Ever Do to an Employee?

What is the worst thing you can do to an employee?

According to management consultants Doug and Polly White, authors of the CFO.com article The Worst Thing You Can Do to an Employee, once you put aside things that are clearly “illegal, unethical, immoral or unsafe,” the worst thing you can to an employee is to pay her or him significantly more than a free-market wage.

Anticipating skepticism and even hosts of volunteers willing to be thus put upon, the authors press on to share their experience with the sometimes devastating effects that can follow circumstances allowing a worker to be paid significantly (and they’re talking 50 percent to 100 percent plus) more than her or his capabilities command in the labor market.

Why overcompensation is a problem

From the CFO.com article:

When an employee is significantly overpaid, several things happen. In most cases, employees do not recognize that they are overpaid. It’s human nature: most of us believe we are worth more than we are paid. At the least, we think we are paid fairly. It’s a very unusual person who recognizes that his or her compensation is well above what he or she could earn elsewhere and adjusts his or her lifestyle to compensate.

The second thing that happens is that overcompensated employees, not recognizing the precariousness of the situation, build a lifestyle that cannot be sustained by less than their current income. For most, even if they know they can’t replace their income, they behave as though they can. People stretch to buy the biggest house for which the bank will approve a loan. They buy new cars with debt and leverage themselves to the hilt. Spending on “extras” chews up cash, and savings are minimal. Often it takes the current level of income just to service the debt.

Then, the unthinkable happens. The goose that laid the golden eggs is gone.”

An irresponsible employee practice?

The authors share, from situations they’ve witnessed themselves, the difficult circumstances following that “fall to earth” when circumstances change and individuals are unable to shift their lifestyle and expectations to the reality of a non-premium level of pay. They note that the phenomenon extends beyond blue and white collar workers to the ranks of elite athletes, many of whom have met with financial ruin when their playing days were over.

Ultimately, they conclude, the practice is an irresponsible one on the part of the organization.

The article struck a chord with me. Some of the most challenging situations I’ve faced have not involved reward strategy or the nuances of aligning compensation spend with business objectives.

Rather, they have involved the discovery of an individual who is paid significantly more than any reasonable market analysis or internal comparison can justify. And then working with my client to discern an approach that fairly balances the interests and needs of that employee, of their fellow workers and of the organization.

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Many of you, I suspect, have found yourself in similar shoes.

Are “significantly above market” wages the worst thing you can do to an employee? Obviously, it is a question that can be considered on a number of different levels – from the macroeconomic to the very personal.

What’s your take?

This was originally published on Ann Bares’ Compensation Force blog.

Ann Bares is the Managing Partner of Altura Consulting Group. She has over 20 years of experience consulting in compensation and performance management and has worked with a variety of organizations in auditing, designing and implementing executive compensation plans, base salary structures, variable and incentive compensation programs, sales compensation programs, and performance management systems.

Her clients have included public and privately held businesses, both for-profit and not-for-profit organizations, early stage entrepreneurial organizations and larger established companies. Ann also teaches at the University of Minnesota and Concordia University.

Contact her at abares@alturaconsultinggroup.com.

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5 Comments on “Is This The Worst Thing You Can Ever Do to an Employee?

  1. So then, if you find an employee who is paid above market rates in your organization, what steps can you take to fairly resolve the situation?

  2. I’d say promote them to a job that was more inline with their current comp without giving them a salary increase, perhaps an annual bonus instead. OR, just don’t give them anymore salary increases until inflation catches up with them, instead give them an annual bonus to keep them from being too disgruntled as their salary waits for the market to catch up with them or just fire the SOB and hire a new cheaper worker.

  3. But this is what Americans do. Don’t they? Acquire debt, live large, borrow as much as they can until the bottom falls off and then wait for a government bailout?

  4. Overpayment leaves the employee, whether fiscally responsible or not, in a position of being more expensive than his replacement, and a layoff candidate. That’s particularly true of a long-time worker who’s been given annual raises beyond inflation rate whether or not the worker’s real market value has increased.

  5. It’s a difficult problem. He probably has a golden parachute, making any move to reduce salary difficult. Additionally, the board is a “closed shop,” and tends to raise his salary to protect their own income interests. In the US, the salary is from ten to 100 times what it is in other countries for companies of a similar size, so it is well above “market”. It is almost impossible for stockholders to effectively raise an objection. Of course, despite an historically declining workload, he will believe he is worth it, even if he carries the company into the ground. C’est la vie!

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