It’s Bad For the Employee to Pay Too Much

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

According to management consultants Doug and Polly White, authors of the 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% to 100% plus) more than her or his capabilities command in the labor market.

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.

When the job disappears

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 as a pay advisor 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.

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? It’s a challenging question that can be considered on a number of different levels – from the macroeconomic to the very personal.

What’s your take?