The Dangers of Paying Employees Too Much

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One of the more challenging compensation conversations I have as a consultant is helping clients understand that offering the highest pay isn't always the best option. There are dangers and downsides to "overpaying" people. It's certainly an unpopular sentiment at the neighborhood BBQ (and likely among many who read this article).

If you're trying to connect the dots, it may make sense that avoiding "overpaying" is just a tactic to protect the bottom line. However, my perspective is in support of both the employee and the employer. I’ve outlined a few of the hazards associated with paying someone more than the market or their experience and contributions support.

Unhappy employees paid significantly above market will feel captive with no exit strategy.

An employee with limited skills getting paid significantly more than they would be compensated at other employers presents a problem. If the employee has come to rely on a higher income, they may not be able to afford transitioning to a new role or employer that would be a better fit for them.

If they dislike their boss, don’t believe in the company, need to relocate, are struggling with work-life balance, or see an opportunity that provides more meaningful work… they may not experience the same freedom as others if a move also demands a 30 percent pay cut to perform a comparable job.

Employees paid significantly above market and outside the employer’s compensation philosophy may be vulnerable during economic or industry downturns.

When faced with budget cuts and reductions in force, it is not unusual for employers to ask themselves “can we get two people to do the same job as this one higher paid employee?” Employers may even place a more severe level of scrutiny upon the compensation outliers. This increases pressure to perform, and in return, increases work-related stress.

Higher compensation combined with an inflated title can make job searches feel impossible.

As discussed in my “Pitfalls of Title Inflation” blog and whitepaper, this combination can set someone up to fail. Offering a title and level of compensation they cannot effectively deliver on in a meaningful, timely way presents problems down the road. This may result in the individual getting terminated for poor performance or finding other employers won’t consider them a candidate because of their inflated title and compensation expectations.

So, what's the price?

To be clear, I am an evangelical believer in paying individuals competitively in relation to the market and the compensation philosophy established by the organization. High-performers should be rewarded consistently for their performance and contributions. People from the bottom to the top of the organizational chart deserve to be paid higher than the middle of the pack.

I celebrate organizations that see compensation as an investment and not just an expense, that go above and beyond to generously recognize and reward its employees. However, I also caution employers from ignoring the market and internal equity. I recommend taking time to develop a compensation philosophy, evaluating your talent strategy, and increasing your awareness of the talent market you compete in so you support the best interests of both the individual employee and the company.

Julie Bingham is an Advisor at FirstPerson.

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