7 Reasons Why Your Employees are Overpaid

Why an Employee’s Salary May Be Higher Than Reported by Our Compensation Reports

You’re an employer who has market-priced your open positions and employees. Perhaps you used our Salary Wizard Professional tool (SWP) to do so and found that you have an overpaid employee on your hands. Before you take any drastic action, there are a few important things to remember when it comes to employee compensation.

There are a number of reasons why an employee’s current compensation may be higher than the market data in the Salary Wizard. Please remember that being higher than the market numbers shown does not necessitate “overpayment,” as half of the people in a given job are paid above the median and 1-in-4 is above the 75th percentile.

1. Seniority

Often, incumbents that are strong performers and have been in the same position for extended periods of time will master the responsibilities along with the concepts and practices of the position. They are performing at a higher level than the typical person with the same title. As a result, they are often paid accordingly – which could be well above the levels of a typical person working in that same job.

Also, some companies expect employees to work at the next level before they can be promoted to that level. In some of these cases, salaries are increased – in part or in full – prior to an actual promotion.

2. Incomplete Job Description Match

Matching the job to the most appropriate position in the SWP is crucial in obtaining the correct market salary data. To ensure that you have made an accurate comparison, re-review the job description, ensuring it closely reflects the actual job. You also may want to look for the job title that has slightly greater responsibilities than the one you’ve selected – you may find that this job description more closely matches the role.

3. Excellent Performance

Simply stated, most companies will compensate employees who are above-average performers with above-average compensation. If the employee’s performance is truly excellent, they are a company asset, and they’ve earned it.

4. Company’s Compensation Philosophy

In order to compete for top talent, some companies pay larger compensation amounts to attract and retain employees. The philosophy is to pay top quartile salary to get and keep top quartile performers. Some companies will outwardly state this, while others just do it quietly.

5. Company Size

The SWP data represents the typical person in a job and is based on incumbents from companies of all sizes. Not all salaries are closely related to the size of the employer, but sometimes it is a consideration. It is most common for the size of the company to influence the pay levels of more senior employees. If you are looking at a management or an executive position, the size of the company is one key measure to determine pay levels. Senior people in large companies, under normal circumstances, often earn more than the salary market data in SWP because the scope and responsibilities are greater than his/her typical peer. Middle-level positions within a company are also impacted by the size of the company, but to a lesser degree than executives. Clerical and lower level positions are, as a rule, affected only slightly.

6. Type of Company

The SWP data represents the typical person in a job. This data is based on incumbents of companies from all industries. Not all salaries are closely related to the industry of the employer, but sometimes it is a consideration. It is most common for the industry of the company to influence the pay of senior employees and those whose skills are less transferable to other industries.

If you are examining a management or an executive position, take a close look at the industry. For example, executives in the manufacturing industry historically have been paid lower than executives in the financial sector. If your industry high paying, you may expect pay to be higher than the salary market data. On the other hand, if your industry is lower paying, you may expect pay to be lower than the salary market data in SWP. Middle-level positions within a company are also impacted by industry, but to a lesser degree than executives. Clerical and lower level positions are, as a rule, affected only slightly.

7. Is it a “Hot Job”?

In today’s job market, if an overpaid employee is in a job family that is well sought after, companies are willing to place a premium on the value of scarce skill sets relating to these jobs (e.g., IT professionals). As a result, if an employee possesses certain skills, employers may pay them at a premium to keep them from leaving for another offer.