Written by Stephan Duncan
May 3, 2019
The term “red circle rate” is used to describe an employee whose pay is above their position’s maximum rate. Conversely, a “green circle rate” is used to describe the salaries of your underpaid employees, who you should consider paying more equitably as soon as possible.
Red circle rates and green circle rates are commonly associated with pay inequity, as they’re known to disrupt fair pay in your compensation program. To manage red circle pay rates and green circle rates, you must first have a complete understanding of what they mean, and how your employees’ salaries arrived in that state. Then, you can take steps to mollify their negative effects on your compensation program.
In the article, the follow questions will be answered:
According to Section 1620.26 of the Equal Pay Act, a red circle rate describes individuals with “certain unusual, higher than normal, wage rates.” In an established pay range for a specific job, there’s always a minimum, medium, and maximum rate, but red circle rates are individual salaries paid above the established maximum for that position.
When an employee is marked as a red circle rate, this typically means that their salary is frozen in place. Historically, this has meant that these employees are ineligible for future pay increases whether it’s a merit-based or a market-based increase. Red circle pay rates typically progress to this level because of individual merit or tenure over time, leading to a salary above market rate.
Red circle rates are a predicament for employees who believe their salaries will continue to increase based upon factors such as their own performance, what the market price is, or what the company-wide increase is. Without a sustainable answer to address red circle pay rates, this could lead to an over-budgeted compensation plan, decreased employee engagement, and turnover.
In contrast to overpaying employees, a green circle rate is an individual salary that’s below the pay range minimum for their jobs. This instance of underpaid employees usually occurs when an organization adjusts their pay range upwards while an employee’s salary remains static. However, green circle rates also occur if an employee receives a promotion and their salary increase doesn’t increase within the market rate for their new role.
Employees that are being paid at green-circled rates will feel as if they’re being underpaid for their responsibilities, so it’s vital to make sure that they’re being fairly compensated. Factors that could entice these beliefs of being underpaid include an employee’s responsibilities, job title, performance, and the market price for that role.
If you want to reduce the quantity of employees paid red circle salaries, you have to carefully balance your employees’ salaries within your set pay range. You can give small incremental pay increases to employees with red circle rates while simultaneously giving larger raises or merit-based increases to employees properly progressing within their pay range. This method of wage increases will give the chance for non-red circled employees to catch up to the outliers over time.
If you completely stop giving employees with red circle salaries any pay raises whatsoever, whether merit or tenure-based raises, they could feel undervalued. This could cause turnover among red circle employees, who may actually be some of your top performers or longest-tenured employees.
Another solution to solving red circle rates could be to give a lump-sum bonus to red circle employees. This one-time cash payment could replace a pay increase which bumps their rate up further and remains part of their salary for years to come. Choosing a one-off cash payment is less expensive for the company, and the larger lump sum could be perceived as more valuable to the employee.
The least popular option by employees is to freeze employees with red circle pay rates until the grade range caught up due to annual adjustments. Though this solution is less costly, it can result in low employee engagement and an increase in turnover because you aren’t increasing salaries at all – regardless of their performance or the current market.
If underpaid employees are not caught up to the appropriate pay range quickly, morale and productivity could decline, leading to turnover. There are two ways you can adjust green circle rates so these employees can be paid within the pay range.
One approach is to immediately raise the employee’s pay to fit within the range. This raise would need to align with tenure and performance and would need to be positioned as a salary adjustment. This action is often best for all parties if your business has the budget. It’s the simplest and fastest choice, and this compensation decision allows you to rip off the Band-aid and heal your salaries.
The second approach is to gradually raise the employee’s salary to fit within the appropriate range. Over time, their salary increases would be greater than their co-workers’. It’s important to communicate this decision with your employees and explain why some employees outside of the pay range are being given higher raises than their coworkers within the range.
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