The Red Flag of Minimum Pay

It's one thing to hold down a minimum wage job, but it's another to be paid the lowest available job rate.

Probably doesn't create a warm feeling of appeciation.

Minimum Value

When you pay employees the minimum rate you're telling them that their value to you is just that, the least payable for the position; not exactly a strong statement of recognition or encouragement.  Quite the opposite.

Of course, there may be legitimate reasons to pay at the bottom:

• A candidate only meets the minimum qualifications for the position.

• The employee being promoted has a salary low in their current salary range, and it would take too large an increase to raise them into the new range.

• Other, more experienced employees in the same job are presently paid low in the same salary range - so that internal equity inhibits higher pay.

Hopefully the company will keep an eye on this employee, so that their status as "minimum paid" will be as brief as possible.

Given the above, what must it mean to an employee when you pay them less than the minimum; less than the announced lowest value for the job?  It lets everyone know that to you (the employer) their value is even less than what you've told other employees you would pay for minimally qualified employees.

Studies show that low paid employees tend to perform as you reward / treat them.   If you keep someone low paid relative to their internal / external worth, you'll receive a similar value from them (performance) in return.

Paying less than the minimum

What reasons would compel companies to pay employees below the minimum of the salary range?

• The employee is newly hired, with minimal qualifications for the position, so the company uses a temporary training rate.  When performance indicates the employee can perform the basic job they're raised to the minimum - usually in 3 to six months.

• For an internal promotion, where the employee is minimally qualified and the company is giving them "a chance."   A quick increase to the minimum is warranted when performance indicates.

• If a large increase is necessary to move an employee from one salary range to another, some managers resist granting so much money at once, preferring to grant installments that'll eventually gain the minimum rate.

• Some managers want to see an employee actually perform before paying them the minimum rate.  In this case the manger puts the employee into the position, with full responsibilities - but without paying for it.

The question you're all asking is, do companies actually follow through and quickly raise such affected employees to the salary range minimum?  I'm afraid the track record is spotty, at best.

A Bitter Harvest

Without off-cycle intervention an employee at the minimum almost never reaches the salary range midpoint.  Consider this:  an average performing employee paid at 80% of the midpoint will receive 3% - 4% annual merit increases, while the salary range will likely raise @2% or more each year.  How long will it take the employee to move a net 20% to reach the midpoint?  8 Years or more.  How long will it take an average performing employee to gain enough knowledge / experience in the job to warrant being paid the market rate?  A lot less time than 8 years.

Low paid but satisfactorily performing employees will see their market value increase faster than most employers raise their pay - thus making this group more susceptible to being lured away by competitors, or any employer willing to pay them what they're worth.

When you place a promoted employee near the bottom of their salary range, be careful to avoid creating problems for yourself; it'll be difficult to move a low compa-ratio employee to a higher ratio in the new range - without providing an eyebrow-raising increase. 

So look to the bottom quartile of your salary ranges and find out who's there.  Marginal performers likely deserve no better, but you had better ensure that higher caliber employees are moved along and further into the salary range before soured morale and disengagement set in - or they simply quit.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of rightee

Comments

[E. James (Jim) Brennan]

Good advice; but it's worse than you said, Chuck, because the mere 2% net growth rate you posit at your "Bitter Harvest" paragraph would require a full dozen years before the qualified entrant reached the market midpoint, at best! I've had a new article on that precise topic sitting in my que here for a while, so maybe it's time to run it.

You also hit another hot button in your observation about the dilatory stalling tactics of managers who refuse to immediately advance a known qualified internal talent to the same entry rate they would give to a complete stranger from outside. Burns me, big time.

[Bob Goedjen]

Minimum wage is not a good thing really. It is not fair and usually is not relevent to the specific area and situation. Wages must be competitive. Your arguments are good but that assumes the minimum wage is really something good for the economy and fair which it is not.

[Chuck Csizmar]

Actually Paul, my article is not about either State or Federal minimum wages. It's about the negative ramifications of paying employees low in their salary ranges. Your assumption that I made an assumption is incorrect.

[E. James (Jim) Brennan]

"What Is 'Fair Pay'?" was the title of the August 17, 2012, article here. That discussion covered the topics Bob seems to find more interesting than the "relatively minimum range position" or low compa-ratio topic you raised here, Chuck.

If wages were simply required to be competitive, minimum wages laws would not exist because the open market would demand a different rate of pay. That's a completely different subject; it was covered in some detail in the August 6 post.