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Overpaying is just as bad for employees as businesses

Overpaying can lead employees to take on more debt than they can afford.

Everyone likes to make money and making more for the same work seems appealing. But Doug and Polly White, principals at of Whitestone Partners management consulting, wrote for CFO Magazine that overpaying employees can actually prove extremely detrimental.

The issue ultimately comes to market value. Employees and the work they do have a certain value, defined broadly by the wages they could reasonably expect to get doing the same work if forced to look for a position elsewhere.

In cases where employees are paid 50 percent or more above market value, which can easily happen in situations where government or unions require certain wages, employees become accustomed to a certain level of income and the quality of life that comes along with it.

If they then lose that position due to cost-cutting during a down economy or any other reason, spending habits alone can prove difficult. However, more importantly, much of the modern economy is based on lending and debt. Since people take on debt based on their income, overpaid employees can readily take on more debt than they could reasonably expect to pay at market value wages.

Compensation Today notes that addressing overpayment can prove awkward and difficult, particularly given the complexity of identifying an employee's market value. After establishing firmly what that value is, employers should consider future action based both on the costs to the company and the potential costs to the employee of growing accustomed to an inflated income.

Comments

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Agreceiving...a compensation above market levels encouranges over-commitment financially and is not repeatable if a move is required, a circumstance likely to be faced by everyone womewher in their career. Economic distortions of all types have unplesant corrective mecahnisms.