The dangers of paying employees more than they’re worth

Believe it or not, it’s entirely possible to pay employees too much money.

Even in this economy, it happens. It happens when employee performance consistently fails to meet expectation yet raises continue; when employees stay in entry- to mid-level positions too long; when employees reach their level of incompetence (i.e., The Peter Principle) yet aren’t developed or moved along; and when employees are paid too much to begin with, as a result of a weak or nonexistent wage administration policy.

Related: You Need a Wage Administration Program, Seriously

But, other than the unwarranted drain on your company’s cash flow, is this really a problem?

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Oh yes, indeed. Paying employees too much harms the overpaid employee, the employees around them, and your organization. Here’s how.

Too Much Pay Stifles Employee Development

Some overpaid employees will become complacent as a result. They won’t seek alternative opportunities for advancement within your company, and they won’t pursue more challenging work that would stretch and improve their skills. Simply put, they don’t have to. Unfortunately, this lack of development creates its own vicious cycle. The more time the employee remains unmotivated to grow, the less marketable he becomes, and the more likely he is to stay in your company without giving you your money’s worth.

Too Much Pay Spreads Resources Too Thin

Cash is finite, and profits tend to come in cycles. When you overspend in one area, it’s likely to have an effect elsewhere. Overpaying one (or two, or twenty) employees, especially when compounded over time, can significantly compromise your ability to reward other employees properly. And that can lead to low morale and bad turnover. In the extreme, bloated wages could even affect your ability to adequately staff all areas or invest in innovation.

Too Much Pay Leads to Talent “Bottlenecks”

Paying employees significantly over market, such that they could never go anywhere else and make the same salary, creates a talent “bottleneck” in your organization, because the overpaid employees are working in jobs that could be available to junior employees who would work for less and, once bought up to speed, could produce as well. And, ironically, some employees will be far from grateful for their “golden handcuffs.” In fact, those who would like to advance but feel trapped by their pay may resent the organization and become disengaged. As a result, they’ll be less productive, less cooperative, and overall less of a good investment than they could be.

Related: Identifying and Resolving Internal Compensation Inequities Within a Position

Deciding that you want to be a market leader by paying more for the best and brightest can be a smart strategy if managed effectively. However, when overpayment is the result of laissez-faire management or faulty or nonexistent wage policies, the end result is harmful to your employees and your company and best addressed as quickly as possible.


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On the contrary, paying them to little increases costly turnover, loss of trained and knowledgeable staff, possible loss of unknown essential personal and job-specific knowledge. All of which can trickle down to failure to fulfil obligations and loss of customers.