Justified Wage

408(k) Plan

What is a justified salary?

A justified salary refers to a level of income determined by market dynamics, work experience, education and skills. A justified wage is the wage level that is high enough to attract workers but low enough to allow employers to offer employment. The divergence between a justified wage and the statutory minimum wage may depend on several factors, including the state of the economy and the level of unemployment.

Key points to remember

  • A justified salary is a fair level of compensation paid to an employee that takes into account both market and non-market factors.
  • It is a wage which is often above the minimum wage, but which also allows employers to actively seek out and hire workers.
  • The type of work, the skills required, the experience, the tasks and the general state of the economy come into play when establishing a justified salary.

Understanding a justified salary

A justified wage combines economic factors of labor supply and demand with more social and culturally relevant inputs such as work experience, education and vocational training and type of job. A salary is justified when it is considered socially acceptable while being economically feasible for workers and employers.

For example, the justified salary of a fast food chain worker with two years of experience can be around $ 10 an hour. An investment banker in a big city like New York, on the other hand, can order a justified salary of more than $ 150,000 with the same two years of experience.

In a recession, the real wage level of this worker may fall just above the minimum wage due to the high unemployment rate and a stagnant economy. After the Great Recession, many investment banks justified falling wages due to weak economic growth. For more information on the salaries of investment bankers, see: Investment Banker Salaries.

Example: justified wages for employees

Companies can compare the wages and work experience of their employees when determining a justified salary. For example, Meagan, a current employee, has 10 years of experience and receives a salary of $ 65,000. Based on this information, management determines that Paul’s justified salary is $ 60,000 since he has eight years of experience. Management can also take into account other factors when establishing a justified salary, such as the employee’s responsibilities and the income he generates. For example, the amount of commission that a stockbroker writes could justify his salary. Employees can help determine their justified salary during payroll reviews by discussing how they add value to the business.

Example: justified salary for CEOs

When determining a justified salary for a CEO, the board of directors of a company generally takes into account:

  • Leadership: What are the CEO leadership skills? Does it have the capacity to unite the management team and set an example during transition periods? The justified salary of a CEO can be based on his ability to motivate his employees.
  • Strategic capacity: does the CEO allocate resources effectively? Are they entering markets that allow the organization to grow and attract new customers? For example, the board of directors of a multinational company may determine the justified salary of a CEO based on his proven track record of success in foreign markets.
  • Network: the justified salary of a CEO can depend on the efficiency with which he or she can use relationships. For example, do they have the ability to attract top executives from competitors? A CEO can have a higher justified salary if he has contacts that allow him to find new suppliers and customers.

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