What Is a Justified Wage?

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

Key Takeaways

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

Understanding a Justified Wage

A justified wage combines economic factors of supply and demand in the workforce with more social and culturally relevant inputs like work experience, education and skills training, and type of job. A wage is justified when it is seen as socially acceptable while at the same time economically feasible for both workers and employers.

For instance, the justified wage for a worker in a fast-food chain with two years of experience may be around $10 per hour. An investment banker in a large city like New York, on the other hand, may command a justified wage of upwards of $150,000 with the same two years of experience.

In a recession, the actual level of wages for this worker may drop to just above minimum wage due to the high level of unemployment and a stagnant economy. After the Great Recession, many investment banks justified lower wages due to slow economic growth.

Example: Justified Wages for Employees

Companies may compare their employees' salaries and work experience when determining a justified wage. For example, one current employee, has 10 years' experience and receives a salary of $65,000. Based on this information, management determines that another employee's justified wage is $60,000 given that they have eight years' experience.

Management may also consider other factors when establishing a justified wage, such as what responsibilities the employee has and the revenue they generate. For instance, the amount of commissions a stockbroker writes could justify their wage. Employees can help determine their justified wage during pay reviews by discussing how they add value to the company.

Example: Justified Wage for CEOs

When determining a justified wage for a CEO, the board of directors of a company typically considers:

  • Leadership: What leadership skills does the CEO have? Do they have the ability to unite the senior management team and lead by example during times of transition? A CEO’s justified wage might be based on the ability to motivate employees.
  • Strategic Ability: Does the CEO allocate resources effectively? Do they enter markets that enable the organization to grow and attract new customers? For example, the board of a multinational company may determine the justified wage of a CEO based on a proven record of successfully entering foreign markets.
  • Network: A CEO’s justified wage might be dependent on how effectively network connections are utilized. For instance, do they have the ability to lure senior executives from competitors? A CEO may have a higher justified wage if they have contacts that allow them to secure new suppliers and customers.