Justified Wage

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.

$7.25

In 2022, the federal minimum wage remains stuck at $7.25/hr, where it has been since 2009. Many states and localities, however, have higher minimum wages—some upwards of $15/hr.

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.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Wolters Kluwer. "More than Half of US States to Institute a Minimum Wage Increase in 2022." Accessed Jan. 8, 2022.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description