What is a Justified Wage
A justified wage refers to income determined by market dynamics, work experience, education and skill. 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 minimum wage may depend on several factors including the state of the economy and level of unemployment.
BREAKING DOWN Justified Wage
The justified wage for a worker in a fast-food chain with two years of experience may be $10 per hour. 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. To learn more about investment banker wages, see: What Drives Investment Banker Salaries.
Justified Wage for Employees
Companies may compare their employees' salaries and work experience when determining a justified wage. For example, Meagan, a current employee, has 10 years' experience and receives a salary of $65,000. Based on this information, management determines that Paul’s justified wage is $60,000 given that he has 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 commission a stockbroker writes could justify his or her wage. Employees can help determine their justified wage during pay reviews by discussing how they add value to the company.
Justified Wage for CEOs
When determining a justified wage for a CEO, the board typically considers:
- Leadership: What leadership skills does the CEO have? Does he or she 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 his or her 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 by his or her proven record of successfully entering foreign markets.
- Network: A CEO’s justified wage might be dependent on how effectively he or she can utilize connections. 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.