The devil is in the details.  The finer points of a compensation program can have significant impact on attracting and retaining talent.  If these are blind spots for you and you’re at risk of losing top talent if they are offered more money at a competitor, give us a call.  We help every business in America 

The Concept of Red Circles in Compensation Practices

In the world of compensation management, red circling is a term used to describe a situation where an employee’s current salary exceeds the maximum of the established pay range for their job or grade. This creates a “red circle” around the employee’s pay, indicating that their salary is “above the range” and outside the typical salary band for the position.

Why Do Red Circles Occur?

Red circling usually happens for several reasons:

• Salary Range Changes: When an organization adjusts its pay ranges—often lowering the maximum limit—due to market conditions or budget constraints, some employees may find their salaries exceed the new maximum.
• Promotion or Reclassification Issues: An employee may have been promoted or moved to a new job with a pay range lower than their current salary.
• Longevity and Performance: Employees who have been with the company for many years or who have received consistent merit increases might outpace the pay range limits.
• Market Adjustments: Market rates can shift, and companies may update pay ranges accordingly. Employees hired before these changes might have salaries higher than what is now considered appropriate for their role.

Implications of Red Circling

While having employees paid above the pay range might seem like a reward for loyalty or performance, it creates several challenges:

• Equity Issues: New hires or colleagues performing the same job may earn less, causing morale or fairness concerns.
• Pay Compression: The salary gap between junior and senior employees can narrow, reducing incentives for advancement.
• Limitations on Future Increases: Employers may hesitate to grant raises to red circled employees since they are already paid above the range.
• Budget Management: It can strain compensation budgets, especially if multiple employees are red circled.

Managing Red Circles

Effectively managing red circled employees requires a thoughtful approach. Here are common strategies:

1. Red Circle Freeze
   • Employers may choose to freeze the red circled employee’s salary, meaning they do not receive further base pay increases until the pay range catches up or the employee moves to a new role.
   • This helps control costs but can be demotivating if not communicated well.
2. Range Reassessment
   • Organizations might revisit and adjust pay ranges to reflect current market realities, potentially reducing the number of red circles.
   • However, this approach can be costly and may not be feasible for all companies.
3. One-Time or Lump-Sum Payments
   • Instead of increasing base pay, companies may provide lump-sum bonuses to reward performance without permanently raising salary above the range.
   • This maintains pay structure integrity while recognizing employee contributions.
4. Job Reclassification
   • In some cases, employees can be moved to a higher pay grade or reclassified to better align salary with responsibilities.
   • This is only appropriate if job duties truly warrant a higher classification.
5. Communication and Transparency
   • Employers should clearly explain why an employee is red circled and what the future pay progression might look like.
   • Transparency helps manage expectations and reduces dissatisfaction.

When Red Circling Is Acceptable

Red circling isn’t inherently negative. In fact, it can be a sign that the company values employee experience, skills, or historical compensation levels. It also avoids the risk of demotivating long-term employees by cutting their pay.

However, it should be used cautiously. Employers must balance fairness, legal compliance, and budget considerations. Having many red circled employees can signal outdated pay structures or ineffective compensation management.

Conclusion

Red circling is a common and complex issue in compensation management, reflecting the dynamic nature of salary administration in evolving markets. While it poses challenges like pay equity concerns and budgeting constraints, thoughtful strategies can mitigate negative impacts. Companies that proactively address red circles with transparency and fairness maintain employee trust and keep their compensation programs aligned with market and business needs.