What Is a Justified Wage?

A justified wage is a pay level for a job that is determined by market dynamics as well as the degree of skills and experience that the job requires. It is a wage level that is high enough to attract qualified candidates but low enough to be affordable to the business. The justified wage may be viewed as the amount above the mandated minimum wage that an employer must pay to attract a candidate with the capabilities that the job requires. The term "fair compensation" is often used interchangeably with "justified wage" in political and economic discussions.

Understanding a Justified Wage

A justified wage begins with the economic factors of supply and demand in the workforce. A scarcity of job candidates with the skills needed will increase the justified wage offered. There also are many job-specific factors such as the levels of work experience, education, and training the job requires. The supply of applicants who meet the requirements is important. A wage is justified when it is seen as acceptable to potential candidates and economically feasible for the employer.

When the economy is in a recession, the actual level of wages for many workers drops to the minimum wage or a little above. There are too many candidates for too few jobs, and the businesses that hire may be barely breaking even. During the Great Recession that started in 2008, even investment banks justified paying lower wages due to their slowing revenue 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 the responsibilities the employee will have and the revenue that their work will generate. For instance, the amount of commissions a stockbroker writes justifies their wage.

Employees can have input into their justified wages during pay reviews by discussing how they are adding 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 is based in part on an ability to motivate employees.
• Strategic Ability: Does the CEO allocate resources effectively? Is the CEO entering new markets that enable the organization to grow and attract more 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.
• Networking: A CEO’s justified wage might depend on how effectively network connections are used. For instance, does the CEO have the ability to lure senior executives from competitors? A CEO with good contacts in the industry can merit a higher justified wage.

The Bottom Line

The concept of justified wages is used primarily by employers and personnel departments to determine a pay scale that is reasonable and acceptable to both the employer and the employee.

Understanding the many factors that go into setting a justified wage can help employees negotiate a higher wage based on the skills and experience they bring to the job and the prevailing economic conditions that inform wage decisions.