- Demoting an employee often comes with a compensation reduction. Companies should approach the change intentionally and transparently.
- Pay equity will come into play. Unless there is a strong argument otherwise, the simplest approach may be to keep an employee's salary and total rewards in line with their new position, to avoid pay parity issues down the road.
- Employees will discuss their salaries. With an ever-increasing focus on pay transparency, companies should expect that their decisions will be public, and they should communicate compensation changes with employees honestly.
Whether a demotion is prompted by an internal reorganization, a merger or the need to better match an employee's skills to a different position, compensation is a major factor when determining how to best navigate the change.
Shifting compensation is more clear-cut when an employee knowingly applies for, interviews for and accepts a different position within the same company that carries less responsibility and pay. However, when an employer initiates a worker's demotion, one of the biggest considerations is how to handle morale and performance issues if the employee’s pay is decreased — or how to address pay equity questions that may arise if the employee's higher salary remains in place.
“Demotions that occur within the right circumstances can provide an employer with the opportunity to retain a valuable employee while allowing the employee to be successful in a role more conducive with the knowledge, skills and abilities he or she has,” said Ruth Thomas, pay equity strategist with Payscale.
Demotions and associated compensation decisions can vary widely depending on circumstances, and as such, it's important to have flexibility when handling each case. However, companies may find it helpful to have a general policy in place so that there is consistency in how they address demotions.
Deciding Whether to Decrease Compensation
In some cases, companies may choose not to reduce the employee's pay in an effort to protect morale or reward the employee for bringing advanced skills and experience to the new role. However, pay parity questions could arise down the road.
“One of the downstream impacts of not adjusting pay is that you create internal pay imparities that will need to be corrected down the road if you don't ensure that the demoted employee's pay is commensurate with the pay of other incumbents in the role,” said Justin Sun, senior rewards manager for Expedia Group.
One straightforward method in terms of consistency and clear communication is to always tie compensation to the relevant role, not the employee, Sun said.
Beyond salary, organizations should consider how best to address full compensation with the new role. One option to improve morale is to offer a bonus or additional benefit related to a performance improvement plan, Thomas said.
The simplest approach may be, as with salary, to tie benefits to the new position, rather than mirroring what was offered in the employee's previous role.
Nancy Romanyshyn, senior director, total rewards strategy and solutions at Syndio, said it’s important to keep compensation consistent with the job to which an employee is being transitioned. Employers also should be transparent about the total rewards implications associated with moving into a new role.
Pay Equity and Pay Transparency
With pay transparency translating to greater awareness of pay between employees, honest and clear communication about compensation decisions can increase employee trust and offer legal protections to the business.
“Organizations should be aware of the pay inequities and perceptions of unfairness that they may create if they move employees to a lower level job without reducing pay, keeping in mind that employees are more open to sharing their own pay details with each other than they’ve ever been,” said Expedia Group’s Sun, “even though they don’t have the full and critical context behind why their co-worker might be paid higher than them.”.
Written documentation should be kept of why a demotion and pay change took place, including in the case of red circling.
Having clear guidelines in place that explain a company's salary and benefit structures for each role provides a foundation for straightforward discussions about pay changes.
“Employers must be able to explain decisions authentically,” Romanyshyn said. “They also need to include employees in the pay discussion. Employees are stakeholders in pay decisions now in a way they never were before.”
Employers should consider labor laws and the affected employees' contracts, and they may want to work with a labor and employment attorney to ensure best practices.
“Analyze everyone impacted — those let go, those demoted, those remaining — by gender, race and ethnicity, and other characteristics to ensure decisions are equitable,” Romanyshyn said.
Addressing Morale and Protecting Retention
Morale is an important consideration both for the employee taking on a new role, and for others with whom they'll be working. Concerns may arise not only in relation to the employee's compensation, but also their new responsibilities and the company's rationale for the change.
Organizations should proactively communicate, offer support for all affected employees and create an environment in which employees can express their concerns and feedback. It's important to emphasize consistency while showing a willingness to evolve as needed.
“Transparency is the key with both the impacted employee as well as the employee’s new team,” Romanyshyn said. “Your efforts to maintain the impacted employee’s employment in the midst of organizational change may be a positive message for the team, especially in a time of great change.”
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