Red Circled Employee - Definition & Meaning

Published in Human Resources Terms by MBA Skool Team

What is Red Circled Employee?

Red Circled Employee refers to a situation where an employee’s is overpaid or his/her pay rate exceeds the maximum salary set for that particular position. Once such employees are identified, organization freezes their salary at the current level. Therefore, this makes the employee not eligible for any increase in the base pay until the maximum range exceeds the employee’s pay rate. Red circle is a very usual approach to addressing situations like these.

It indicates that the organization is spending too much on the compensation of the employees, which exceeds the value they are adding to the organization. It is more expensive than being dangerous. It is paying an employee more than what is the worth of his job to the company.

Situations that lead to Red Circling:

Many a times employees in an organization are overpaid for many years as managers are reluctant to deal with red circled employees. But now more and more managers are realizing the need and importance to deal with such employees. The following are the conditions that lead to implementation of the red circle policy:

• Market conditions: When the economy struggles and the market positions fall down and the industry is experiencing a negative or a slower growth. That’s when organizations need to implement their red circle policy.

• Employees have long occupancy: The organization may have employees for a long tenure and have received continuous increase in pay leading to a position when they are overpaid than what the industry is paying for the same position.

• Responsibility decrease: When an employee’s job responsibilities decrease because of various reasons but the job position stays the same, then the salary of that employee has to be frozen.

• Philosophy shift: If the current leadership or a new leadership decides to improve the prevalent compensation philosophy of the company, leading to introduction of new salary ranges being set. This might result in red circling of a few employees.


Hence, this concludes the definition of Red Circled Employee along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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