Capped Wages vs. Maximum Wage

There seems to be a wage for everything in the payroll industry, from supplemental wages to minimum wage. So, where do capped wages and maximum wages fit in? The two sometimes are confused for each other, so we'll break it down;

Capped Wages 

Capped wages – or salary caps – refer to a limit placed on an employee's salary that's enforced by the government or another organization. Most often, employers create salary caps to ensure pay equity and manage costs.

An employer must have a reasonable justification for salary caps – like maintaining a compensation structure in a large company. The cons for salary caps become noticeable in small businesses, when employees who've worked long enough become 'red-circled.' Red-circled workers receive their maximum salary but continue to work for many more years. This can be demotivating for employees and affect performance;

The most well-known use case for salary caps revolves around professional athletics. A salary cap on a basketball player is a rule that limits the amount of money his or her team can spend on an individual's wages.

Maximum Wage 

Maximum wage – which is not yet legal in the US but long suggested by political players  – is a ceiling imposed on how much income an employee can earn in a given pay cycle. Proponents believe with this in place, senior management employees would earn less, putting more money back in to the company and overall redistributing wealth that would otherwise been consumed by one to two employees. Opponents believe it threatens a free market.

Employers could implement maximum wage in two ways: with a fixed sum, like salary caps, or as a ratio.  However, like capped wages, maximum wage has believers on both sides. Where do you stand? Continue the conversation on PayrollTalk!