Red-Circled Employees: What to Do When Pay Exceeds Range Maximum

Estimated reading time: 12 minutes | Last updated: October 27, 2026

Every merit cycle, the same names land on your exception report. These people have long tenure and strong reviews, and their pay sits above the top of the range. Managers want to reward them, while finance wants to hold the line. Meanwhile, the individuals themselves start to wonder why their increase letter keeps saying zero. Red-circled employees create one of the most uncomfortable decisions in compensation, and a default freeze rarely solves it.

This guide gives HR Directors a practical way through. First, you will learn how pay ends up above range maximum. Next, you will sort each case by cause instead of treating every case the same way. Then you will compare five options, run the catch-up math, and check the legal guardrails that apply in 2027.

Key Takeaways

• Employers in Mercer’s July 2026 survey plan to move salary structures by 2.6% on average for 2027. That trails the 3.2% projected merit increase.
• At that pace, someone 12% above range maximum would wait more than four years to fit back inside the range.
• Sort above-range cases by cause before choosing a response, because the right fix depends on why the gap exists.
• Lump-sum payments can reward performance without raising fixed costs. However, they carry overtime implications for non-exempt staff.
• Document a consistent, job-related policy. Federal Equal Pay Act regulations recognize bona fide red-circle rates as a factor other than sex.

Why Red-Circled Employees Deserve Attention in 2027

Salary structures are not keeping pace with pay. Mercer published its first look at 2027 pay and merit increase budgets on August 31, 2026. In that survey, 75% of employers manage pay with a formal structure that they adjust each year. However, those employers plan to move their structures by only 2.6% on average for 2027. By comparison, they project a 3.2% average merit increase.

That gap seems small in a single year. Over several cycles, though, it pushes long-tenured strong performers toward the top of their ranges, and eventually past it. In other words, the structure itself can manufacture above-range pay over time.

Pay transparency adds pressure, too. A July 2026 National Law Review analysis counted 16 states plus Washington, D.C. with statewide pay disclosure laws in effect by August 1, 2026. Delaware’s law follows on September 26, 2027. Once ranges appear in job postings, people can see exactly where they sit. As a result, someone above the posted maximum may feel stuck. Similarly, peers below the maximum may question why a coworker in the same job earns more.

MorganHR perspective: Above-range pay is usually a structure problem disguised as a people problem. When a range lags the market, the person in the job did nothing wrong. A default freeze makes them pay for the organization’s own range decisions.

For that reason, red-circled employees deserve a deliberate review each cycle, not an automatic zero. The rest of this guide shows how to run that review.

Start by pulling everyone whose pay exceeds the range maximum. Then add anyone within 3% of the maximum, because next year’s merit increase will likely push them over. This list becomes your working population for the triage that follows. Also note each person’s job, grade, hire date, and last increase. That context will speed up every later step.

How Pay Ends Up Above Range Maximum

Above-range pay rarely happens on purpose. Instead, it usually builds through a handful of common paths:

• Long tenure with steady increases. Annual merit increases compound faster than the range moves, so pay eventually passes the maximum.
• Range restructuring. A new market study lowers or holds a range, and incumbents above the new maximum become outliers overnight.
• Reclassification or job change. A role moves to a lower grade, or a person moves into a lower-graded job, while pay stays the same.
• Above-range hiring. A competitive offer for scarce skills lands above the posted range to close a hire.
• Mergers and acquisitions. Acquired staff bring legacy pay that does not fit the buyer’s structure.
• Job mismatch. The person actually performs work at a higher level than the job title reflects.

Each path points to a different fix. For example, a range that trails the market calls for a structure update. A job mismatch, on the other hand, calls for re-leveling the role. Meanwhile, a temporary assignment to lower-graded work may justify keeping the higher rate for a defined period.

That is why cause matters more than the size of the gap. Two red-circled employees can each sit 8% above maximum for completely different reasons. Treating them identically would be easy to administer. Still, it would almost certainly be wrong for at least one of them.

Before you decide anything, confirm the data. Check that each person sits in the correct job and grade, and that the range itself reflects current market data. In our experience, a meaningful share of apparent above-range cases turn out to be job coding errors or stale ranges. Fixing the data first keeps you from building policy around a problem that does not exist. For a refresher on building market-based ranges, see MorganHR’s Mid-Market Compensation Strategy: 13 Steps.

The MorganHR Triage: Sort Red-Circled Employees by Cause

Once your data holds up, sort each case into one of four groups. This triage is the core of the MorganHR approach. Diagnose the cause before you choose the response.

1. Structure lag. The range trails the market. Update the range, which often resolves the issue for an entire job family at once.
2. Job mismatch. The person works above the level of their title. Re-level or promote, using your normal job evaluation process.
3. Legacy or protected rate. Pay reflects an acquisition, reclassification, or temporary reassignment. Hold base pay, set a review date, and consider lump-sum rewards.
4. True outlier. The job and range are correct, and pay simply exceeds the job’s value. Use a documented hold, with a clear plan to communicate.

HR Director decision test: For every above-range case, answer four questions in order. Is the range current against market data? Does the person sit in the right job and level? Did a documented organizational decision create the rate? Does their performance still justify a reward? Your answers point to one of the four groups above.

This sequence protects the organization in two ways. First, it prevents freezing someone whose real issue is an outdated range. Second, it creates a written rationale for every decision. That record becomes valuable if anyone later questions why two people in the same job earn different amounts.

Set a review clock as well. In our view, every above-range rate should carry a review date no more than 12 months out. Without one, temporary decisions quietly become permanent, and red-circled employees drift further from the structure each year.

Finally, assign an owner. Someone in compensation should track the list, the cause for each case, and the next review date. Spreadsheets can handle a short list. However, tracking becomes difficult once the population grows past a few dozen people.

Five Options for Pay Above Range Maximum

After triage, choose a response. Most organizations select from five options for red-circled employees, and many combine two of them.

Option 1: Freeze base pay. The person keeps current pay but receives no base increase until the range catches up. This approach controls fixed cost. However, it can hurt engagement, especially for strong performers.

Option 2: Pay a lump sum. The person receives a one-time payment instead of a base increase. Many employers size it to match the merit percentage the person would otherwise earn. As a result, they still see a reward, while base pay holds steady.

Option 3: Allow a partial increase. The person receives a smaller base increase, often combined with a lump sum. This option works well when the gap is small and performance is strong.

Option 4: Re-level or promote. If triage shows a job mismatch, move the person into the correct job or grade. Use your standard criteria, so the decision holds up against other promotion cases.

Option 5: Reduce pay. Some employers lower pay to the range maximum. This is the rarest option, and it carries the highest risk to engagement and retention. If you consider it, involve employment counsel before you act.

Match each option to the triage group:

• Structure lag pairs with a range update, so individual cases need no separate action.
• Job mismatch pairs with re-leveling or promotion.
• Legacy or protected rates pair with a freeze plus a lump sum.
• True outliers pair with a freeze or partial increase, plus clear communication.

Notably, none of these options requires a permanent choice. A legacy rate might start with lump sums and move to a full freeze after two cycles. Likewise, a true outlier who later takes on broader scope might move into Option 4. Revisit the choice at each review date.

Red-Circled Employees and the Math of Catching Up

Numbers make the trade-offs concrete. Assume your structure moves 2.6% per year, in line with Mercer’s 2027 average. Here is how long a frozen rate would wait to fit back inside the range:

Now consider a specific case. A senior analyst earns $112,000 in a range with a $100,000 maximum, so pay sits 12% above maximum. With a full freeze, the range needs about 4.4 years to catch up.

Compare two other approaches over four years. A 3% annual base increase would add $34,623 in cumulative cost. It would also leave base pay at $126,057, which widens the gap rather than closing it. By contrast, a 2% annual lump sum would cost $8,960 over the same period. Base pay would stay at $112,000, so the range would still catch up on schedule.

The lesson is simple. Lump sums cost far less than base increases over time, and they let the structure close the gap. Even so, they do not compound, so long-tenured staff may feel the difference over many years.

Quick Implementation Checklist

• Pull everyone above range maximum, plus anyone within 3% of it.
• Verify job codes, grades, and range data for each case.
• Assign each case to one of the four triage groups.
• Choose a response and record the job-related reason.
• Set a review date no more than 12 months out.
• Confirm overtime treatment for non-exempt lump sums with payroll.
• Check union contracts and state notice rules before any change.
• Prepare manager talking points before increase letters go out.

Legal Guardrails for Red-Circled Employees

Above-range pay creates differences between people in the same job. Fortunately, a consistent and documented policy addresses much of that exposure.

Start with the Equal Pay Act. Federal regulations at 29 CFR 1620.26 describe red-circle rates as unusual, higher-than-normal rates kept for reasons unrelated to sex. A bona fide rate of this kind can support a pay difference as a factor other than sex. However, the label alone does not create a defense. Apply the policy evenhandedly, and keep records showing why each rate exists.

Next, consider age. Long-tenured staff often make up a large share of red-circled employees. So check whether a freeze policy falls more heavily on workers age 40 and over. Then document the business reason behind it.

Also check overtime rules. Suppose your policy promises non-exempt staff a set lump sum in place of an increase. That payment is likely nondiscretionary. Under the Fair Labor Standards Act, nondiscretionary payments generally belong in the regular rate for overtime. Ask payroll and counsel to confirm the treatment before payments go out.

Other guardrails also apply:

• Unionized workplaces. Employers generally cannot freeze pay or restructure ranges for represented workers without bargaining. Review the contract first.
• Pay reductions. Many states require advance written notice before a pay cut takes effect. Exempt staff must also stay above applicable salary thresholds.
• Pay transparency. Posted ranges must reflect a good-faith estimate. Keep posting ranges and your internal structure aligned, even when some incumbents sit above the maximum.
• EU operations. The EU Pay Transparency Directive’s transposition deadline passed in June 2026. It requires employers to justify pay differences with objective criteria.

Remember that this guidance is general information, not legal advice. Involve employment counsel when you set or change an above-range policy.

How to Talk With Above-Range Staff

Even the right decision can fail in the conversation. Someone who hears “you’re over the maximum” may hear “you’re overpaid.” So the message needs care.

Lead with what the person contributes, not with the range. Then explain the structure in plain terms. Every job has a range that reflects its market value, and their pay already sits above it. That reflects past investment, not criticism.

Next, explain what happens now. If they receive a lump sum, say so clearly and describe how you calculated it. If base pay will hold steady, explain when the organization will review the case again. Avoid vague promises about future increases, because they can create expectations you cannot meet.

Finally, point to growth. If they want higher pay, describe what a larger role would require. That conversation turns a frustrating limit into a career discussion.

Managers should avoid a few phrases entirely:

• “You’re overpaid for this job.”
• “Everyone else in your role makes less than you.”
• “Next year you’ll definitely get an increase.”

Manager preparation makes a real difference here. Programs such as CompAware, MorganHR’s manager training, help managers explain ranges, compa-ratios, and lump sums with confidence. Similarly, a short written FAQ keeps the message consistent across departments when red-circled employees compare notes.

Timing matters as well. Hold the conversation before the increase letter arrives, not after. A person who opens a letter showing a zero base increase without warning will likely assume the worst. In contrast, someone who already understands the reason and the lump sum will usually read the letter as confirmation.

Red-Circled Employees by Company Size

Small organizations (under 250 employees). Small employers often have only a handful of above-range cases. Even so, each one stands out, because peers notice. Keep the policy short and written. A simple rule, such as a lump sum equal to the merit percentage, gives managers something consistent to apply. Review the whole list once a year alongside the range update.

Mid-size organizations (250 to 2,500 people). Mid-size companies often accumulate above-range pay through acquisitions and rapid growth. Consequently, structure lag and job mismatch tend to drive most cases. Prioritize a market review of the ranges with the most outliers. Spreadsheet tracking also breaks down at this size. For that reason, many teams use compensation platforms such as SimplyMerit to flag outliers during the cycle.

Large enterprises (more than 2,500 people). Enterprises face governance challenges more than volume challenges. Different business units may treat red-circled employees differently, which creates inconsistency risk. Therefore, set one enterprise-wide policy with clear exception rules. Then require each business unit to report its above-range population and review dates. Multi-country employers should also align the policy with local rules, including EU requirements.

Industry shapes the picture as well. Mercer’s July 2026 data shows healthcare and retail employers projecting 3.0% merit increases for 2027, with consumer goods at 2.9%. Tighter merit pools often mean slower range movement. As a result, employers in those sectors may see above-range populations grow faster.

Whatever your size, the approach stays the same. Diagnose the cause, choose a response, document the reason, and set a review date. Only the volume and the governance change.

Frequently Asked Questions

Can red-circled employees still receive a merit increase?

Yes, though often not to base pay. Many employers pay a lump sum equal to the merit percentage instead. Others allow a partial base increase for top performers.

Is it legal to cut pay above range maximum?

Generally, employers can reduce pay going forward, but rules vary. Many states require advance written notice. Exempt staff must stay above salary thresholds, and union contracts may prohibit changes. Consult counsel first.

How long should an above-range rate last?

There is no fixed legal limit. In our view, every case should carry a review date no more than 12 months out. At 2.6% annual structure movement, pay 10% above maximum would take about 3.7 years to fit back inside the range.

Do lump-sum payments count toward overtime?

They can. A promised, nondiscretionary lump sum for non-exempt staff generally belongs in the regular rate for overtime. Confirm the treatment with payroll and counsel.

What is a green circle?

A green circle is the opposite situation, with pay below the range minimum. Most employers move green-circled pay up to the minimum as a priority.

How can software help track above-range pay?

Compensation platforms can flag outliers, apply lump-sum rules, and track review dates across the cycle. For example, SimplyMerit includes outlier analysis with board-ready reporting. Even so, people still make the final decision for each case.

This post is for informational purposes only and does not constitute legal advice. Consult qualified counsel for guidance specific to your organization’s compliance obligations.

Ready to build a defensible above-range policy? MorganHR’s compensation consultants help HR leaders update ranges, triage outlier cases, and prepare managers for difficult pay conversations. Talk with a MorganHR consultant today and turn your exception report into a clear plan.