Red circle rate explained: What HR leaders need to know when an employee earns too much

Most HR teams would have encountered this situation. 

A long-serving employee is earning significantly more than the current salary range for their role. This can be a result of an organisation restructuring after the employee was promoted or because they received annual loyalty incentives from the previous structure. Whatever the reason, the employee's pay now sits above the maximum salary band. 

This is called a Red Circle Rate. And it creates one of the most delicate compensation challenges HR leaders face. This blog explains what a red circle rate is, why it happens, and what HR must do when it does.

Why does Red Circle Rate exist in the first place?

Red circle rates follow predictable patterns, and understanding those patterns helps HR prevent them from taking root in the organisation.

• Salary band revisions create overnight anomalies: Organisations review and update their salary band regularly. When a band is revised downward, every employee sitting above the new maximum becomes a red circle employee immediately. 
• Restructures move employees into lower-graded roles: When an organisation restructures, and an employee moves into a role at a lower grade, their salary often remains the same. Organisations frequently protect the salary of employees who are displaced downward as a goodwill gesture. The result is an employee whose pay exceeds the band for their current role.
• Long tenure combined with consistent increases: Some employees accumulate annual increases over many years and gradually drift above the top of their band. The annual incentives place them outside the range.

How HR should approach the conversation with Red Circle employees?

The red circle conversation is one of the more challenging conversations in HR practice. It requires HR to be honest about a situation that the employee may find genuinely distressing, while preserving the relationship and maintaining the employee's sense of value.

• Be direct about what is happening:  Employees who are told the full picture handle it significantly better than employees who sense that the full picture is not being shared. HR teams must clearly explain the organisation’s situation and why their salary is creating a financial anomaly for the organisation. 
• Separate the pay conversation from the performance conversation: A red circle rate is not a performance issue, and HR must make this clear. The employee is not being penalised for poor performance. Their salary sits above a band that changed. Conflating these two things is one of the most damaging mistakes HR can make in this conversation.
• Make the path forward clear: The employee needs to understand what happens next. HR must clearly answer questions like: Will their salary be frozen? For how long? What conditions would allow their pay to move again? Is there a career development path that would move them into a higher band where their current salary is no longer an anomaly?

The HR policy framework for managing Red Circle rates

Individual conversations solve individual cases. To solve the Red Circle issue, HR must build a clear, consistently applied policy for red circle situations.

• Define what triggers red circle status: The policy must specify exactly when an employee is classified as red circle. Is it when their salary exceeds the band maximum by any amount? Or by a specific percentage? The trigger should be clear, documented, and applied consistently across the organisation.
• Establish the freeze protocol: Most red circle policies involve freezing the employee's salary at its current level until the band catches up, either through annual band reviews or through the employee moving into a higher-graded role. The policy should specify how long a freeze can run, what happens if the band does not catch up within that period, and what exceptions are permissible.
• Address performance increases separately: One of the most contested questions in red circle management is whether employees whose salaries are frozen should still receive performance increases. Freezing a high performer's salary while their peers receive increases creates a fairness problem that often drives the best employees out. Instead, HR teams should consider using one-off bonus payments for high performers in red circle situations
• Include a review cycle: HR teams must build a regular review cycle that reassesses each red circle case, tracks whether the band is moving toward the employee's salary, and identifies development or role change options that could resolve the anomaly over time.

What HR can do to resolve Red Circle Rates over time?

A salary freeze addresses the symptom. Resolving the underlying situation requires HR to think more strategically about the options available.

• Accelerate the band review cycle: If an employee's salary is above the band because the band is genuinely below market, the band may need to be revised upward. HR should use red circle accumulation as a signal to examine whether the compensation framework still reflects the market, rather than simply freezing employees who have drifted above it.
• Create a development pathway to a higher band: In many cases, the most durable resolution to a red circle situation is to move the employee into a higher-graded role where their current salary falls within the band. HR teams must work with business leaders to identify whether such pathways exist, and whether the employee has the capability and the interest to pursue them. This approach resolves the compensation anomaly while simultaneously investing in the employee's development.
• Use one-off payments instead of base salary increases: For red circle employees who would otherwise be eligible for a performance increase, some organisations use one-off bonus payments rather than base salary increases to reward strong performance without compounding the anomaly. This approach acknowledges the employee's contribution without moving their base salary further above the band.
• Be honest about timelines: If the band is unlikely to catch up with the employee's salary in the near term, HR must say so. An employee who is told their situation will be reviewed annually and expects resolution within a year, but is still frozen three years later, will feel misled. Honest timeline management is a fundamental part of handling red circle situations with integrity.

Key Takeaways

• A Red Circle Rate occurs when an employee's salary exceeds the maximum of their current band, typically due to salary band revisions, organisational restructures that move employees into lower-graded roles, or years of accumulated annual increases.
• The Red Circle conversation requires honesty and clarity. Explain the situation directly, separate it explicitly from any performance assessment, and give the employee a clear picture of what happens next, including the freeze conditions, the timeline, and the development pathways available to them.
• Build a clear, consistently applied policy that defines what triggers red circle status, establishes the freeze protocol, specifies how long a freeze can run, and addresses how high performers in red circle situations are recognised without compounding the anomaly.
• A salary freeze addresses the symptom. Resolving the underlying situation requires a more strategic response: revisiting whether the compensation band still reflects the market, creating development pathways into higher-graded roles where the employee's salary sits within the band, or using one-off bonus payments to reward strong performance without moving base salary further above the band.
• Be honest about timelines. An employee who expects resolution within a year but remains frozen three years later will feel misled. Managing expectations with integrity is as important as managing the compensation anomaly itself.