Under what specific circumstance might a salaried employee effectively take a real-terms pay cut year over year?
Answer
If the annual merit increase (e.g., 2% or 3%) is lower than rising market rates for new talent (e.g., 5% or 6%).
When market rates for comparable new roles are rising faster than the existing employee's annual raise percentage, the existing employee's fixed compensation fails to keep pace, resulting in a real-terms reduction in value relative to the market.
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