Two-tier system

A two-tier system is a type of payroll system in which one group of workers receives lower wages and/or employee benefits than another.

The two-tier system of wages is usually established for one of three reasons:

• The employer wishes to better compensate more senior and ostensibly more experienced and productive workers without increasing overall wage costs.
• The employer wishes to establish a pay for performance or merit pay wage scheme that compensates more productive employees without increasing overall wage costs.
• The employer wishes to reduce overall wage costs by hiring new employees at a wage less than the wage of incumbent workers.

A much less common system is the two-tier benefit system, which extends certain benefits to new employees only if they receive a promotion or are hired into the incumbent wage structure.

That can be distinguished from traditional benefit structures, which permit employees to access a benefit, such a retirement pension or sabbatical leave, after they have achieved certain time-in-position levels.

Two-tier systems became more common in most industrialized economies in the late 1980s. They are particularly attractive to companies with high rates of turnover for new hires, such as in retail, or with many high-wage, high-skilled employees about to retire.