At some point in your managerial life, you may find yourself in a situation where someone on your team is over-leveled i.e: their compensation or title is meaningfully higher than what their impact merits. Maybe you overestimated their seniority when hiring them. Maybe you inherited a team where a previous manager gave them a promotion or a raise they weren’t ready for. Or maybe your company rewrote your career ladder and it turned out that some people’s salaries or titles were previously inflated. Point is: someone’s title or compensation is seriously higher than what their impact justifies. What do you do?
This isn’t complicated if the person is adding no or negative value (in which case you'd just let them go).
Where this gets interesting is when someone is performing reasonably well at a level lower than the one the company expects from them. For example, your staff engineer is performing like a senior engineer, or your director is performing like a senior manager. It’s not that they’re doing nothing well - they may be doing a lot of good in your organization, but they’re not quite up to par to their official level. In fact, if it weren’t for this pesky over-leveling thing, you might even be perfectly happy to have them perform at their current level indefinitely at your company.
So what do you do? Should you even do anything at all?
I mean, they're adding a lot of value, even if not technically at the level expected from them. Their team likes them. If you let them go, you'll need to hire a backfill, and how long is that gonna take? You might not even be sure that you'll get budget and time of day from the recruiting team. Plus, why should you go through all this trouble when, with time, this preson will eventually "grow into" their official level? Is shaking the boat worth all this trouble?
It comes down to which kind of pain you want to avoid: long-term pain, or the short-term one. If you want to avoid short-term pain, then do nothing. If you want to avoid long-term pain, then treat this exactly the same as a serious underperformance situation, for a number of reasons.
The bar for what’s expected from a role in your company is derived from the level of those who currently hold that role or title. Culture is how your company behaves, not what you believe or say. So regardless of what your career ladder document says about the bar required from a staff engineer, the real bar in people’s minds is, approximately, the average of the people currently in that role. If you have 5 staff engineers, all of whom are exceptional, then everyone will intuitively know, without even looking at your career ladder, that you need to be truly exceptional to get to that level. If you have 1 exceptional staff engineer and 4 average ones, people will intuitively know that the bar is not that high. This is true even if levels aren’t public within your company, because someone at your company is responsible for deciding people’s levels (probably a committee of managers or senior employees), and they’re going to compare promotion candidates with people already holding that title.
If anything, you as a leader should behave as if the bar is set at the minimum level of everyone with that title, not the average, because that’s how a lot of promotion cases might get argued. A manager thinks their report is doing a great job, wants to reward them, and argues that “if so and so is a staff engineer, and my report is doing at least as good of a job as them, they should be promoted to the same level”. This reasoning is theoretically sound, but only if the minimum level of a staff engineer at your company basically never drops. Otherwise you’re just watering down what it means to be a staff engineer (or whatever other level you’re talking about).
The second reason you should handle this situation is a lot more pragmatic: opportunity cost. Teams will typically have a budget allocation that is expected to help them achieve a certain output. Your team's budget might be expected to buy you a manager, one staff engineer, two seniors, two mid, and one junior engineer. If you have a staff engineer who's actually behaving like a senior, then someone still needs to do their job. Maybe you can fill the gap as their manager, but now you're spending your time doing their job, which takes time away from your own responsibilities and growth (which as a manager, frequently requires growing others to take over your current responsibilities). And you can't go to your manager and ask for another staff engineer because, well, you already have one. Now you're stuck having to pick up the slack and you can't get any staffing help.
Another reason you should act is: what happens if people find out about this person’s compensation? Would they think it’s fair? Would they continue to trust you and believe that you have their best interest in mind? Would they continue to feel motivated to do their work? This is a great litmus test of whether your compensation or leveling is fair: if a spreadsheet containing the level and compensation of every employee in your organization were to leak, would you be willing to publicly stand by every number on that spreadsheet? If the answer is no, then that's because those numbers aren't fair. This test may seem extreme, but the reality is that people talk about these things. Documents could leak. Private conversations could be overheard. So you should behave as if one day, that spreadsheet will leak out.
Even ignoring all these practicalities, assuming you could somehow guarantee no one would know that someone is overcompensated or over-leveled, you should still do something because you know about it. You can’t lead with integrity if you knowingly allow a double standard just for convenience. So you need to do something.
Here's something I wouldn't do: offer a demotion. Since the employee is doing well at a lower level than their official one, you could theoretically offer them a demotion if they think they can’t or don’t want to hit the improvement goals. This way, they don't get fired, they keep producing their positive output, and everyone is happy, right? I personally wouldn't do it, because it’s very difficult to reduce an employee's standing and still have them exhibit the same level of motivation or excitement about their work (unless they specifically asked for less responsibility after doing a good job in their role). If this works for you, though, please reach out, I'd love to learn about your situation.
Otherwise, generally speaking, this will look very similar to how you’d handle any underperformance situation.
Before you actually do anything, loop in your manager. Not only will they probably have a useful perspective, but they likely also need to fulfill some mechanical HR or paper trail requirements.
The first thing you then need to do is be absolutely clear with the employee that their performance does not meet the required bar for their role, and explain the gap. This step is crucial, because the worst thing you can do to someone who needs to improve their performance is ruin their chances for improvement by not even letting them know they need to do it and the level they need to reach.
If the employee is interested in attempting to rectify the situation, then set very clear, time-bound goals for exactly what output level they will reach. It's important to be time-bound because otherwise you might procrastinate taking action (because let's face it, this situation just sucks for all involved). I mean this literally: set a specific date with the employee, in writing, by which they should hit their goals. Once that date arrives, you should make a clear decision one way or another. If the employee hit their goals (and sustains them): fantastic. If they didn’t, then the optimal long term outcome is to part ways.
Unfortunately, I believe it’s harder to hit this kind of improvement goal than in an otherwise "standard" underperformance situation. In a way, you’re asking someone to grow their skills in a very short amount of time (a few months at most), enough to earn a promotion that would have normally taken them a year or more. This is a tall order. People generally take at least a year, often more, to grow from one level to the next. If you find yourself in this situation, it will most likely result in separation. For this reason, when you share the improvement expectations with the employee, you should also give them an “easy out” where they can just resign and we don’t have to go through a whole ordeal which will likely end with separation.
If you do your best to uphold a high standard of meritocracy in your company, you should ideally never find yourself in this position. Promotions should have a high bar. Your leveling in the hiring process should also be risk averse, only hiring people at a given level if you’re pretty sure they have what it takes.
Of course, no company is perfect and you may very well find yourself having to resolve this. If you do find yourself in this situation, it's important to remember that this is basically no different than a standard underperformance situation. It’s never fun to deal with, but it’s critical that you do in order to maintain meritocracy as an invariant of your culture.