In the early days, Employco played fast and loose with job titles. Ten years ago, the founders of the company, an HR consulting firm and insurance provider, decided that heavyweight titles would lend credibility to their new venture and help land customers. A company isn't a company without a CIO, they figured. And with cash tight, doling out a few lofty titles served as a low-cost way to attract smart employees--and keep them around.

Over the next decade, Employco, based in Westmont, Illinois, evolved from a start-up with fewer than 10 employees to an established business with 17,000 full- and part-timers. Unfortunately, as the company expanded and the roles of top executives became more complex, some employees weren't up to the demands that came with their titles. Others lacked traditional senior-level credentials altogether, having landed their titles by default or out of necessity. So two years ago, Rob Wilson, Employco's president, decided to overhaul the company's titling policy, giving lower titles to half a dozen senior staffers. He didn't make the decision lightly. "If you take someone's title away, there's a good chance you're going to lose that person," he says. "But we had to look at what was best for the company."

HR pros call it "overtitling," and Employco is far from the only company that's been stung by it. The practice became widespread when the economy floundered in 2000 and cash-strapped companies began handing out flashy titles in lieu of raises or bonuses. But it soon became apparent that what seemed like a cost-saving move came with a price tag. Not only did many vice presidents and senior managers prove to be unqualified for their jobs, employees began to comb the Internet to find out what people with similar titles were being paid. The result was widespread disgruntlement over the relative size of their paychecks, says Bill Coleman, senior vice president of compensation for Salary.com. Indeed, a recent survey by Salary.com found that nearly 80 percent of employees who claim to be underpaid are actually overpaid, fairly paid, or holding titles that don't match their jobs. About 30 percent of those respondents most likely were overtitled, according to Coleman. "A lot of managers out there don't manage anybody or anything," Coleman says. "They are not rationally linked to a corporate hierarchy."

Today's tightening labor market is making titling even trickier because quality job seekers can afford to be picky. "We're in a worker-centric era," says Sharon Jordan-Evans, co-author of Love 'em or Lose 'em: Getting Good People to Stay. "The talent war is raging and that means employees have more choices, more power." By offering fancy job titles, you can stoke egos and coax talent through the door, she suggests.

But doing so can be risky. Employco's Wilson, for example, wishes he had been more careful about job titles from the outset. Things became especially difficult a few years ago when Employco started to hire truly seasoned managers for the first time. The company already had several VPs of sales when Wilson hired a new person with the title of vice president to oversee the department, a move that sparked confusion and resentment among some staffers. "It wasn't that the other VPs were not good at what they did," Wilson says. "It's just that they were not effective leaders and managers."

After the overtitling problem became apparent, Wilson and a few other managers began to review employees in key positions. When they determined that a staffer lacked the skills and experience needed, they met with each one to explain that the job title was being changed. In some cases, employees were told that they would be sharing their title with a more experienced co-worker.

The news did not go over well. No one quit on the spot, but most have since moved on. In one instance, Wilson informed a well-liked payroll manager that she would be sharing her title with an employee she had been supervising. "There was a fair amount of crying," he recalls. "She was a good employee, but we needed to bring in a stronger manager." The arrangement lasted for about a year before the miffed employee left to start her own business.

One way to avoid such headaches is to standardize the qualifications necessary to ascend to a certain title. If possible, reward restless stars with perks like cash or extra days off instead of new titles. Also, consider handing out less generic job titles. For example, Wilson changed the title "account executive" to "risk consultant." The new title is more accurate, he says, since employees holding the position assess a client's risk exposure related to workers' compensation, taxes, and benefits costs. And thanks to the more specific name, staffers have a tougher time comparing their titles, and paychecks, to those of their friends and on salary surveys. The new policy has eliminated overtitling and made job requirements and expectations more clear. "Now everyone knows that if there is a promotion, that person deserves the new title," Wilson says.

Doing away with titles is another option. That was the approach taken by the Richards Group, a Dallas-based marketing firm. As the company grew, so did the tendency to add bigger and better titles, recalls Diane Fannon, a principal at the company. "You start thinking if you're going to give Sue a new title, then are you going to give Jane one, too?" she says. "It was creeping in like bad weeds." Executives began to spend an inordinate amount of time matching employees with titles. Meanwhile, they worried that employees would become obsessed with climbing the corporate ladder.

By 2003, there were more than five different titles, including account executive and account director, in the company's brand-management department alone. Fannon and her colleagues began to think that the various titles were unnecessary and often meaningless. That's when they began toying with the idea of drastically revamping the company's approach to job titles. First, they took an informal poll of their clients, who said that they didn't care about the title of people who handled their accounts. A few clients even viewed the idea of eliminating job titles as cutting edge--not a bad impression for a marketing firm. Three years ago, the Richards Group erased the titles of 560 employees and gave the company's 20 executives the same title: principal. Some longtime employees were leery of the move, particularly those who had spent years earning lofty titles. Still, nobody quit, and staffers now seem to be more focused on their jobs than on their titles, Fannon says.

The lack of hierarchical titles has also helped lure new recruits. Shortly after the Richards Group implemented the new policy, a job applicant who was fresh out of school asked Fannon, "Does this mean I can take on any project without a title holding me back?" At that moment, Fannon knew the new system was going to work.