This is a lesson from our forthcoming ecourse on compensation analytics, and builds on what we covered in the post on setting goals. Be on the lookout for the course launch, which includes helpful examples and insightful exercises — coming soon!
It’s time to get technical. In this step, we introduce five critical comp measures — more specifically, categories of measures. For each type of analytic, you can dig deeper to really start pinpointing issues in your organization, ideally before they become a problem. We’ll be getting into more detail in the next step (a future blog!), so don’t worry about that just yet. For now, get used to each measure, calculate it for your organization and see if you notice anything interesting.
Note: This assumes you know what pay ranges are, and have developed them for your organization. If you need help understanding or developing ranges, check out this ecourse.
Usage: Market-ratios answer the question “How are we paying relative to the market?”.
Measures: This measures employee pay relative to market value of the job — for one employee, a group of employees and the whole organization.
Formula: Employee Pay/Market Value for the Job
Note: Use the correct percentile of the market for each job, which could be 50th, 75th or something else, depending on your strategy.
Calculate: Pick your most critical job. For every employee in that job, divide the employee’s pay by the market value you’re targeting for their job. To get the average market-ratio for the group of employees in the job, first calculate each employee’s market-ratio, then average the market-ratios.
Assess: A market-ratio value of 1.0 says you’re paying exactly where you’re targeting. The more you deviate from 1.0, the more you should have a good reason for doing so: performance, experience, skills, education, tenure, whatever. On an individual basis, pay a lot of attention to those with a market ratio below 0.8 or above 1.2, and some attention to those with a market ratio below 0.95 and above 1.05. PayScale’s 2017 Compensation Best Practices Report says the average increase still hovers around 3-5%, and the average increase timeline is roughly annually; those with a market-ratio that is 5% off may be about a year away from where they belong.
Usage: Compa-ratios help answer the question “Are we paying according to our plan?”.
Measures: Ranges set guidelines for pay based on market values and organizational priorities. Given that, it’s helpful to measure where employee pay compares to range midpoints — for one employee, a group of employees or the whole organization.
Formula: Employee Pay/Range Midpoint
Calculate: Keeping with the same critical job, compare each employee’s pay with the midpoint of the pay range. As with the average market-ratio for the job, to get the average compa-ratio for the group of employees in the job, first calculate each employee’s compa-ratio, then average the compa-ratios.
Assess: Similar to market-ratio, a compa-ratio of 1.0 says you’re paying exactly at the midpoint. What’s different here, though, is that with a compa-ratio, you don’t actually want a whole group of employees to have exactly a 1.0. Instead, you’d want their pay to differ depending on some key factors you’ve identified such as performance, skills, experience, etc. Note: Watch compliance with relevant laws for appropriate ways to differentiate pay. Compa-ratio tends to work best for groups of individuals where you average compa-ratios to get an overall pay trend.
3. Range Penetration
Usage: Range penetration answers the question “Are the right people in the right place of their range to help us accomplish our goals?”.
Measures: Range penetration plots how far an employee has progressed through their range. Range penetration is almost like a gas gauge: How much room is there to put cash “in the tank” before they get to the top? Plotting range penetration against the key factors that matter to your organization (performance, certifications, skills, experience, etc.) can help ensure you’re spending money in the best way possible.
Formula: (Employee Pay – Range Minimum) / (Range Maximum – Range Minimum)
Calculate: For your most critical job, determine the range penetration for each person in that position.
Assess: Look at the position of each person in the job. Do you have more seasoned people with greater range penetration? Are your higher performers farther along in their ranges? Do people with more education or certification show up higher in range — and does that matter for this position? Consider whether you’re spending your comp dollars appropriately based on the results delivered by the individuals in this role.
4. Flight Risk
Usage: Flight risk answers the question “Am I in danger of losing any vital employees?”.
Measures: Typically, flight risk identifies those employees who are both high-performing and whose pay is low to the market. It could also be used to track critical skillsets, experience or something else that is crucial to the success of your organization.
Formula: Technically there is no “formula” for flight risk. It’s determined by plotting two factors against each other, one of which is market-ratio. PayScale’s Insight product calculates flight risk for you by plotting employee performance against employee market position.
Calculate: Using employees from your most critical job, make two columns: one for market-ratio and one for performance rating. Create a scatter plot of Performance relative to Market-Ratio. Split the plot into quadrants.
Assess: Employees who fall in the “High Performance Low Pay” quadrant are flight risks. Examine other factors to determine if there is some logical reason they may be in that quadrant, such as a recent promotion, new-hire status or something else. If performance isn’t the most vital thing in this role, which would be odd for a critical role, you can plot whatever is the most vital thing (perhaps skill proficiency vs. market-ratio).
5. Midpoint-to-Market Delta
Usage: Midpoint-to-market delta answers the question “Is our comp plan current to the market?”.
Measures: This measure how far pay ranges are from targeted market values.
Formula: Percent difference between ranges and market: (Range Midpoint – Market Value) / Market Value
Calculate: Again, with your most critical job, identify your current range midpoint. Compare that with the market value for the job at the correct percentile. Note: If it’s a critical job, the 50th percentile may not be competitive enough.
Assess: A result of 0% difference says that your range is exactly at the market. How much your job range should deviate from market will depend on a few factors. You may decide that you need to be higher even than the 75th or 90th percentile of the market, in which case you’ll have an intentionally large percent difference. If you’re aiming to be at market for the job, and it’s not a leveled role (e.g., Teller I, Teller II, Sr. Teller), a good guideline is to stay within 10% of the market. If it’s a leveled role, the acceptable distance depends on how far apart your ranges are.
By this point, you should have plenty of actionable insights for your organization for that one particular role. In the next blog, we’ll learn how to identify issues that may exist in a function, department, location, organizational level or with a specific manager. Stay tuned!
Image: Karen Eliot/Flickr