Author: ERI

Labor cost is an essential piece in the profitability puzzle, but calculating it can be tricky. Labor cost, in the simplest terms, is the cost required to employ a worker. Cost of labor, while similar, is somewhat different from labor cost.

What Is the Difference between Cost of Labor and Labor Cost?

Cost of labor and labor cost are similar and often used interchangeably, but there are some differences between the two. The main difference is how detailed the calculation is to determine the cost to employ workers.

Cost of labor includes all salary (gross pay), benefits, and payroll taxes paid by employers to employ workers  and can be compared from location to location. The cost of labor is commonly used for determining salary structures and geographic pay. This value is critical when deciding which location a business may decide to operate in since it is easily comparable between locations. ERI’s Geographic Assessor allows a business to compare the cost of labor by looking at geographic differentials between multiple locations.

Labor cost is a more casual term and includes the expenses used to determine the cost of labor, but it may also be customized based on an organization’s specific definitions. For example, a company that operates and maintains an oil rig would include specific expenses, such as lodging and meals, that would not apply to most other businesses. Labor cost is useful for companies that want to know exactly how much it costs to employ an individual to further calculate profits.

In short, to appreciate the difference between cost of labor and labor cost, remember that cost of labor is a more universal and reproducible calculation that can be compared easily between locations. Labor cost, on the other hand, is a more specific and tailored calculation used to help determine a specific business’ total profitability.

Determining Labor Costs

Before delving into how to calculate labor costs, it is important to understand some key terminology: indirect vs. direct labor costs and fixed vs. variable labor costs.

What Is the Difference between Indirect and Direct Labor Costs?

Direct labor costs refer to labor that can be correlated directly with an output of goods or services. For example, a Product Assembler hired to construct tables at a factory can make six tables per hour. Each of these tables can be sold for a given amount of money. This employee is a direct labor cost that can be correlated easily with the cost of the goods that they are producing.

Indirect labor costs refer to labor that cannot be tied directly to the production of goods or services. An example of this would be an IT Support Specialist. This role does not necessarily produce any goods or services directly, but they may help other employees do their jobs effectively.

What Are Fixed and Variable Labor Costs?

Fixed labor costs refer to labor costs that do not change with the amount of output of a product being manufactured or labor costs that are not expected to change over time. For example, the salary of an exempt employee is not expected to change within a year, so may be considered a fixed labor cost.

Variable labor costs are costs that can change depending on production output or increased demand. An example would be seasonal shifts in retail when more employees are needed or required to work overtime. This could also relate to the cost of powering machines that workers will be using in a production environment.

How Do You Calculate Direct Labor Cost?

Direct labor cost is an involved calculation, but it is a critical value since it can directly impact a business’s bottom line. Here is an overview of the steps needed to calculate this value:

1. Determine the Employee’s Salary

The first step is determining the total salary for an employee to see how much they would be paid on an annual, weekly, or hourly basis. For this example, let’s calculate the cost of an exempt Front-End Developer in Portland, Oregon. Take their annual salary of $100,000 and divide it by 52 to get their weekly cost. If they work 40 hours a week, we would further divide that number by 40 to get their hourly rate.

Annual salary = $100,000

$100,000 / 52 = $1,924.08

Weekly salary = $1,924.08

$1,924.08 / 40

Hourly salary = $48.08

It’s important to note that this is an exempt employee. For a non-exempt employee, you would have to factor in overtime, as well, to get their total labor cost. Breaking this down into weekly or hourly equivalents allows you to easily work with other types of expenses later.

      2. Factor in Additional Benefits

Benefits can constitute a significant part of an employee’s overall compensation and must be considered carefully in a labor cost calculation. Determining the cost of benefits is critical to understanding exactly how much it would cost per hour, week, or year to have an employee work on a specific project.

Employer-provided employee benefits may include some of these popular options, though there are many other benefits utilized to attract, retain, and motivate employees in competitive labor markets:

• • Medical insurance
  • Dental insurance
  • Life and disability insurance
  • Retirement plans
  • Paid time off
  • Employee assistance plan (EAP)
  • Executive perquisites
  • Compensated meals
  • Education and training

Let’s say our Front-End Developer receives $2,000 per year for medical insurance, $200 annually for dental insurance, $500 per year towards retirement, and $2,000 of paid time off annually. This employee would cost an additional $4,700 in benefits per year. Keep this in mind as we continue with the next steps.

3. Factor in Payroll Taxes

The cost of payroll taxes can vary depending on your location, but it should be factored into the total labor cost for an employee. Payroll taxes paid by employers include Social Security tax, Medicare tax, federal unemployment tax, and state unemployment tax, which varies by state. For our Front-End Developer, let’s say it costs $200 per month for payroll taxes. This equates to $2,400 per year in payroll taxes for this employee.

4. Calculate Annual Cost of Labor

The next step is to combine salary (gross pay) with benefits and payroll taxes. We will use annual values so that we can break them down later for our various needs.

Salary + Benefits + Payroll Taxes = Cost of Labor

In this example:

$100,000 + $4,700 + $2,400 = $107,100

This value will give you a good base for determining labor costs, but there are still some additional steps to determine the exact cost.

5. Factor in Additional Fixed Labor Costs

Earlier, we mentioned fixed labor costs being a factor in determining total labor costs. An example of this cost would be the software subscriptions that an employee needs to do their job. An employee’s computer, however, would not fall into this category because buying a computer for an employee is not a regular cost. This would be considered a variable labor cost.

Variable labor costs cannot be factored into direct labor costs due to their frequent fluctuations. They should still be considered when deciding on the value and efficacy of projects, but they are not useful for direct labor cost calculations.

For this example, let’s say that the software used by the Front-End Developer will cost an average of $100 each year per license. That means that, with this additional fixed labor cost, the cost of labor would now equal $107,200 per year.

6. Break Down the Cost of Labor into Digestible Numbers

With all these extra expenses included, you have arrived at your total annual labor cost value. Let’s use the salary pay period calculation that we demonstrated in step one to convert the annual labor cost value into weekly and hourly rates:

Annual salary = $100,000	Annual labor cost = $107,20
$100,000 / 52 = $1,924.08	$107,200 / 52 = $2,061.54
Weekly salary = $1,924.08	Weekly labor cost = $2,061.54
$1,924.08 / 40	$2,061.54 / 40
Hourly salary = $48.08	Hourly labor cost = $51.54

As can be seen, an employee’s salary is not everything; there are significant additional costs to consider in the total labor cost to keep an employee working. With these values handy, you will now be able to get a better grasp of your company’s potential profits when it takes on new endeavors or projects.

How Can I Reduce My Cost of Labor?

The most effective way to reduce your cost of labor would be to employ workers in a different location with a lower cost of labor. ERI’s Geographic Assessor helps organizations easily compare the cost of labor in multiple areas by looking at geographic differentials across locations. That said, relocating to an area with a lower cost of labor is not always possible, so managers and owners may need to think of other creative ways to lower the cost of labor, such as adjustments to benefits offered.

How Can I Reduce My Labor Costs?

Now, since labor cost is based on the total cost of all expenses related to employing an individual, there are quite a few different ways to reduce this expense:

1. Hire Temporary Labor During Busy Times

Depending on your industry, there may be predictable busy times and quiet periods. You can save some major labor costs by hiring temporary labor for specific jobs instead of paying overtime.

2. Avoid Turnover

As an employer, you know that the hiring process can be quite expensive. Employee Benefits News (EBN) reported that, according to the Work Institute’s 2017 Retention Report , hiring a replacement can cost employers 33% of an employee’s annual salary. It may even cost more depending on how long the employee was employed before they left. Making employees feel heard and valued with annual check-ins on employee satisfaction coupled with reasonable adjustments based on feedback are great ways to retain and motivate employees.

3. Try to Avoid Scheduling Overtime

Overtime laws for non-exempt employees can turn a profitable project into an unprofitable one. Try to schedule employees so that they are not working overtime regularly. See point number one above about hiring temporary labor during busy periods.

For help estimating FLSA overtime exemptions, turn to ERI’s Occupational Assessor, which includes a module to help subscribers easily estimate overtime exemption status at the state and federal level.

4. Reexamine Your Benefits

Examine your benefits and consider if it would be more cost effective to increase or add additional benefits instead of paying higher salaries. Employer-provided medical benefits, for example, are considerably less expensive than individually funded medical benefits. That said, it is important to ensure that medical benefits are desired by your employees, as opposed to higher salaries; otherwise, you may see increased turnover.

ERI’s Benefits Benchmarking Survey provides an invaluable resource to organizations in the process of building and updating competitive employee benefits packages with a comprehensive analysis of health care benefits, in addition to sections on life and disability insurance, paid time off, retirement, and executive prerequisites. To drill down on actual costs and extensive details on employer-provided employee benefits in today’s competitive marketplace, read ERI’s 2025 Benefits Benchmarking Survey report.

ERI’s Salary Assessor also includes three useful resources for planning and managing employee benefits in your organization:

• • The Benefits page includes current survey data on trends in employee benefits, including benefits offered (medical, dental, vision, prescription drug, paid holidays, paid vacation, paid sick leave, retirement, and telecommuting), health care coverage, and paid time off (PTO). ERI’s employee benefits survey data can be filtered by geographic region, organization size (number of employees), and industry, allowing you to accurately evaluate trends in benefits offerings amongst peers in your market.
  • The Benefits Administration feature in Compensation Management helps you define benefits plan options, including health & wellness benefits, financial & retirement benefits, time-off & leave benefits, mandatory benefits, and additional benefits, to administer in your organization.
  • The Total Rewards Statement is an essential report in Compensation Management that provides a complete breakdown of individual employee pay, including current base, incentive, and long-term compensation, plus benefits, with employee and employer contributions for each benefit option. You can easily download and share this report to evaluate the costs of individual benefits options for each employee.

5. Consider Part-Time Workers

Part-time employees will be less expensive to hire and maintain than full-time employees since they do not require certain benefits that are provided to full-time workers. It may make more sense to hire two part-time workers than one full-time employee. As always, it depends on your situation.

Knowing how labor cost is calculated and the many factors that affect it is a first step towards optimizing your profits. For a more in-depth analysis of how to manage the cost of labor, use ERI’s Geographic Assessor to analyze geographic differentials and perform cost-of-labor comparisons across various locations in the United States and worldwide.

HR and professionals recognize that salary adjustments are a crucial component of maintaining fair and competitive pay within an organization. It is a way of not only ensuring that a particular set of criteria regarding an employee’s compensation is met, such as a market-competitive base salary, but also navigating pay with consistency, strategic planning, and adaptation to evolving market pay practices.

Although many typically associate salary adjustments with employee performance, such as merit and performance pay raises, a salary adjustment does not always indicate a rise in pay and it is not necessarily tied to performance. Pay increases based on performance or merit are ultimately considered a salary adjustment; however, conceptually, salary adjustments and pay raises refer to different things.

Salary adjustments refer to a change, either an increase or a decrease, to an employee’s base pay, which is typically made to reflect distinct factors, such as market rates, internal pay equity, or cost-of-living increases.

Pay raises, on the other hand, are typically tied to employee performance. These salary changes are administered as a way to reward individual performance, with the focus on motivating employees and retaining talent. Alternatively, salary adjustments are made to ensure equity within the organization and competitiveness in the market, resulting in either salary increases or decreases.

In general, salary adjustments are a method for HR and compensation professionals to ensure legal compliance, align with market rates, and stay competitive. Which brings us to our next point: what are some factors that influence why salary adjustments are made?

Reasons Why Salary Adjustments Are Administered

Salary adjustments may be made for myriad reasons, but here are some typical examples:

• Internal Equity: HR coordinators may administer salary adjustments in the case of internal organization issues, such as salary compression or pay disparities, to maintain internal equity. These adjustments will be applied after conducting internal audits of pay structures and employee salaries. For instance, HR teams typically conduct a pay equity analysis comparing compensation for employees in protected groups, such as age range, religion, or disability, to ensure that the organization maintains equitable pay for all employees.
• Internal Pay Structures: Additionally, coordinators may administer salary adjustments in response to changes within the company structure, as in the restructuring of job responsibilities or a job hierarchy, for example, or work model changes, such as a company-wide shift from in-office to hybrid or remote work.
• Market Alignment: To stay competitive and promote external equity, HR and compensation professionals often benchmark internal organization salary data with market data specific to the organization’s geographic region, industry, and organization size. Ultimately, the market holds a huge influence on how HR teams navigate pay adjustments to ensure compensation stays competitive and fair.
• Legal and Compliance: Maintaining compliance with current labor laws is a necessity. Labor laws may change over time, ranging from federal mandates, such as changes to Fair Labor Standard Act (FLSA) overtime rules, to local regulations, such as county-level or municipal minimum wage rates. This makes it critical for HR coordinators to stay abreast of current labor laws, conduct internal audits, and make pay adjustments to prevent any potential legal issues due to dated salary structures.

Different Types of Salary Adjustments

As HR and compensation professionals steer through evolving pay practices, administering salary adjustments becomes a strategy in maintaining pay consistency, retaining employees, and refining pay structures. There are several types of salary adjustments that coordinators may administer for particular situations and purposes, including these typical examples:

• Market-Based Salary Adjustments: Market salary adjustments are one of the most common pay adjustments that HR and compensation professionals make. Salary benchmarking is a crucial task as this process is used to analyze an organization’s internal pay practices against the market. As the labor market evolves due to various factors, such as the economy, government regulations, and more, ensuring that salary structures and employee pay align with market standards is crucial to staying competitive, managing budgets, and avoiding potential problems that may arise from dated structures and salary data.
• Geographic Differential or Location Adjustment: HR coordinators often make salary adjustments based on location. These adjustments are based on a geographic differential, a numerical value representing the comparison of pay in a particular geographic location to the national average or between two different locations. HR coordinators apply location adjustments to maintain compensation that reflects the local labor market where the organization is competing for talent, especially if the scope of an organization reaches multiple locations. Locations may be assigned geographic differentials by city, locations within a radius, state or province, region, or country.
• Internal Equity Adjustments: Pay equity adjustments are applied to correct internal pay disparities. HR coordinators may administer pay equity adjustments after identifying specific internal pay issues, such as pay compression, tenure gaps, or inequity in compensation for employees within protected group categories, such as age range, disability, gender, national origin, race, religion, and sexual orientation.
• Cost-of-Living Adjustments (COLA): A cost-of-living salary adjustment is typically tied to economic factors, such as inflation or other cost-of-living changes. A cost-of-living adjustment is usually implemented to help employees maintain their purchasing power as living expenses rise or assist employees with relocation between areas with different cost-of-living rates.

Best Practices When Administering Salary Adjustments

When adjusting salaries, coordinators must be as accurate as possible, requiring steps to ensure that the process stays transparent, compliant, and fair. Here are a few best practices to consider when implementing salary adjustments:

• Review Your Organization’s Budget: One of the first steps in administering a salary adjustment is a budget review. With an understanding of the organization’s budget, teams will be able to identify the limitations or scope of what they are able to efficiently manage, while also averting problems caused by going over or under budget.
• Understand the Salary Adjustment Justification: It is important to identify the reasons behind a salary adjustment in order to implement the correct action and the scale of a particular adjustment, as well as effectively communicate the adjustment to the employee.
• Access Benchmarking Data: Benchmarking internal salary data against market data is a crucial aspect of salary adjustments. By analyzing market data, HR teams can make data-driven pay decisions that are accurate and effective.
• Assess Internal Pay Structures: To avoid any further pay discrepancies that may arise even after adjusting salaries, regularly assess your organization’s internal pay structures. Doing so will contribute to equitable pay across similar jobs and job hierarchies.
• Monitor Changes: After implementing salary adjustments, coordinators must monitor changes and evaluate whether these adjustments achieve a particular goal or garner the expected outcome.

Using ERI’s Assessor Platform to Administer Salary Adjustments

Salary adjustments are fundamental to maintaining fair and competitive pay. ERI’s Assessor Platform has the accurate data and resources that HR and compensation professionals need to confidently conduct various tasks in compensation management, including administering salary adjustments. ERI’s Assessor Platform provides a robust database with current salary survey data and an array of benchmarking tools to compare pay for internal jobs against market rates. With various useful applications, ERI’s Assessor Platform is the perfect solution for HR and compensation professionals to streamline and optimize essential organizational tasks.

Our Geographic Assessor makes it simple and straightforward to calculate geographic cost-of-labor differentials. Using the Two City Comparison feature, users can access decisive geographic wage differential data to set branch office salary structures, calculate adjustments for cost-of-living differences, and accurately apply location adjustments, ensuring that salaries stay consistent and updated.

Figure 1. Access cost-of-labor and cost-of-living data using the Two City Comparison feature in ERI’s Geographic Assessor.

Additionally, ERI’s Salary Assessor is your reliable solution for both salary benchmarking and comprehensive compensation management. In the Compensation Management solution, the Pay Equity feature helps HR and compensation coordinators comb through their entire employee list and compare compensation for employees in protected groups. Coordinators can utilize this solution alongside other workforce insight tools to complete pay equity audits and ensure that total compensation remains both internally equitable and externally competitive.

Figure 2. Use the Pay Equity feature in the Compensation Management solution in ERI’s Salary Assessor to easily analyze employee data and compare pay for employees in protected groups.

Moreover, ERI’s Assessor Platform boasts an extensive salary survey database that is continuously updated with the most recent market data to ensure your compensation strategy stays market competitive. Using the Survey Management resource in our Salary Assessor, compensation professionals can easily import and manage their salary survey library and make comparisons with ERI’s robust compensation database to apply data-driven market adjustments for their internal jobs.

Figure 3. Utilize the Survey Management solution in ERI’s Salary Assessor to upload your external salary surveys, compare them with ERI’s Assessor Series data, and develop an effective compensation plan.

Contact ERI for a free demo today to tap into the power behind ERI’s Assessor Platform !

Job leveling is a system used by HR and compensation professionals to clearly describe job roles and functions, while also establishing a structured framework to scale and categorize jobs into job families or hierarchies within an organization. Differing from job classification, job leveling seeks to classify and assign job titles into a structured framework that clearly defines the career pathway for a particular profession, as in the Software Engineering career pathway provided as an example below. 

Because a job leveling system helps to frame jobs within levels of relative value, complexity, and authority, it allows HR and compensation professionals to develop clear and transparent pathways for professional development and career progression. This aspect of job leveling is important to both employers and employees as it has become a strategic tool to motivate and retain long-term employees and allows employees to understand how their roles fit within the scope of the organization. 

What Makes Job Leveling Important? 

Job leveling is a working framework or system that enables both employers and employees to see how specific jobs relate to one another in terms of ranking and professional development. Since jobs are classified into clear levels, each level has a set of criteria that determines how a job fits into a particular job level, which is usually based on a number of factors, such as key skills, responsibilities, and compensation.  

As part of an organization’s greater compensation strategy, HR and compensation professionals use a job leveling system to provide a clear structure for a specific job’s role, responsibilities, and expectations, while ensuring fair and consistent compensation across all levels. Job leveling is an essential aspect of compensation management as it presents a framework for organizations to make transparent and equitable decisions regarding different job titles. In turn, it also allows employees to better understand their roles and responsibilities in an organization and how they can make a lasting impact in their roles as they progress. 

The Benefits of Job Leveling 

A job leveling system is one of the core foundations of an organization’s greater job architecture. When job leveling systems are fully developed, HR and compensation professionals can properly build out teams and manage talent. Moreover, employees can identify the skills and knowledge that are needed to progress to the next level in their careers. Here are some benefits of job leveling for employers and employees: 

Benefits for Employers 

• Organizational Consistency: Job leveling creates a consistent framework for roles and responsibilities across the organization, allowing managers and employees to better understand them and how different roles relate to one another.  

• Enhanced Talent Management and Recruitment: Job leveling facilitates better talent management and streamlines recruitment processes by identifying and attracting qualified employees or candidates and establishing clear job descriptions and levels.  

• Performance Management: With well-defined job levels, organizations can facilitate more effective review processes by providing clear expectations and feedback.  

Benefits for Employees 

• Fair and Equitable Compensation: Working from a job leveling framework ensures that employees are compensated fairly based on the complexity and responsibilities of their roles, minimizing pay disparities while promoting pay transparency.  

• Defined Expectations: Through job leveling, job roles and responsibilities are thoroughly and clearly defined, maintaining transparency regarding company expectations and how employee performance will be evaluated.  

• Clear Career Pathways and Advancement: Job leveling provides a comprehensive pathway for career advancement and explains how different roles are structured. Additionally, employees are able to understand and track advancement opportunities and stay motivated to work. 

Implementing a Job Leveling System 

Creating an effective job leveling system requires that HR and compensation professionals consider the goals and trajectory of the organization. Similar to setting up other organizational frameworks, a job leveling system involves multiple factors: 

1. Evaluate the current market and your organization. The very first thing that HR teams should do is consider the current market and how particular practices will influence and inform the job leveling framework. When evaluating current market practices, recognize that your team will be recruiting from competing organizations, so identify common job levels and career paths that are effective in attracting and retaining talented employees. By doing this, your team will be able to build an effective and data-driven job leveling system that meets current market trends and expectations, ensuring your organization stays competitive.  
2. Conduct a job analysis. This next step is the most critical—conducting a job analysis. A job analysis entails collection information for a specific job, such as the job description, roles, responsibilities, and salary. The key is to gather as much information on different job titles as possible and stay organized. To help with this process, HR and compensation analysts can turn to ERI’s Occupational Assessor to complete a job analysis using the Position Analysis Questionnaire (PAQ), a structured job analysis questionnaire that aids the user in conducting a quantified analysis of a given job. The questionnaire can be used to complete several crucial tasks: 

• • Determining the hierarchy of jobs and suggesting pay structures 

• • Identifying the important dimensions of each job 

• • Establishing content validity requirements of jobs 

• • Evaluation and classifying jobs 

• • Developing dimensions for appraising job performance 

• • Grouping jobs into job families/career ladders 

The PAQ Analysis module in ERI’s Occupational Assessor also includes a PAQ Library to store your PAQ analyses online securely and export a variety of related reports, as well as an array of resources to guide your job analysis process. Using the PAQ, HR and compensation analysts can easily and accurately conduct a job analysis of any job, allowing them to set the foundation for a working job leveling system. 

3. Consider the key criteria that will be used to evaluate and assign jobs into levels. After conducting a thorough job analysis, use your findings to identify the key criteria that will be used to evaluate and differentiate jobs amongst your job levels. Consider the      complexity and value of each job, whether each level requires particular skills or certifications, how they will be measured, and how each job fits into the greater job architecture.  

For this step, utilize ERI’s Assessor Platform to gain access to relevant and current job-related information on more than 18,600 job titles in more than 1,100 industries. In your account, you will be able to import and manage a comprehensive list of internal jobs, customize job descriptions and responsibilities, and add skills and certifications as they relate to that specific job.  

Figure 1. Using the My Organizations solution in ERI’s Assessor Platform, subscribers can import customizable internal job titles, create AI-generated job descriptions, and apply specific experience levels and salary ranges.  

Figure 2. Using the Adjustments feature, subscribers can apply pay premiums for education, skills, certifications, direct oversight, and shift work.  

Using ERI’s Assessor Platform, building out a job leveling system is straightforward. Our platform will help you plan job levels, differentiate between job titles, and inform your next steps.  

4. Structure your job levels. Now, you want to begin building out your job levels. Make sure each level reflects the complexity and value of the various jobs in your organization, labeling each level to represent the different levels of jobs and roles. For example, you could utilize a common, numerical labeling system with “Level 1” representing entry roles, and “Level 3” representing the more senior roles within the framework.  

5. Assign jobs to the levels. With the job levels established, your team can now assign each job to a level, utilizing key criteria that you have identified and carefully evaluating every job to ensure that each assignment stays consistent and makes sense within the company’s greater job architecture. In this step, make sure to compare jobs against one another so that you can determine the complexity of each job in relation to another.  

Below, you will find an example of a job leveling framework (also known as a job leveling matrix) for the Software Engineering career pathway. 

Level 1: Entry-level Software Engineer

Collaborates with senior leaders and other product team members to develop applications to enhance productivity and to create secure, reliable, and scalable software solutions within the Software Department and in all other related departments.  Scope: Works on defined tasks under supervision of the Lead Software Engineer.  Technical experience: 0-2 years  Responsibilities:  Configures solutions to align with evolving business needs, documents major portions of code, executes changes, and writes automation scripts for infrastructure and appropriate test cases.  Works on software applications, where performance, reliability, and scalability are essential design goals.  Skills:  Understand basic data structures, algorithms, and debugging.  Proficient in at least one programming language.

Level 2: Software Engineer

Develops, researches, designs, implements, tests, and evaluates software and systems, in conjunction with hardware product development, that enables computers to perform their applications, applying principles and techniques of computer science, engineering, and mathematical analysis.  Scope: Works independently on moderate-sized projects.  Technical experience: 2-5 years  Responsibilities:  Formulates and designs software system, using scientific analysis and mathematical models to predict and measure the outcome and consequences of design.  Develops and directs software system testing procedures, programming, and documentation.  Skills:   Knowledge of system architecture and development.   Solid understanding of software design principles.

Level 3: Lead Software Engineer

Responsible for leading the design, development, and implementation of software solutions within the organization. This role involves collaborating with cross-functional teams to enhance and maintain the company’s software systems. Strong problem-solving skills and technical expertise are essential for success in this role.  Scope: Leads and directs complex projects.  Technical experience: 5-8 years   Responsibilities:   Leads and mentors junior Software Engineers in coding best practices and project execution.  Communicates project status and updates to upper management and key stakeholders.  Designs and delivers complex technical features end to end.   Skills:  Understands scalability, reliability, and performance considerations.   Advanced technical and project management skills.

Level 4: Principal Software Engineer

Manages all phases of technical engineering projects for an organization, provides guidance to the engineering teams working on the project, and assures the successful achievement of project goals.  Scope: Company-wide technical authority and visionary.   Technical experience: 8-12+ years  Responsibilities:  Oversees the conception, design, and initial specifications of a product or project, which may include mechanical, civil, electrical, chemical, or computer engineering; manages scheduling; and estimates and secures materials.  Plans, directs, and implements advancements and improvements in project or product designs and implementation methods.  Skills:   Shapes long-term technical strategy.  Anticipates and solves highly complex and ambiguous problems.

Figure 3. Example of a job leveling framework for the Software Engineering career path

Job Leveling Best Practices 

It is important for HR teams to recognize that each organization requires a unique and customized job leveling system. After carefully constructing your organization’s job leveling system, consider these best practices to guarantee it stays effective and competitive: 

• Ensure that each level is clearly defined. When each level in your job leveling framework is clearly defined, it presents each step transparently, especially for employees who are interested in progressing in their careers.  

• Consistently update and communicate your job leveling system to employees. It is typical for job roles to adapt with organizational changes. This makes it important to consistently update your system, from the essential job description to how the role fits in the evolving organization. These updates could ultimately impact how each job is ranked or even influence pay grades. It is also essential to communicate these structural changes to employees so they are able to keep track of their career pathways. 

• Consider each job individually. Treat each job with equal value when conducting a job analysis and assigning it to a job level. You will be able to gain a holistic perspective of each job and how it individually impacts the organization. 

Use ERI’s Assessor Platform to Build Your Job Leveling System 

Implementing a job leveling system in your organization is essential in attracting and retaining top talent. An effective job leveling system will contribute to successful recruitment of new candidates while ensuring that job descriptions and job hierarchies stay consistent across the organization. This is where ERI’s Assessor Platform comes in to streamline your process, keeping track of your organization’s job titles, compensation plan, and more. Master compensation management with ERI, and it will soon become an essential platform in your organization. Contact us for a free demo today! 

A foundational understanding of basic quantitative principles is a necessity for HR and compensation professionals involved in salary planning. Mathematics is used constantly when managing compensation within an organization, so understanding how mathematics can be applied to ensure an accurate analysis of salary survey data is critical in the development, administration, and monitoring of salary plans. In short, learning how to analyze salary data is a vital skill for HR and compensation analysts to master.  

Compensation analysts are heavily relied on to analyze compensation and survey data to help streamline the compensation management process in an organization. Their insights and conclusions on collected survey data will ultimately help guide the direction and development of an organization’s compensation plan, in addition to being key in attracting, retaining, and motivating top talent. 

As part of our ongoing series in helping professionals understand the ins and outs of becoming a Compensation Analyst, we will focus here on a few foundational quantitative methods that are commonly used in compensation as it pertains to analyzing survey data. In this blog, we will examine the following: 

• The importance of mastering basic quantitative principles to accomplish essential tasks, such as compensation management, salary administration, and accurate interpretation of survey data. 

• Understanding which tasks require a grasp of these foundational quantitative skills. 

• A cursory look at the most common, basic quantitative methods in compensation planning and management — the mathematics needed for success — and how they are used in salary administration. 

The Importance of Mastering Basic Quantitative Principles in Compensation Management 

First and foremost, salary administration is a complex process requiring mastery of many analytical and quantitative skills in order to administer and manage compensation competently and successfully. A significant part of being a compensation analyst is understanding when to apply these skills and how to effectively incorporate these findings into a specific organization’s current compensation strategy.  

One of the main tasks of a compensation analyst is to assess and perform analysis on collected compensation data and prepare wage and salary data to facilitate compensation management functions of an organization. You can imagine that quite a few of these tasks require basic quantitative principles. 

Here are a few examples of tasks that commonly require the mastery of core foundational quantitative skills: 

• Analyzing and interpreting salary survey data 

• Building and managing a salary structure 

• Implementing salary increases 

• Accounting for geographic pay differentials 

With our Distance Learning Center (DLC) you can soon become an expert in successfully applying these quantitative skills. ERI gives professionals the opportunity to enrich their skill set with the Compensation Analyst Credential (CAC), plus additional continuing education courses. This online credential teaches the basics of salary planning and administration, allowing you to diversify your skill set and demonstrate your knowledge of compensation management and salary administration. 

Common Quantitative Principles Used in Salary Administration and Compensation Planning 

In salary administration and compensation planning, there are a few core quantitative principles needed for compensation analysts to complete their tasks accurately and effectively. 

Interpreting Salary Surveys 

Compensation analysts are exposed to many salary surveys, making learning how to analyze salary data accurately an essential skill. With salary surveys being widely used in salary administration to conduct essential tasks, such as setting pay, examinations must render an accurate analysis from the myriad salary surveys that are available. This entails measuring the average, median, and mode. 

Average 

Measuring the average pay of the positions surveyed is one of the most important aspects of analyzing data. The following three averages are the most common averages used in compensation analysis: 

• Arithmetic mean: The most common form of average, it is simply the sum of all the observations divided by the total number of observations. 

 When is this used? A common example of arithmetic mean is finding the average pay for a specific job found among all utilized salary surveys. 

• Geometric mean growth rate: This average is used when you need to look at trends in the average salary for a particular job over time, especially when salary values build on each other. This is used when trying to find the average annual salary increase for a job over a span of years, accounting for compounding. An example would be calculating the salary increase from 2019 to 2023, where the average salary for a job was $50,000 in 2019 and $58,000 in 2023: 

(58,000/50,000 )1/4  − 1= (1.16)1/4 – 1 ≈ 1.0377 – 1 =0.0377.   

Therefore, 3.77% per year would be the annual salary increase from 2019 to 2023 for this job. 

• Weighted average: This average is used to calculate the overall average salary for a job, accounting for the number of incumbents reported by each survey. Each survey’s reported average salary is multiple by the number of incumbents, summed across all reporting surveys, and then divided by the total number of incumbents. 

Weighted average = Total salary dollars across all companies / Total number of incumbents  

When is this used? Weighted averages are used to represent the true average across an entire population, rather than a simple average that gives equal weight to each data point regardless of size. This ensures larger organizations with more incumbents in a role have a proportionate impact on the final average. 

Median 

Since the average can be significantly affected by high or low values, computing the median is often favored, giving compensation analysts a more accurate measure of the middle of a salary distribution if it has outliers.  

The median is the middle value in a data set when the values are arranged in order. The median is often referred to as the midpoint of a distribution, such as the following data set with 50 as the median: 

[25, 38, 38, 50, 60, 68, 95] 

Mode 

The mode is used by compensation analysts to find the most frequently occurring salary in a survey. The mode can be identified by rearranging the salaries in groups, allowing analysts to clearly see which value occurs most frequently. For example, the data set below has a mode of 38: 

[25, 38, 38, 50, 60, 68, 95] 

Establishing and Administering Salary Structures 

Now that you understand some of the basic, core mathematical tools used in analyzing salary surveys, let’s turn to learning quantitative methods to establish salary structures and perform salary administration. 

A salary structure is composed of an organization’s hierarchy of jobs, which is based on grades, ranking, or job evaluation points, and their associated pay ranges. Salary structures are also used by HR and compensation coordinators as a framework to determine how much an organization’s employees should be paid. An organization’s salary structure can also be seen as the physical representation of their compensation strategy in action, making the maintenance of salary structures a critical component of compensation management.  

The proper maintenance of an organization’s salary structure can translate to several positive outcomes: 

• Staying competitive as an employer, attracting and retaining top talent 

• Maintaining accurate information on an organization’s expenses  

• Incorporating the space and opportunity for pay raises  

The proper development, administration, and monitoring of salary structures are critical responsibilities for compensation analysts. When creating salary structures, there are a number of quantitative methods that compensation analysts must utilize:  

• Market index: This is the company’s current pay rate for a job compared to the market rate for the job, expressed as a ratio. The market index is calculated as follows: 

• Compa ratios: This is the company’s current pay rate for a job compared to the range midpoint for the job. This is how you determine a compa ratio:  

• Pay grades: These are groups of jobs ranked and grouped based on similar market value or internal worth, typically resulting in fewer groups than total individual jobs. Each pay grade contains jobs with similar compensation levels, even if the duties differ. 

• Salary range: This is the spread of pay given to a job or group of jobs, defined by the minimum and the maximum. Salary ranges allow an employer to recognize differences among employees performing the same or similar job but at different performance or experience levels. 

Note: Pay grades and salary ranges are used as tools, usually represented through functioning graphs, to manage the financial progression of employees within an organization. Often, determining the market index and compa ratios helps compensation analysts develop pay grades and salary ranges in a salary structure.  

 From here, the salary structure is used as a framework to help define, regularly review, and manage the salary administration process. 

Implementing Salary Increases 

As part of continuous monitoring and management of an organization’s salary structure, compensation analysts encounter common tasks, such as implementing salary increases. When implementing a salary increase, compensation analysts have to create a salary formation formula. 

For example, let’s assume that an organization has the following salary structure: y = 8.34x + $2,400. The salary structure is based on a point evaluation system, with 100 representing the bottom and 900 representing the top of the structure. Salaries at the bottom of the structure are increasing at a 6% rate. Salaries at the top of the structure are increasing at a 12% rate. To determine the new salary formation formula, there are a couple of steps to take: 

First, calculate the salary increase for the bottom and top of the structure separately.  

Calculate the bottom of the structure as follows: 

y = 8.34x + $2,400 

y = (8.34) (100) + $2,400 

y = 834 + $2,400 

y = $3,234 

$3,234 x 1.06 = $3,428.04 

Calculate the top of the structure as follows: 

y = 8.34x + $2,400 

y = (8.34) (900) + $2,400 

y = 7,506 + $2,400 

y = $9,906 

$9,906 x 1.12 = $11,094.72 

Then, solve the two equations simultaneously to find the new structure by calculating the slope, using this equation: y = mx + b 

$11,094.72 = (m)(900) + b 

– $3,428.04 = (m)(100) + b 

$7,666.68 = (m)(800) 

m = 9.583 

Substitute “m” into one of the original equations to solve for “b”: 

$3,428.04 = (m)(100) + b
$3,428.04 = (9.583)(100) + b 

$3,428.04 = 958.3 + b 

$2,470 = b 

Here is the new structure equation: 

y = 9.583x + $2,470 

Accounting for Geographic Differentials 

For organizations of a larger scale, accounting for geographic differentials plays an important role in determining salary and cost-of-living adjustments. Disparate locations may have widely different pay for the same jobs due to various factors, such as the supply and demand of labor or even differing state legislation.  

Geographic differentials are represented through percentages to compute differentials between two or more areas. Let’s say the national average salary for an executive secretary is $65,00,000, and California’s salary index is 22% above the national average. To determine the salary of an executive secretary in California, multiply the national average salary of the job by the specific salary index for the location. For this example, finding the salary for an executive secretary in California is computed as follows: 

$65,000 x 1.22 = $79,200 

ERI as Your Resource Center 

ERI’s Compensation Analyst Credential (CAC) designation is a smart choice for continuing education and career development. From the ease of your computer, you can become an expert in the field of compensation, mastering foundational concepts, such as basic quantitative principles in compensation management. Through ERI’s Distance Learning Center (DLC), you will have access to a library of resources for HR and compensation training. At the tip of your fingers, ERI is your trusted resource center to spearhead your achievements and success.  

If you have any questions about the Compensation Analyst Credential (CAC) designation or other resources provided by ERI’s Distance Learning Center, please email [email protected]