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Understanding and Leveraging Percentiles in Salary Survey Data

Posted on | by ERI

Accurate data and insights form the foundation of effective salary surveying and benchmarking strategies. Percentiles are a key component of salary survey data, and a compensation team’s methodology for using this salary survey data can greatly affect compensation outcomes. This blog is dedicated to demystifying the role of percentiles in salary surveys, emphasizing their critical role in shaping fair and competitive compensation strategies. 

What Are Percentiles? 

Percentiles offer a measure that indicates the relative standing of a salary within a broader salary range. By arranging salaries from lowest to highest, percentiles reveal what proportion of salaries falls below a particular value. For example, the 25th percentile marks the salary below which 25% of observations lie, offering insights into what we typically see as entry-level or less experienced compensation for a given data cut. As a further example, around the 75th percentile (and above) typically reflects the compensation of a more experienced employee, providing a benchmark of top-tier salaries to effectively compete for top candidates. 

Figure 1. Salary Percentile Distribution: This sample pay distribution illustrates a range of salaries across the market, delineated by key percentiles. The median represents the middle point of reported market salaries; the 25th percentile and below represent entry-level or less experienced workers; and the 75th percentile and above represent high salary thresholds that typically reflect workers with extensive skills and experience.

The practice of reporting salary survey data by percentiles is driven by the need for a nuanced understanding of salary distributions. Unlike mean salaries, which can be skewed by outliers, salary percentiles paint a detailed picture of salary variability and market competitiveness. Percentiles data offer a comprehensive view of salary distributions that go beyond the mean or median pay estimates. The granularity provided by a broad range of percentiles allows organizations to align their compensation strategies with market realities, ensuring that they can attract and retain job candidates by looking at the full range of the market rather than just the average compensation. 

Utilizing Salary Percentiles for Compensation Planning

Utilizing percentiles enables organizations to accurately position themselves within the competitive labor market. Salary percentiles are vital in identifying whether an organization’s pay scales are aligned with their market, whether current wages require adjustment to secure talent, or if an organization is positioned as a market leader in compensation. 

In the context of salary increments, percentiles function as a comparative guide. Identifying positions or employees whose compensation falls below the desired percentile allows for targeted adjustments, aligning salary structures with market trends and organizational objectives. For example, getting a market index based on the 50th percentile, particularly for executive titles which are typically surveyed by the median, allows organizations to mathematically calculate whether their internal salary is 100% matched to the market, in which case, they would receive a market index of 1 within ERI’s Assessor Platform. Otherwise, organizations can see if they fall below or above the median market index in order to make adjustments to a pay package. 

Figure 2. The market index is a ratio of your internal salary to the reported market median (or mean). A market index of 1 means that your internal job’s salary is in line with the mean salary of the survey job. Values above 1 indicate that the employee’s salary is above the reported market median. Values below 1 indicate that the current salary is below the market median. The actual salary of this sample employee indicates that their salary of $500,000 is 14% above the market median of $436,761.

Additionally, percentiles are crucial in developing and establishing salary ranges that promote internal equity. For example, setting the minimum pay for an internal position based on the market rate at the 25th percentile, while setting the maximum pay for the position near the market’s 75th percentile, allows for a structured progression that is competitive and equitable. Fairness and transparency in compensation planning help employees appreciate the market relevancy of salaries. Establishing a company’s pay grades relative to specific percentiles aids in maintaining consistency across roles and experience levels. A minimum-maximum approach is instrumental in defining pay grades, enhancing the clarity and consistency of compensation policies. When using percentile data to adjust pay grades, it is important to establish a baseline and then monitor the market’s movement. If, for example, the 50th percentile for a position increases due to market trends, then an organization may decide to adjust its median pay accordingly. 

To tailor salary data to unique organizational needs when specific data points are missing, percentiles can be a powerful tool. For example, when adapting roles beyond standard survey levels (which may only provide Level 1 to Level 3), organizations might align a hypothetical Level 4 position with the 90th percentile of a Level 3 benchmark, reflecting the heightened expertise and experience expected at Level 4. This approach is similar to the previously discussed method of looking to lower percentiles for less experienced employees, and higher percentiles for compensating extensively skilled employees. This allows for flexibility in compensation planning, enabling firms to match their specific circumstances with broader market data. 

The Importance of Understanding Percentiles

A thorough understanding of percentiles and how percentiles work in compensation planning transforms their complexity into a compelling strategic tool. This depth and granularity in analyses equips organizations to make well-rounded compensation decisions that balance market competitiveness with internal fairness. Organizations may develop flexible compensation structures that can adapt to insights derived from percentile analyses. This flexibility allows for responsive adjustments to emerging trends and competitive pressures. To effectively use percentiles, HR professionals should conduct a thorough compensation market analysis, considering factors such as industry, geographic location, and job function. This comprehensive approach ensures that percentile-based benchmarks are accurately aligned with the organization’s specific circumstances.

Key Takeaways

The application of percentiles in salary survey data is a practice that underpins effective compensation strategies. By offering detailed insights into salary distributions, percentiles enable HR and compensation professionals to make informed decisions that align with both market conditions and organizational goals. As organizations strive to navigate the complexities of compensation planning, the strategic use of percentiles will continue to be an invaluable asset, ensuring that compensation practices are not only competitive but also equitable and transparent.  

This blog is designed to enhance the toolkit of HR professionals, equipping them with strategies for benchmarking salaries and formulating compensation plans. Beyond integrating insights from percentile data, it is important for strategies to also reflect external influences, such as economic changes, regulations affecting wages and equity, and industry developments. By integrating a comprehensive approach to percentile data, organizations can drive continued success and employee loyalty.  

Internal vs. External Equity: What’s the Difference?

Posted on | by ERI

Ensuring that employees are competitively compensated relative to the external marketplace and their peers is an essential two-part function of the compensation plan. This analysis reflects two sides of the same coin: equity.  Equity pay entails ensuring that all employees in an organization receive unbiased total rewards based on permitted internal and external factors. Equitable compensation has many benefits: reducing turnover, increasing cooperative behavior, decreasing counter-productive behavior, and ensuring legal compliance. The General Fair Pay Act provisions allow employees to disclose, discuss, and ask about their wages. Both employers and employees have a vested interest in making sure that pay is fair and that differences are not based on sex, race, ethnicity, or other protected categories.  Ensuring an equitable pay strategy is a complex issue.  Internal and external equity analysis allows an organization to evaluate its compensation plan based on the fairness of employee compensation.

What’s the Difference? 

Internal equity refers to fairness of pay among current employees working for the same company and performing the same or similar jobs. An analysis of internal equity ensures that fairness is maintained throughout the organization based on similar responsibilities, performance, knowledge, skills, and experience.  A good review is contingent on accurate job analyses and descriptions, not just job titles (which may be inflated), to provide the appropriate comparators.  Pay grades are an example of a process that is designed to ensure internal equity. These structures ensure that individuals in an organization are compensated in a consistent manner relative to their peers, supervisors, and reports.

External equity refers to fairness of pay against the external market.  External equity compares what the company is willing to pay for talent versus what outside organizations competing for the same talent are willing to pay.  It provides a basis for competitive job offers, salary adjustments, and salary structures. Equity exists when employees are rewarded fairly in relation to those who perform similar jobs in other organizations. 

Both internal and external equity factors are important tools used to define and implement a solid compensation strategy, resulting in effective management of employee total rewards. With the majority of expenses attributable to labor costs, consideration of both is vital to providing fair, equitable compensation and the ability to attract and retain the best talent. 

Why Do Internal and External Pay Equity Matter?

Internal equity looks inside the organization to compare salaries and wages of employees in the same jobs.  Analysis determines if the differences in pay are attributable to legitimate factors, such as performance or experience.  If analysis reveals that a protected group is paid at a lower rate than the norm, further analysis is required to determine if pay practices (intentional or not) are creating disparate treatment.  Perception is a key factor in internal equity.  Employees often compare themselves to others who they believe are in comparable positions, but HR must know the jobs that they are comparing.  This can create tension and lower morale.  The result may be regrettable turnover or employees interviewing and receiving job offers in order to force the employer to evaluate and perhaps make a counteroffer, leaving the employee wondering, “Why not just pay me what I’m worth from the very beginning?”  This can cause resentment in an otherwise effective and productive employee.

External equity looks at factors such as market, company size, revenue, sales, location, and industry to compare salaries for qualified workers. This is typically accomplished using compensation surveys.  The average salary for benchmark positions provides information to help determine if companies are paying their employees competitively.  It is important to pay attention to market changes and stay current because failing to keep up with the competition can lead to the loss of valuable employees.

A review of all jobs on a regular basis (at least annually) helps to keep an eye on compensation, to make necessary adjustments, and to ensure the compensation strategy remains fair and equitable.

Having access to salary survey data and the resulting analyses, as well as taking the time to review your jobs, the organization’s needs, and strategic goals, are all critical to developing a solid understanding of the current labor force, both internal and external.

Both internal and external equity warrant consideration; one is not more important than the other. Both should be considered when determining and maintaining a pay strategy that supports the organization’s strategy.  The perception of fair pay is an important factor which can have a positive or negative effect on morale, productivity, and employee engagement. 

It is important to communicate regularly and honestly with employees about total rewards.  Provide total rewards statements to educate employees, highlight perquisites, and explain benefits, in addition to base pay.  Communicate the entire compensation package.  Employees are savvy when it comes to their salaries and want to know that they are getting the package that meets their needs and expectations, just as the company does.   For more information about total compensation and how to calculate total pay while taking into account internal and external equity, utilize ERI’s Salary Assessor.

How To Calculate Shift Differentials

How to Calculate Shift Differentials

Posted on | by ERI

A widespread practice among industries characterized by around-the-clock operations is to incentivize employees to work less-than-desirable hours (or shifts) with premium pay above the base rate. A typical standard work week consists of eight hours somewhere between the hours of 6:00 am and 6:00 pm; anything beyond those hours requires the worker to adapt to an alternative schedule to accommodate family and lifestyle. Less desirable shifts include evenings, nights, and perhaps weekends. While not legally required, many companies voluntarily offer shift differentials, which are additional compensation for employees who work outside “normal” work hours, ensuring staffing for 24/7 operations. The premium most often applies to non-exempt, hourly workers; however, in unusual circumstances such as the pandemic, some organizations may elect to provide a “bonus” to exempt employees working additional shifts to cover a shortage of workers, as an example. Common industries with shift differentials include health care, hospitality, manufacturing, retail distribution or fulfillment centers, and security.

Employers determine the rates for shifts, often based on data and common industry practices reported in relevant salary surveys. The shift differentials are created and applied to specific jobs, positions, or groups of workers, not to the individual employee. In a union environment, these differentials are often included in bargaining and negotiations; but, if there is a choice between differentials and a percentage to base pay, most unions would prefer the additional percentage to base pay.

If permanently assigned to a shift, the base pay rate may reflect a higher rate. However, if shifts vary, companies pay the premium rates only for the duration of the shift. Once the shift assignment is over, the shift differential is no longer applied. If an employee temporarily picks up the graveyard shift, then he or she will want to be properly paid for the less desirable work hours. So, accurate accounting is critical.

There are several ways to calculate premiums for shift differential pay:

  1. Percentage of base rate:

    The employee’s hourly rate is multiplied by a set percentage depending on the assigned shift. The additional amount is added to the rate and multiplied by the total number of hours worked on that particular shift.

     

  2. Additional dollar amount per hour:

    A premium rate is determined for all employees working a certain shift regardless of base rate. So, three employees earning $15, $20, and $22 per hour and working the night shift would each earn an additional $4 per hour, bringing their rates to $19, $24, and $26, respectively. The rates inclusive of the shift differential are multiplied by the number of hours worked during the shift to determine the earnings. Utilizing night shift differentials can help benchmark total pay and accurately price night shift roles, considering compensation differences between shifts.

     

  3. Specific dollar amount per shift:

    A set dollar amount is determined for working the shift, regardless of rate of pay. If the three employees mentioned above work the evening shift for the full five-day work week, then they each would receive an additional $2 per shift worked, or an additional $10. This amount is added to the earnings and divided by the total hours to determine the new rate of pay (for calculating overtime rates).

     

Shift Differential Example:

For example, an employee earns an hourly rate of $25.00. If assigned to work eight hours during the evening shift for two days of a weekly pay period, earnings are calculated as follows:

In each instance, total weekly earnings are $1,000. Of course, the rates have been simplified for the purposes of this demonstration. Shift differentials are not a legal requirement, so companies are allowed to determine the shift differential amounts and means of calculation. The compensation team would review historical payroll and employee data and project the need for the various shifts and labor, calculate the costs to the bottom line, and determine a rate that is both attractive to those working these shifts and cost efficient for the organization.

ERERI’s Salary Assessor includes a shift differential calculator for day, evening, or swing shifts. To learn more, visit ERI or contact ERI to schedule a guided tour.

What Is the Difference between Median and Mean Salary?

Posted on | by ERI

Median literally means “the middle.” It refers to the middle value of a series of values arranged in numerical order, from smallest to largest. There is an equal probability of a value falling above or below it.  If there is an even number of values, then the median is calculated by averaging the two middle values. 

Half of the salaries fall below the median and half are greater than the median value. 

  • The median salary of the series $55,000, $162,000, $176,000, $185,000, $193,000, and $200,000 is calculated by adding $176,000 and $185,000, then dividing by 2 to get the average of the two middle values.  In this case, the median salary is $180,500.

Again, half of the salaries fall below the median and half exceed the median value. 

The term mean refers to the average value of a dataset; specifically, the sum of the values divided by the number of values.  Using the data above, the average salary in the first example is:

  • ($55,000 + $162,000 + $176,000 + $185,000 + $193,000) / 5 = $154,200

In the second example, the average salary is:

  • ($55,000 + $162,000  + $176,000 + $185,000 + $193,000 + 200,000) / 6 = $161,833

When to Use Median Salary vs. Mean Salary for Compensation Benchmarking 

Depending on the nature of the data, either the mean or the median may be more useful for describing the center of the dataset.   Both estimate the location of the center of the dataset.  They may seem similar, but significant variations can occur when comparing the median salary with the mean salary.

The difference comes in when there are outliers in the data. A few people earning a much higher salary than normal can skew the results to make it look like it is normal to earn more. This is important in determining where most employees’ salaries are expected to fall, given the same or similar skillset, years of experience, education, and knowledge.  It can help determine or validate the salary midpoint and range, as well as setting salaries for new hires, offering promotions, and evaluating the salaries of current incumbents. 

The mean can be misleading if there are outliers in the data set.  In the first (very simplified) example referenced above, the median salary of the dataset provided is $176,000, while the mean salary is $154,200.  The relatively low salary of $55,000 is much lower than the other salaries in the series.  This salary may be explained by entry-level employees with minimum qualifications and little to no experience as compared to employees with many years of experience and proven performance, knowledge, skills, and abilities.  Using the median value versus the mean results in a $20,000 difference in salary.

Advantages of Using Median Salary

In general, the median is a better indicator than the mean for measuring typical values. It is not significantly changed by outliers. When a distribution is skewed, the median does a better job of describing the center of the distribution than the mean. It is best to use the median when the distribution is either skewed (i.e.,  there is a higher number of values at the top or bottom of the distribution) or there are outliers present.

The mean, however, is very sensitive to the most atypical values, especially very high or very low values.  If there are no outliers in the dataset, then the mean can be used since the distribution would be fairly symmetrical (a bell curve distribution).  It is best to use the mean when the distribution of the data values is symmetrical and there are no clear outliers.

For six employees with a range of salaries of $16,500, $18,000, $18,000, $20,000, $21,000, and $45,000, the mean salary is $23,083.  This salary is actually higher than five of the employees, but still much less than the highest earner.  The median salary is not as likely as the mean salary to be skewed by outliers (e.g., an extremely high or low salary that only a few people may earn).  It may not seem like much, but it can give an inaccurate view of how much most people make in the field.

When considering a larger set of numbers or industries where there are a few people who are paid extremely well, the median can give an even more inaccurate view of the typical salary. This can also occur with a few extremely low-paid outliers, which would result in a lower mean salary. Using the median approach eliminates the skewing that can happen due to the extreme salaries in the data. The median salary in the example above is $19,000, which is more in line with what the majority earns. 

This is critical information when reviewing the salaries of incumbents for job offers, especially where limited or no market data are available.  The median salary is considered more neutral than the mean salary.  A mean salary that is much higher than the median indicates salary outliers, where some employees earn much more than the overall group of employees.

Both mean and median salary calculations are useful and should be reviewed beyond the simple, straightforward mathematical equations to determine the best use of each in any given situation.  As with all compensation, it is a balance between “art” and “science” and requires a bit of detective work to investigate which is most relevant and meaningful.  Learn more about how to accurately compare mean versus median in terms of salary compensation and how mean and median salaries affect benchmarking for total compensation at ERI.