Jingcong (“JC”) Zhao is a Content Marketing Manager at PayScale. She enjoys sharing ideas and stories on how compensation professionals, HR leaders and business leaders can build winning organizations.
As HR professionals, we may not need to be experts in math and statistics—but most of us need to have an understanding of compensation metrics. After all, understanding the key metrics is a crucial part of managing your organization’s compensation plan.
In this piece, we’ll dive into the eight most common and useful compensation metrics and show you how to apply them in your compensation plan.
1. Pay Range
A pay range is the upper and lower limit of compensation and includes a minimum, midpoint, and maximum.
Why It’s Useful
The pay range is really the starting point for any pay structure. Some companies will build a range for every job, referencing the market value for each and building a range around that market value.
If you have so many jobs that the administration and maintenance of job-based ranges are too cumbersome, you can create job grades and ranges. Jobs with similar internal and market values are assigned the same range of pay and the same grade level. Using this method allows you to place jobs with no market value into the structure, grouped with jobs that have a similar internal value. For more information on building a pay structure, see PayScale’s Leveling Guide.
2. Range Midpoint
The range midpoint is the exact middle of the range, equidistant from the range minimum and range maximum, and aligned to the market value of the job.
Why It’s Useful
The range midpoint is one of the most important details in your compensation plan. If you’re building pay ranges for your jobs, then your range midpoint should be the same as the market value for your job at your target percentile (we’ll explain that in a bit). In a grade or job and range structure, all jobs of similar market value are assigned to a grade with a range midpoint that is closest to the average market value.
The range midpoint is considered the proficiency point for the job. Employees should be hired in at the range minimum and as they gain proficiency, their pay should approach the midpoint. The midpoint should be evaluated annually and is the point in your ranges that you would adjust to keep your structure competitive with your pay strategy.
3. Range Width or Spread
The range width or spread = range maximum – range minimum
Why It’s Useful
The width of the range reflects the extent of salary increase opportunity for the jobs in the range. Wider ranges are usually used for higher level jobs where there is a greater need to differentiate how incumbents in that range are paid. Narrower ranges are more common for jobs where there isn’t a lot of variance in how the market pays for that job and there is less need to differentiate between how incumbents in a single job are paid.
While there is no hard rule on what range spreads should be, it is common to use 30-40 percent for hourly or contract positions, 40-60 percent for entry to mid-level professional or managerial positions, and 60-70 percent for executive positions.
Compa-ratio is one of the most referenced compensation metrics out there. This metric measures the relationship between the salary of an employee (or a position) and the midpoint of the pay range for that employee (or position).
Campa-Ratio = The Salary Divided by the Range’s Midpoint
Therefore, if someone is earning the exact amount of the midpoint of their salary range, their compa-ratio will be 1.0 (or 100 percent).
Anything less than 1.0 means that they’re earning less than the midpoint. Anything more than 1.0 and they’re earning more than the midpoint.
For example, let’s say the range for Sally’s position is $60,000 to $90,000 and the midpoint is $75,000. Sally’s pay is $70,000. Her compa-ratio would be $70,000 / $75,000, which equals .93.
This tells us that Sally is currently earning 93 percent of the midpoint of her salary range.
Why It’s Useful:
Use this metric to see which employees are earning significantly less (or more) than the midpoint of their range, and thus need a raise (or a pay freeze).
When you look at your compa-ratios at the group level, you can start to gain more insight. For example, you can group employees by performance rating and see if your company is truly paying for performance the way you intended. Other useful groupings could be by functional or geographic location.
5. Salary Range Penetration
Range penetration is a compensation metric you should look at in conjunction with a compa-ratio. Rather than just being a comparison to one piece of data (the midpoint), range penetration looks at a salary in relation to the whole pay range.
Range penetration = (Salary – Range Minimum) / (Range Maximum – Range Minimum)
Using Sally as an example again. Her range penetration would be ($70,000 – $60,000) / ($90,000 – $60,000), or around 33 percent. This means that Sally’s salary is 33 percent into her range.
Why It’s Useful
Range penetration could be useful in talking to Sally about where she stands in her range and how much more room there is for her to move up in pay. What determines range penetration is how you’ve set your ranges and how wide they are. You can set one range for every position you have, or set group your jobs into several groups (known as a “grade”) and set a range for each “job grade.”
While range penetration on an individual basis can be useful, looking at where all of your employees fall within each of your ranges can help you determine if your ranges are too wide or too narrow.
Also, you can use this metric to set target levels for different categories of employees. For example, you may say that you want new hires to be within the first 25 percent of the range, and experts or consistent high performers to be in the top 25 percent of the range.
Take Compa-Ratio and Range Penetration With a Grain of Salt
Focusing too heavily on either compa-ratio or range penetration could unintentionally encourage employees to foster counterproductive, negative thoughts. If you only focus on compa-ratio, employees may start thinking “I need to be at the mid-point” or “Why aren’t I at the midpoint?” Instead, you want employees to think about their ability to grow within the organization and move through a range.
On the other hand, focusing too heavily on range penetration could encourage employees to think “I need to get to the 100 percent mark.” Having employees focused on reaching the maximum of their range could set up unreasonable expectations.
6. Target Percentile
Your target percentile is the exact point in the market where you intend to pay proficient employees. When evaluating your pay ranges to market data, the target percentile is what you will compare your midpoints against to determine if your pay ranges are competitive.
The 50th percentile – a favorite among comp professionals- is the exact middle (or median) of the market. Half of companies pay more and half pay less. When someone says they want to “meet the market” they are referring to the 50th percentile. When someone says they want to “lead the market,” they might be targeting 75th or 90th percentile. Anything under the 50th percentile is considered “lagging the market.”
It’s important to note that there cannot be a percentile greater than 100. So if your executives say they want to pay at 105 percent of market, that doesn’t mean the 105th percentile. Instead, what they likely mean is they want to pay 5 percent above meeting the market (assuming that 100 percent is meeting the market).
The market ratio is the comparison of internal pay to the market pay rate for a job.
Market-Ratio = Pay Rate / Market Rate at Your Target Percentile
A ratio of 1.00 means that the employee is paid at the target percentile. Ratios above 1.00 indicate employee pay exceeds the market value for their job and ratios below indicate employee pay is below the market value for their job. For example, a ratio of 1.07 means employee pay is 7 percent above the target and a ratio of .93 means employee pay is 7 percent below the target.
When to Use This Metric
Use this metric to evaluate how closely your organization is paying to where it’s targeting to pay. Most organizations strive to pay the majority of their employees within close proximity to their target percentile, though there are cases where it makes sense to pay employees higher or lower than your target (in the case of newer employees still in training or more tenured employees performing beyond their role).
8. Geographic Differentials
Geographic differential is the percent difference between pay for the same job in two or more locations.
Why The Metric is Useful
Due to the demand for and supply of labor, an employee may be paid more or less depending on where he or she physically works. Generally speaking, jobs in major metropolitan areas tend to pay more than jobs in rural areas, but that is not always the case. Consider that areas which require further employee travel may be compensating people more to get them to make the commute. If you operate in more than one location, it’s a good idea to evaluate the geographic differential between your two (or more) locations and adjust your pay structure accordingly.
As you already know, decisions shouldn’t be made based on metrics in a vacuum. Statistics do not tell the whole story. Rather, they should prompt you to ask questions about your people, your pay practices and whether your overall compensation strategy is still working for you. A compensation strategy should be tailored to your specific goals and needs. Understanding what exactly the metrics are and why they matter is a crucial first step to creating an effective compensation strategy.
This article originally appeared on PayScale.
If you’re nearing the 50 employee threshold, it’s time to consider implementing salary ranges. Salary ranges are the essential guardrails that help you decide how much you’re willing to pay for new hires and how you plan to reward existing talent—all while keeping your goals and budget in check.
Here’s how this approach to employee compensation can help drive serious HR and business results.
1. Consistency in Hiring
One of the biggest benefits of creating a salary range for each position is consistency. First, take the time to define your talent market, or who you’re competing with. Decide how you want to pay relative to the market (lead, match, or lag), and what you want to reward (skills, experiences, or performance). You’ll then be able to consistently hire the right candidate profile.
There are other benefits, too—including a shorter time to fill metric, decreased cost per hire, reduced time to productivity, and a better candidate experience.
2. Increase Offer Acceptance Rate
Having solid compensation ranges also allows you to make the candidate your best offer up front. If you are confident in your data, you can be transparent about how you’ve determined their initial and future compensation trajectory. This unusual practice can help build trust, weed out the wrong candidates, and lead to better outcomes for both the company and applicants.
3. Mitigate Risk of Pay Inequity
Last but not least, creating solid ranges will help you avoid pay inequities in the future. Pay equity issues are much easier to avoid than to fix.
Lets say you have two candidates, Anna and Brad. They bring nearly identical experience, and you’re offering both account executive roles. Anna is particularly excited about your company and she accepts your first offer. Brad pushes back on your initial offer, so you decide to increase it by 10 percent. While everyone might be happy initially, let's say Anna and Brad get comfortable enough with each other to discuss compensation. The disparity becomes apparent—and your approach to compensation comes under fire.
Developing salary ranges informed by market data and adhering to them is the best way to avoid pay inequity. To create ranges for your jobs, you’ll need to select the appropriate market data sources to anchor your ranges.
To learn how to choose the appropriate market data and use it to build salary ranges, check out the full ebook: Comp Is More Than Data: Why You Need Salary Ranges and How to Create Them.
This article originally appeared on Payscale.
The gig economy is here to stay. According a 2018 study by MetLife, 51 percent of U.S. workers said they were interested in contract or freelance work as opposed to a full-time job. And if freelancing continues to grow at its current rate, the majority of U.S. workers will be freelancing by 2027.
Independent workers value the flexibility, lifestyle, and professional development opportunities that freelancing brings. But more often than not, benefits and perks aren’t part of the equation. They should be.
While it may seem advantageous for businesses to not spend cash on benefits like health insurance, tax-advantaged savings accounts, sick leave or disability insurance for gig workers, this isn’t the best long-term solution.
For one, not all freelance workers have the means to secure and pay for their own benefits. Those who skipped the process altogether are put into a vulnerable position. For example, when a worker without disability insurance gets into an accident, they can find themselves without a source of income. Research has shown that worries about finances hurt productivity, and it can literally make workers sick.
In May, the Portable Benefits for Independent Workers Pilot Program Act was introduced in Congress by Senator Mark Warner (D-VA) and Representative Suzan DelBene (D-WA.). Under the proposal, states, local governments and nonprofits would get $15 million to design, implement, and evaluate new programs to provide benefits or $5 million to assess and improve existing models for portable perks for independent workers.
But even in the absence of federal protections, companies are making proactive adjustments. For example, Microsoft recently announced a new policy that requires their contractors and suppliers to bolster their paid parental leave benefits. Microsoft said it was inspired by a new Washington state law for paid parental leave that takes effect in 2020.
If your business is thinking about taking on more independent contractors, now is the time to figure out how you will apply benefits and perks to reward these workers. Providing meaningful benefits to gig workers can dramatically improve their financial security, reduce their stress level and increase their productivity. Also, your actions will speak volumes about your employer brand, which impacts your ability to retain and acquire talent.
Providing benefits to gig workers, including health insurance, tax-advantaged savings accounts, and disability insurance, is more challenging than providing benefits to full-time workers. If an employer offers benefits such as group health insurance, it could mean the organization has to classify its on-demand workforce as employees, which results in additional tax and wage requirements for a business.
Also, putting together a meaningful benefits package for gig workers is doubly hard because your gig workforce is likely more diverse than your full-time one. For example, if you have one driver who works one hour a week and one driver who works 40 hours a week, how can you reward both in a way that feels consistent and fair? Below, we’ll provide some ideas to get you started.
Making it Possible
Etsy, the online handicraft retailer, is leading the way when it comes to developing benefits for contingent workers. In 2016, Etsy published a policy proposal that outlined a new form of “social safety net” for gig workers, including Etsy sellers as well as Uber and Lyft drivers. The premise of their public policy proposal is that gig economy participants need three things they’re lacking currently:
- A single place to manage benefits, regardless of income source.
They proposed that workers should have a federal benefits portal, which would tie all benefits (retirement, health insurance, paid leave, tax-advantaged savings accounts, disability, etc.) to the individual, providing a single place to view, choose and pay for their benefits, regardless of where or how they earn income.
- A single, common way to fund those benefits. In the gig economy, workers can’t rely on payroll as the vehicle to administer benefits. Etsy proposed using tax withholdings as the universal means to administer benefits contributions, enabling both employees and 1099s to withhold their Social Security and Medicare taxes from their pay, as well as an additional percentage of pre-tax income to fund benefits.
- A way to manage income fluctuations. To mitigate gig workers’ income volatility due to the lack of income protections like unemployment insurance, Etsy put forth the idea of combining all existing tax-advantaged savings accounts (health, dependent care, parking and transformation) into a single flexible account, which anyone could use to manage short-term income fluctuations throughout the year.
Care.com, a company that helps families find caretakers for children, pets, and the elderly, has launched a “peer-to-peer” benefits program that allows families who hire caretakers through the platform to contribute to their healthcare and other expenses.
So what approaches should you consider? Mark Feffer at SHRM offered employers some suggestions on how to give freelance workers benefits without running the risks of causing them to be re-classified. Experts say that it’s important to recognize several things when designing a benefits package for gig workers.
1. It's about more than money.
First, understand that freelancers consider more than money when deciding whether or not to take on a project. To start, gig workers want to work with well-run businesses that treat them with respect.
“When we ask our customers why they liked or didn’t like a particular client, the number one thing they talk about isn’t money—it’s about the client recognizing their value and treating them with respect,” said Gene Zaino, CEO of MBO PartnersZaino, whose company provides back-office support to independent workers. “Independents want to feel as if their work is making a difference.”
With this idea in mind, you can ensure that gig workers feel respected and valued by:
- Paying them on time.
- Awarding bonuses for hitting key milestones and contributing to overall team goals.
- Including them in your company’s social events or L&D opportunities (e.g. speaker series).
- Offering discounts and deals to your company’s products for the duration of their contract.
2. Give them tangible, portable benefits.
As we mentioned, gig workers often lack the safety net that full-time employees enjoy. Give gig workers tangible benefits that can increase their spending power or otherwise improve their financial wellness. For instance, while you cannot provide paid health insurance to gig workers, you can offer them access to other health and financial benefits as long as these benefits are portable, meaning they can be accessed after their assignment ends.
For example, Uber and Etsy both provide Stride health to their gig workers. Stride is an online insurance broker that works exclusively for independent workers. The company’s online platform includes more than 230 insurance carriers, and is free for consumers.
Alternately, you may allow freelancers to participate in financial and health wellness programs your company already offers, provide them access to professional training, or access to auto, home and other types of insurance.
3. A one-size-fits-all approach will not work.
According to Jeff Yaniga, Chief Revenue Officer of Maestro Health, gig workers’ benefits should be tailored whenever possible. For example, a work-from-home mom may value a daycare benefit while a graduate student would rather have you reimbursement them for textbook purchases. The point is to make sure to ask your workers what they want.
The way you treat your contingent workforce has repercussions on their productivity, your reputation and your business results. When treat your gig workers with respect and provide them with solid benefits, you establish yourself as a progressive organization and that has ripple effects on your ability to retain and attract employees.
This article originally appeared on Payscale.
Many HR professionals fall into HR because they care deeply about making workplaces better. Day in and day out, HR teams focus their time and energy on ways to improve the employee experience. They spend a significant amount of time training managers how to hire candidates, coach employees, and evaluate performance in a manner that removes biases in pay raises and ensures a fair experience to all employees.
Yet, our latest research shows that most organizations still have a long way to go when it comes to eradicating bias in merit evaluations and increases. In Payscale’s latest “Raise Anatomy” report which surveyed workers to understand their history of asking for raises, we found that employees of color who ask for a raise are less likely to receive it as compared to their white male employees.
Payscale surveyed over 160,060 workers to find out who asked for a raise, who received it, and why others chose not to ask at all. Additionally, the survey looked at how employee feelings toward their workplaces shifted when they were denied a raise.
We found that only 37 percent of all workers surveyed have asked for a raise from their current employer. We dug deeper to find whether any particular demographic group is more or less likely to ask for raises compared to others.
We know that there are a number of reasons why a worker may not ask for a raise. However, after controlling factors like experience, tenure, job title, job level, industry, education and demographics, we found that there is no statistically significant difference in the rates at which women of color, white women, men of color and white men ask for raises. In other words, no single gender or racial/ethnic group is more likely to have asked for a raise at some point than any other group.
But here’s the kicker: holding all other factors constant, people of color (both male and female) are less likely to receive pay raises when they ask compared to white men. Women of color were 19 percent less likely to have received a raise than a white men, and men of color were 25 percent less likely.
What This Means for HR
Given the large number of people surveyed (over 160,000 workers), this finding indicates that there is a level of bias—whether conscious or not—that impacts organizations’ performance evaluation and salary increase processes. This study underscores the importance of paying attention to implicit biases in your organization’s pay and people practices.
Unconscious bias can cause managers to dismiss great ideas, undermine individual potential, and even create a toxic work environment for their colleagues. So, what can HR leaders do to foster a fair environment for all employees? Here are two tips to start weeding out bias in your compensation practices:
1. Re-Assess Performance Management
A good performance management system should motivate employees and appropriately reward them for driving results. When performance and compensation are clearly and fairly tied together, workers tend to trust the system of checks and balances. But when workers feel like the system is flawed, poorly handled performance evaluations can easily become a departure trigger for workers. If your managers do not assess and report accurate performance data, you can bet that employee engagement is taking a hit as a result.
Make sure that your managers use objective, standardized criteria to evaluate the performance of direct reports. To avoid manager bias, have managers focus on questions that deal directly with their experiences, such as:
- If [employee] left the company, what would I do?
- What are the top things [employee] does well?
- What are the ways in which [employee] can improve?
In addition, ask managers to meet with their reports regularly to provide timely and actionable feedback. Ongoing, positive interactions between managers and employees will help employees gain the trust and confidence to initiate conversations about performance and compensation.
Furthermore, encourage managers to seek out a 360 degree view of the employee’s performance by asking for feedback from others who work with the employee. This helps ensure that promotion decisions aren’t skewed by the opinion of a single manager.
2. Train Employees to Call Out Bias
A few well-known companies including Google and Starbucks are now several years into their “unbiasing” journey. Google’s re:Work features a collection of practices, research, and ideas from Google and others on how to remove unconscious bias from an organization. Unbiasing is a journey that involves education, measurement, accountability and more.
According Google’s experience, unbiasing comes down to taking five actions:
Increase awareness about unconscious bias through employee training.
Create a culture where employees hold each other accountable in instances of biases.
Gather data and measure decisions.
Evaluate subtle messages that may cause groups of people feel included or excluded.
Use consistent structure and clear criteria when making decisions.
Compensation is only one piece of diversity and inclusion. Find more analysis and expert tips in Namely’s Diversity Report 2018.
This post originally appeared on Payscale.
In the last couple of years, a new wave of digital disruption swept through businesses in nearly every industry. In 2017, Amazon opened its first supermarket without salespeople in Seattle. McDonald’s decided to replace all of its cashiers with self-serve kiosks, and Caterpillar now invests in driverless tractors.
As more industries go digital and accelerate the need for talent, the skills shortage problem becomes acute. PayScale’s research on compensation best practices found that 33 percent of companies worldwide had positions that have been open for six months or more. When we asked HR and business leaders why these positions remain unfilled, 67 percent of them said it’s because they could not find qualified applicants.
In light of the tight talent market and the increasing competition for tech jobs, a number of businesses have started offering retraining programs to their employees. TechCrunch reporter Percia Safar recently wrote a piece arguing that “in the increasingly competitive market for talent, tech companies are leading a new type of labor innovation: retraining is the new recruiting.”
Pew Research found that sixty-one percent of Americans under 30 expect that it will be essential to develop new skills at some point in their careers. Meanwhile, during the latest college recruiting season, students started asking corporate recruiters whether companies will help them get new skills as jobs shift, says James Manyika, chairman of the McKinsey Global Institute.
If you’re not taking steps to future-proof your workforce, now is the time to start planning. To help you spark ideas on how you can develop your employees—and make your organization more agile, resilient, and competitive—here are seven tips to help you get started.
1. Identify the skills your firm needs and create a blueprint for sourcing them internally.
Get managers involved in this process and work with them to develop their ideal future job profiles. Then, work with managers to figure out how to create internal pathways to filling these new positions.
2. Look at your organizational structure and find opportunities to create career paths for employees.
Are there roles that can evolve to combine multiple skills? By making more roles hybrid, you can increase job mobility and help your employees cultivate new skills. For example, if each role requires a person to be proficient in four things instead of just two, employees will build their expertise and value through doing.
3. Look at your performance metrics.
Do they drive the behaviors you want? Think about creating performance metrics that focus directly on how individuals are contributing to business goals.
4. Make sure you are recognizing the market value of jobs.
In-demand skills should be compensated that way. When you ensure that there’s a financial upside for jobs with in-demand skills, employees will be motivated to gain these skills and step into these roles.
5. Evaluate your compensation plan.
Does it motivate employees to develop laterally and acquire new skills, or does it emphasize seniority? Consider de-emphasizing tenure, adding more variable pay to motivate high performers and putting a premium on in-demand skills.
6. Give your employees opportunities to “wear more hats.”
Are your employees able to work on cross-functional teams or across departments? By giving employees opportunities to work with colleagues they wouldn’t normally work with, or giving them a wider range of assignments, they get to utilize skills they don’t use in their primary role.
7. Empower your employees to make decisions.
If your employees feel comfortable in making in-the-moment decisions on behalf of the company, you’ll build a more nimble and resilient organization. Give your team frameworks for how to act in different situations, but allow them to use their own scripts to solve problems when unexpected challenges arise.
Even if you’re not ready to launch a company-wide retraining program (and you may not need to), these practical steps can help you ensure that your workforce has the skills needed to do the jobs your business requires today—and as you recruit in the next few years.
This post originally appeared on Payscale.
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