Introduction

Why compensation metrics matter

Offering the right compensation is one of the keys to attract and retain the best talent. This is especially important as organizations face the great resignation and a future of shrinking talent pools.
Even now, 69% of employers globally are struggling to find skilled workers. And in 2019, compensation was the number one factor in voluntary turnover.
As finding a fitting compensation strategy becomes more important than ever, so does tracking compensation metrics.

1. Increased strategic importance

Provide compensation packages that support your organization’s objectives and business strategies, and align pay to market realities, granting you a strategic advantage.

2. Improved talent acquisition and management

Determine which compensation package will let you remain competitive in the war for talent, and see the impact of your policies on employee retention.

3. Better equity and fairness

See how equitable and fair the pay is within teams and across the entire organization, and ensure pay is fair, preventing legal issues related to pay discrimination.

Using this guide

Ready to capitalize on these benefits in your organization? This guide explains how to use 12 key compensation metrics and easily visualize compensation metrics in Excel.
Whether you’re looking for an introduction to compensation metrics or a handy reminder of how a certain calculation went, this guide will help you keep your data-driven compensation strategy on track.

1. Target percentile

What it means
Your company’s target percentile is where you pay employees relative to market rates, expressed as a percentile. If your policy is to meet the market, your target percentile will be 50. Anything over the 50th percentile is leading the market. Targets below the 50th percentile are lagging the market

Example
If your policy is to pay twenty percent above the market rate, your target percentile is 20 percent above the 50th percentile. It is the 60th percentile, not the 70th percentile (50+20).
In this case, the formula will be applied as followed:
50 x (1+20%) = 60

2. Range midpoint

What it means
This is the exact middle of your range, equally distanced from the range minimum and range maximum, and aligned to the market value of the job.

Example
If your goal is to lead the market by 30% when the market rate is $46,000, your range midpoint would be:
$46,000 × (1 + 30%) = $59,800
If your goal is to lag the market by 10% when the market rate for a job group is $46,000, your range midpoint would be:
$46,000 × (1 – 10%) = $41,400

3. Range spread

What it means
The spread or width between the range minimum (e.g., the 25th percentile) and the range maximum (e.g., the 75th percentile).
If your policy is to meet the market, your target percentile will be 50. Anything over the 50th percentile is leading the market.
Targets below the 50th percentile are lagging the market.

Example
You do not need to calculate the spread, as this is something that you determine yourself. Do you want it to be 25%, 50%, or 75%?
Different jobs would have different spreads. For example, the spreads within an organization can look like this:
● Hourly contract positions: 30%-40%
● Entry to mid-level to managerial positions: 40%-60%
● Executive positions: 60%-70%

4. Range minimum

What it means
The minimum is the lowest value in the scale. It is what you would typically offer a new employee.

Example
If your midpoint for a range is $50,000 and the spread is 40%, the minimum will be:
$50,000 / (1 + (40 % / 2) = $41,667 (rounded)

5. Range maximum

What it means
The maximum is the highest value in the pay range. This is often your executives believe they should pay the top talent in your organization.

Example
If the minimum is $41,667, you can calculate the maximum as follows:
$41,667 × (1 + 40%) = $58,333 (rounded)

6. Salary differential

What it means
This metric shows the progression from one job level to another by comparing the two ranges’ midpoints.

Example
If the midpoint of the higher job is $74,000 and the midpoint of the lower position is $64,000, the salary differential is:
(74,000 – 64,000) / 64,000 = 15.63%

Bonus: Using ranges for compensation planning

With established salary ranges, you have the data you need to effectively plan your organization’s compensation strategy. Here is an example of what this could look like.

7. Compensation ratio (or compa ratio)

What it means
The compensation ration (or compa ratio) is a formula designed to compare where an employee’s salary stands relative to the midpoint.

Example
If the midpoint is $50,000 and the salary is $45,000, the compa-ratio is:
$45,000 / $50,000 = 0.9

Compa ratio matrix
For pay management, some organizations use a matrix of performance ratings, compa-ratio, and policy bands. Turn to the next paragraph for an example from WorldatWork, the global association of compensation professionals.

Note:
If you want to try this approach at your own company, it’s best to have an automated system create the bands for you.

8. Salary range penetration

What it means
The salary range penetration metric is somewhat similar to the compa-ratio. However, this metric looks at a salary in relation to the whole pay range, instead of using a single data point.

Example
If the minimum is $35,000, the maximum is $65,000, and the salary is $45,000, the range penetration is:
($45,000 – $35,000) / ($65,000 – $35,000) = 33.33%

9. Green circle

What it means
The green circle includes employees whose starting pay falls below the minimum and typically have their pay levels increased to the range minimum at the next review cycle.
Employees who are green circled have a salary range penetration of less than zero. In your Excel worksheet, use conditional formatting to change the cell color to green to highlight these employees.

Example
If an employee’s salary is $38,000, the range minimum is $40,000, and the maximum is $60,000, the salary range penetration will be less than zero:
($38,000 – $40,000) / ($60,000 – $40,000) = -0.1 (-10%)

10. Red circle

What it means
The red circle includes employees whose pay falls above the salary range maximum. They will probably have their pay frozen until their salary once again falls within the range.
Employees who are red circled have a salary range penetration of more than 100%. In your Excel worksheet, use conditional formatting to change the cell color to red to highlight these employees.

Example
If an employee’s salary is $65,000, the minimum is $40,000, and the maximum is $60,000, the range penetration will be greater than 100%:
($65,000 – $40,000) / ($60,000 – $40,000) = 1.3 (130%)

11. Market-ratio

What it means
The market-ratio metric metric shows you how close you are paying to your target pay policy. It compares the midpoint of the internal salary range to the market pay rate.

Example
If the market rate is $50,000, the target percentile is 15 (leading the market by 15%), and the average pay rate in a range is $60,000, the market-ratio will be:
($50,000 × (1+15%)) = 1.04

12. Geographic differentials

What it means
A geographic differential is the percent difference between pay for the same job in two or more locations. This is an especially relevant topic now that many companies are transitioning to permanent remote work
Calculating it
You can calculate geographic differentials based on a benchmark of position salaries and the cost of living for each city and state where your employees work. Typically, this metric is created for differences of approximately 5%. (Source: Total Reward Solutions)

Bonus: Creating a salary range chart in Excel

Bonus: Creating a range penetration chart in Excel

Source: AIHR