Employee compensation is often your organization's biggest operating expense—but it can also be your strategic advantage.
It's important to understand how pay is distributed across your team, so you can make informed decisions that will help you attract and retain employees. These employee compensation metrics will give you the insight you need to do just that.
Salary ranges are an important piece of an effective compensation strategy, as they spell out the target pay range for each of your job grades. But employees can fall out of their salary bands for a variety of reasons. Bands might be updated to reflect market changes, but employee salaries may not be adjusted accordingly. Or, new employees might negotiate higher starting salaries based on other offers. This can create a myriad of problems for employers.
Discussing compensation is not considered as taboo as it once was, and it’s easy for your employees to learn if their colleagues are earning more in the same role. And given the competitive talent landscape, it’s also easy for your employees to find another role that will pay them more. In fact, nearly a third of employees who left their organization during the pandemic now make over 30% more than they did in their previous roles, while 20% received a 10% to 20% increase.
Get ahead of these conversations by keeping an eye on the percent of your employees who are below the salary band for their job level. This is a very common issue when managers inherit a team, but don’t have insight into how compensation decisions were made in the past. Drill down to see who these employees are, and build a plan to bring them in band.
Career development, including opportunities for growth, is another top reason for voluntary turnover. Your employees want to know they have a future at your organization, or they will look externally for another opportunity.
Above band employees can be an indication that promotions are in order, as they’ve already reached the upper earning potential of their current job grade. Ideally, you would already have a career path and development plan in place to move each employee into the next job grade (and corresponding salary band). If not, there’s no time like the present!
If your company has overlapping salary ranges, you may choose to offer promotions to above band employees without an immediate salary increase. Then, create a new development plan to help them gain the skills and experience necessary to increase their salary and eventually move into the next job grade.
The talent market is tight, and employers are learning that they often have to make more competitive offers to win the talent they need. As a result, salary compression can occur as newer employees earn more than their longer tenured counterparts—which can quickly damage employee trust and loyalty.
Keep track of salary band adherence by tenure to understand when it’s time to make market adjustments for your longest standing employees. Any large discrepancies may also be an indication that it’s time to revisit your salary bands to better align with market expectations.
Functions generally above band may be an indication that market compensation is moving beyond your salary bands, and that it's time to re-evaluate them to align with your compensation plan. This is often the case for the most in-demand talent, like engineers, though wage growth is currently being seen across positions, industries, and geographies. Adjusting your salary ranges will help you remain competitive, so you can continue to attract and retain talent.
Functions generally below band could be a warning sign for future attrition. Once one person gives notice, they may very well share what they’ve learned about market compensation rates with fellow employees, creating a domino effect of turnover. Or, a manager may leave and poach their former team from your company with more competitive salary offers. Avoid losing an entire department by bringing employees in band.
Your managers can be a tremendous resource to help you distribute your compensation budget strategically so you can reward your employees and retain your top performers. But they need context to do this right and many employee compensation metrics are too nuanced to provide to individual managers.
Pay range penetration, also known as position in range, are typically more digestible for managers. By showing where an employee’s pay falls in relation to their salary band, managers can make more strategic pay recommendations.
Compa-ratio compares an employee's salary to the midpoint of the salary range for their position. The compa-ratio for a salary that's exactly in the middle of the range would be 1.0, which is typically considered appropriate for a fully competent employee. Top performers are usually between 1.0 and 1.15, while less experienced employees are typically between 0.85 and 1.0.
Comparing compa-ratio by group can provide meaningful data about the distribution of compensation at your organization. Begin by looking at compa-ratio by tenure, function, gender, and ethnicity.
This takes salary band adherence by tenure a step further to show you how early and recent hires compare, even if they’re all in band. If you find that new hires have a higher median compa-ratio, you’ll know you need to focus on early employees whose compensation may have fallen behind.
Again, looking at compensation distribution from both the salary band and compa-ratio angles will provide stronger insight than looking at only one. While all employees may be in range for a given function, compa-ratios can show how they're distributed within that range.
A compa-ratio below 1.0 for an entire function should indicate a more junior team. Dig in to your data to determine if that's the case. If so, you may need to consider developing your team, or hiring more senior-level employees, to help with succession planning. Otherwise, it could mean ranges recently increased, but compensation wasn't adjusted. Some pay increases may be in order to bump up your highest performers and most loyal employees.
Also consider how each employee is ranked in terms of compa-ratio, and whether it's appropriate. It's not uncommon to find a top performer with a lower compa-ratio than an average colleague, especially within inherited teams.
Compare compa-ratio by gender and ethnicity to learn how different groups compare. Dig in where you see any discrepancies to determine why they exist. A low compa-ratio for underrepresented groups may be due to an unconscious bias, which should be remedied. It may also be purely coincidental, due to a small population size for that group, which happens to consist of entry-level employees. Even in that case, you can make an effort to increase that group's representation in talent pipelines for higher level roles.
Also look at compa-ratio for different groups by function. This can point to problems in specific departments, such as lower salary range penetration for underrepresented groups.
In addition to salary range and compa-ratio metrics, keep track of your average salary for ethnicity and gender, and employee vesting progress.
Average salary is another important angle from which to view pay equity at your organization. Employees from underrepresented groups may be in band with acceptable compa-ratio for their roles, but still have a lower average salary than all employees.
People from marginalized groups tend to stall in lower-level positions in which they earn lower overall pay. This metric can be a telling sign that it's time to mentor and promote more people from underrepresented groups, and to create a more inclusive workplace.
As equity vests, employees are less incentivized to stay at their organization and may move on to other opportunities. Keep track of the number of employees who are 50%, 75%, and 90% vested. You may be able to retain these employees with some extra attention, promotions, additional equity grants, or salary adjustments.
Understanding, tracking, and acting on these compensation metrics can help your organization make more informed decisions with regard to hiring and retaining employees. Over time, you will want to see fewer employees above or below band and fewer differences by gender and ethnicity. You will also want to see less voluntary employee turnover caused by low compensation, lack of career development, and vested stock options. With the right data, compensation can become your organization’s strategic advantage.