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Training Managers about Compensation using Pay Range Penetration

Jen Dewar
Sep 23, 2020 6:00:00 AM

Your managers are the best suited to make merit-based raise recommendations because they are in the trenches with their reports. They know who’s performing well, who’s killing it, and who might need a performance improvement plan. Their insights can help you distribute your raise budget more strategically to reward your employees and retain your top performers.

However, your managers can also be ill-suited to make raise recommendations because they often don’t understand how to be strategic with their allocations. It’s common for managers to give all of their direct reports a flat percentage increase. This approach does nothing to reward top performers, and often amplifies existing pay inconsistencies.

Let’s say your highest-paid engineer joined your company in the past year, and had a lot of negotiating power due to the tight talent market. Your top performing engineer joined the company straight out of college with a salary appropriate for her experience level and expected impact. Your manager suggests a standard three percent raise for each of them, which amounts to a much lower raise and salary for your top performing employee. The top performing employee learns of this discrepancy and leaves to find another opportunity where her contributions will be acknowledged and rewarded.

Don’t let this happen at your company. Train your managers to make better compensation decisions with pay range penetration.

What is pay range penetration?

It’s a best practice for each employee to have a salary band associated with their position. This is an important part of a compensation strategy, helping you make consistent pay decisions throughout the employee lifecycle. (You may also have a legal requirement to share a salary range for a role if you’re hiring in California.)

Pay range penetration shows where an employee’s pay falls in relation to their particular salary band.

It’s calculated with the following formula:

Range penetration = (Salary - Range Minimum) / (Range Maximum - Range Minimum)

So an employee earning $75,00 with a $60,000-80,000 pay range would have 75 percent pay range penetration:

($75,000 - $60,000) / ($80,000 - $60,000) = 0.75 (75 percent)

In the example above, an employee earning $55,000 would have -25 percent range penetration (below band). An employee earning $85,000 would have 125 percent range penetration (above band).

Pay range penetration is often more digestible to managers than Compa-ratios, though you could certainly go that route if you’d prefer.

Why is pay range penetration useful to managers?

Pay range penetration can help managers visualize how employees are paid in comparison to their salary band. This is particularly useful if your organization doesn’t share salary ranges with managers.

Pay range penetration is useful to managers in three key ways:

  1. It can help managers make merit-based recommendations. With your guidance, they could come to understand that top performers should be in the high band (75 percent range penetration and above), and everyone else should fall into the mid-band or low-band. This is a great way to ensure that employee performance ratings align with compensation.
  2. It can help managers understand why some employees receive strategic adjustments on top of their merit-based recommendations. A top performer with high range penetration might receive an overall lower increase than a solid performer who is below band. Range penetration can help the manager visualize the necessity for these strategic adjustments, so they’re more equipped to navigate compensation discussions with their reports.
  3. It can help managers understand when it might be time to start discussing a promotion. As employees move through their pay ranges, those with high range penetration may need a promotion to another role or job level in order to continue increasing their compensation. When managers know that point is approaching, they can discuss career ladders, prepare development plans, and better advocate for their reports.

How to enable managers to use pay range penetration

Pay range penetration is a great metric to have at your team’s disposal during your annual compensation cycle—but enabling managers to use them will require some legwork:

  1. Get your pay ranges sorted out: It’s not enough to have pay ranges; you also need to update them once or twice a year to ensure they reflect market rates and your compensation strategy.
  2. Calculate range penetration: Use your up-to-date pay ranges to calculate each employee’s pay range penetration. Providing this information via your compensation management software or a spreadsheet ensures that managers have access to the right information.
  3. Show managers how to use range penetration: It’s helpful to include manager training in your compensation cycle planning phase. Include a primer on pay range penetration, and follow up with some written guidelines to help managers understand what they mean and how to apply them. For instance, how to tell if an employee is in- or out-of-band, and how to compare band penetration to time-in-band.

Final thoughts on pay range penetration

Your managers are an invaluable resource during your annual compensation cycle because they can help you make stronger compensation decisions. However, you must help them help you. Pay range penetration enables your managers to understand where each of their direct reports falls into their salary bands, and advocate for where each employee should fall. Share this information with them so they can help you retain top performers.

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