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.
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.
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:
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:
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.