Does your organization know the health of its base salary program? The health of your base salary practices can easily fly under the radar if you aren't paying attention to certain important numbers. It may result in overpaying or underpaying employees, employees being paid outside of pay ranges, an uncompetitive mix of pay forms, or a low revenue return on your costly investments.
There are several "tools" (i.e. calculations or measurements) that you can use to evaluate the health of your base salary program, six of which are among those that most compensation experts agree are the best and most common tools to use.
Compa-ratio is a measure of employee pay competitiveness. It is calculated as employee salary as a percentage of the salary range midpoint. It is used to assess an employee's pay compared to market, which should be aligned with the salary range midpoint.
A compa-ratio of 100% would typically indicate that the employee is paid "at market" while a compa-ratio significantly above 100% would indicate that an employee is paid above market. Target compa-ratios range from 80% to 120% but exceptions based on employee performance and/or experience may be appropriate.
Compa-ratio = Salary / Range Midpoint
2. Market Index
Market index is the ratio of an employee’s base salary to the actual market rate of pay for their job. It provides a measure of how employee pay compares to the market rate specific to their position.
Market index = Salary / Market Rate
3. Range Penetration
Range penetration refers to an individual's pay compared to the total pay range. It helps identify the position of the individual's pay in the range and indicates how far into the range an individual's salary has "penetrated." Range penetration differs from the compa-ratio in that it is calculated using the minimums and maximums of the salary range versus the midpoint.
A penetration of 100% would signal that an employee has penetrated the entire range for the position and is paid at the maximum of the range. Range penetration of 50% indicates the employee is paid at the range midpoint.
Range penetration = (Salary minus range minimum) / (Range maximum minus range minimum)
4. Range Spread
Range spread refers to the distance between the minimum and the maximum of a salary range. Range spreads vary by type of position. For example, lower level positions (clerical, production, hourly, etc.) tend to have a narrower range spread (35%-50%) than higher level positions like professionals and managers (40%-60%). Wider ranges are typically seen for jobs with larger salaries because pay is more variable.
Range spread = (Range maximum minus Range minimum) / Range minimum
5. Compensation Mix
Compensation mix is the combined distribution of base pay, incentive pay, and other forms of compensation (such as equity compensation) in relationship to total compensation. Compensation mix should be aligned with an organization’s compensation and talent strategy.
Compensation mix is an especially crucial metric to evaluate for sales and executive positions which commonly have a greater mix of pay forms. It’s also important to include the impact of all total rewards components such as employee benefits and retirement programs.
x% Base Salary
+x% Incentive/Variable Pay
+x% Other Pay Components
= 100% Target Total Compensation