Compensation Planning Tips: What is the Median?

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Compensation Planning Tips: What is the Median?

When it comes to compensation planning, one of the most important figures to have on hand is undoubtedly the median or 50th percentile. However, depending on your overall compensation philosophy, you may also want to gather other percentiles along the way, such as the 25th and 75th percentiles.

Of course most compensation surveys don’t stop there, don’t forget weighted averages and employer averages, and of course every demographic breakout you could imagine. But for purposes of this article let’s stay focused on those percentiles. What exactly do they tell us and how should they be used? To help give some context, here are a few quick tips that should help you make sense out of all those numbers.

Calculations

The median is the value at which 50% of the employers pay at and below, or at and above. To calculate the median data points are arrayed in an ordered fashion (i.e. lowest to highest salary) and the middle number is the median.

If there is an even number of data points, the median is derived by averaging the middle two data points. Similarly, the 25th percentile is the rate of pay at which 25% of the employers pay at or below and the 75th percentile is the rate of pay at which 75% of employers pay at or below.

Market Rate

For any given position, the “market rate” is simply an average of several medians. Ideally, the median would be pulled from at least three independent, reliable, employer-reported sources and the job descriptions used by each source would match your organization’s description with at least 70% accuracy.

If your organization’s job description represents multiple jobs in the external market, you can also use a technique called “blending.” By taking the medians of two or more jobs and weighting them according to the breakdown of the job duties for your organization’s particular job, you can still find that market rate.

Using Other Percentiles

We’ve just established that the “market rate” is determined using the median, but what if your organization is looking to hire a highly skilled, experienced individual to fill a key role and they are being actively recruited by your competitors? The median probably isn’t going to be the figure you need. How much over the median you chose to go is up to you or your organization’s compensation philosophy.

Do you just offer a little over market on the base salary and then share with the candidate the robust benefits package? Or maybe you have more room in the budget to look to the 75th percentile or a higher pay level because you are confident the employee will bring returns to the organization?

It’s Just A Number

While the median is a hugely helpful figure, the fact remains that it is just that, a single data point. When planning compensation, the median is a starting point that can help you make better informed and well-structured decisions around pay for each employee, job title, and you organization on the whole. A job that holds more strategic business value to your organization in particular might warrant a pay level for greater than market.

Also, keep in mind that other organizations reporting the data you are using might have different costs of living depending on their location or less demand for certain skills in a different industry, so be sure to make use of those demographic breakouts when they are available. Ultimately, determining what to pay and how to pay your employees is far more complex than just finding that median for each position, but it’s a great place to start!

Compensation & Benefits Consulting

Compensation & Benefits Consulting

ERC offers a variety of compensation and benefits consulting services including competitive market pay analysis, salary structure design, total rewards strategy, variable pay design, and more!

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