Compensation Consultant at PayScale
When benchmarking positions, it’s easy to get tongue-tied
over the terms percentage and percentile. Percentiles are admittedly confusing.
People generally understand that market pay breaks out at the 10th
through 90th percentiles, but what does that even mean? And how can
I use that information to manage employee pay?
When are percentages valid when talking about employee pay? I often get these
questions from my clients. The answer is
that we use both percentiles and percentages when developing and managing
talking about the market, we use the word “percentile.” A percentile is a
location marker along a range of values. The 50th percentile is the
median or middle number in the range of values. For example, assuming 100 data
points, at the 60th percentile, 59 data points would be below the 60th
percentile, 40 data points would be above.
Part of an
organization’s decision around compensation strategy has to do with where they
want to target salaries relative to the market. Hitting the market at the 50th percentile means you’re
“meeting” the market. Targeting higher than
the 50th percentile is referred to as either exceeding or leading
the market, and targeting lower is lagging the market.
Uses for PercentAGE
talking about ranges, we use the terms Min, Mid, and Max. We also talk about an
incumbent’s location in the range as the range penetration. Range penetration
is expressed as a percentage. 50% range penetration is equal to the midpoint of
the range. (eg, if Joe Schmoe is at 60%
range penetration, he’s above the midpoint by 10%.)
Putting it all together
When we benchmark positions, we
look for the market value at our targeted percentile (often the 50th
percentile). Once we know the value of the position at market, we place that
position in range by aligning the market value with the midpoint of the nearest
range. We use an assessment of the internal value of the position to tip the
grade assignment one way or the other when the position falls in the middle of
position has been assigned to a range, we can see where the incumbents fall
relative to those ranges. The idea is to use the full range distribution when
managing employee pay. Incumbents who are newer to the organization or who may
not be as stellar performers should fall towards the Min of the range, or have
a lower range penetration. As incumbents increase in performance, proficiency,
and tenure, they will progress through the ranges towards the top, or have a
higher range penetration.
ranges are developed, we suggest that you manage employee pay using the ranges.
You can know that the ranges are set around the 50th percentile of
the market, so as an organization you’re meeting the market. Then you can talk about incumbent range
penetration in terms of a percentage.
Incumbents can work to increase their range penetration through stellar
performance, gaining skills, sticking around, whatever your organization has
decided to reward.