A compensation analysis, also called salary analysis or pay analysis, is an organization-wide review of how your jobs are classified and compensated. Performing a compensation analysis is an efficient way to review how your employees are being paid, and to ensure they're being compensated fairly for the work they are doing. This analysis measures external competitiveness, internal equity, and talent retention within your company.
A compensation analysis has multiple components, and it’s important to understand what each term in the final compensation analysis report you'll produce really means. Read on to learn more about the specific compensation terms you'll encounter during an internal compensation analysis, as well as what they can tell you about employee pay in your organization.
Preparing to Conduct a Compensation Analysis
To conduct a comprehensive compensation analysis, you'll need to collect multiple data points about the jobs and employees in your organization. These data points may come from multiple different internal systems, as information about jobs and compensation is typically stored in a compensation management solution, while employee demographic information is typically housed in an HRIS platform and performance ratings are typically stored in a performance or talent management solution. If you haven't yet imported all of this data to a single system of record (like Salary.com's CompAnalyst platform), it may take some time to prepare the data for your compensation analysis.
Understanding Compensation Terms
Collecting data in advance of your compensation analysis will ensure that you have everything in one place before proceeding.
The following data items and measurements can help to illustrate your pay practices in more detail as part of your compensation analysis:
Base pay – the fixed portion of an employee’s compensation, which is paid for the fulfillment of their job’s essential functions. Base pay does not include differentials, premiums, overtime, benefits, or any pay elements other than the fixed salary. In a compensation analysis, base pay is expressed as an annualized value regardless of whether an employee is employed full-time or part-time.
There is no legal specification for how many hours a week equates to full-time, so long as companies are adhering to wage and overtime regulations set forth by the Fair Labor Standards Act (FLSA). One company may define full-time as 35 hours a week or more, and part-time as less than that, while another may set the bar at 40 hours per week.
Total cash compensation (TCC) – the combined value of an employee’s base pay and their short-term incentive (STI) pay items, including bonuses, incentives, and commissions. When looking at market pay data as part of your compensation analysis, keep in mind that short-term incentive figures in traditional salary surveys often assume that employees receive the full value of the short-term incentive pay items, regardless of actual incentive plan attainment.
TCC figures also include data from jobs with no STIs, or that were not eligible for STIs. Thus, if the job is not eligible for short-term incentive pay, you may see a TCC figure that is equal to the base pay salary.
Total direct compensation (TDC) – the combined value of the individual’s base salary, annual bonus earned for the performance year, and annual long-term incentive grants attributable to the performance year.
Total guaranteed compensation (TGC) – the combined value of an employee’s base pay and additional allowances they receive, such as housing, transportation, overtime, and child education.
Number of organizations (often displayed as ‘# orgs’) – the number of participating organizations in a survey, (i.e. whose data was used to produce composite pay data in the market data set). Incorporating market pay data into your compensation analysis can help you validate the values of jobs across the market, both inside and outside of your industry, to ensure that salaries within your organization are keeping pace with changing market conditions.
Number of incumbents (often displayed as ‘# incs’) – the count of best-matched individual jobholders whose data was used to produce composite pay data in the market data set. Leveraging sources of market pay data with healthy organization and incumbent levels helps ensure your market reviews are as accurate as possible, and are not biased due to low participation levels.
Years at company – the number of years that an employee has spent with your company. In a compensation analysis, you will typically find that longer-tenured employees tend to have higher salaries than their less-tenured peers. When the reverse is true, your compensation analysis may indicate that you have an issue with salary compression.
Percentiles – statistically, percentiles are defined as the measure used to indicate the value below which a given percentage of observations within a group falls. In compensation, percentiles (either to market or within your internal salary ranges) are used to assess the percentage of people paid to a given point within a salary range. Common percentiles used in compensation analyses include:
- 25th% – if during a compensation analysis, you find that many of your salaries fall within the lowest quartile of the range (i.e., below the 25th percentile), you may have priced your jobs too low - especially if you're comparing internal data with the market. If you do have employees that are paid below market value for their roles (sometimes referred to as “green circle” rates), you may need to consider the position in range (or position to market) in concert with other compensation analysis metrics, such as years at company or performance rating. While it's normal for entry-level employees, employees with fewer years of experience than the role typically requires, or low-performing employees to fall below the 25th percentile in your range, you should dig deeper into your compensation analysis if you find tenured or top-performing employees in this quadrant.
- 50th% – the 50th percentile, also known as the median, is the most widely-used market target for compensation rates - many organizations use the 50th percentile in the market to drive job offers for new candidates or to create internal salary ranges for their jobs and employees. While the 50th percentile is a common target, that doesn't mean it's a one-size-fits-all solution, especially if you have unique, hard-to-find, or hot jobs in your organization that may necessitate the application of a price premium in order to effectively recruit and retain top talent. In your compensation analysis, you may need to analyze pay for these roles separately from other more common jobs in your organization.
- 75th% – if during a compensation analysis, you find that many of your salaries fall within the highest quartile of the range (i.e., above the 75th percentile), you may have priced your jobs too high - especially if you're comparing internal data with the market. If you do have employees that are paid well above market value for their roles (sometimes referred to as “red circle” rates), you may need to consider the position in range (or position to market) in concert with other compensation analysis metrics, such as years at company or performance rating. Long-tenured employees and top performers may often fall above the 75th percentile in your range, as will employees with hot jobs and skills if you've adjusted your compensation philosophy to price these roles above the market median.
- Average – in market pay data, the average is often displayed separately from the median or 50th percentile value to help you assess the range spread of pay for a particular role. This value is less widely-used than the 50th percentile because it can be skewed higher or lower by a few unusual values in a compensation analysis for the particular role.
Performance rating – the score that a supervisor or manager assigns to an employee based on their individual performance. While performance ratings are typically housed in an external performance or talent management solution, importing them into your compensation management solution allows you to fully integrate them into your compensation analysis process. In conjunction with compensation information, employee performance data can help illustrate if you're differentially rewarding top performers in your organization.
Location – the physical place where an employee works. Geographic location often plays a critical role in compensation analyses, as it can be one of the driving factors in pay differences between jobs and employees.
Merit increase – the percentage of base salary allocated as an increase to an employee to reward them for their individual productivity and performance. Merit increases are typically rewarded annually, during the annual performance evaluation and merit planning process.
Compa-ratio – this metric helps you assess the competitiveness of an employee’s pay level based on a defined internal or external pay range. The compa-ratio is obtained by dividing the actual salary paid to an employee by the midpoint of the salary range of that position, and is typically expressed as a percentage. Compa-ratios below 100% indicate that the employee is being paid below the market average for their position, while compa-ratios above 100% indicate that the employee is being paid above the market average for their position. Compa-ratios form a critical part of a compensation analysis because they simply and effectively demonstrate the competitiveness of an individual employee's pay.
Mapping Out the Scope of Your Compensation Analysis
All companies perform compensation analyses somewhat differently. When planning your compensation analysis, map out:
- What data you want to incorporate
- Where that data comes from, and how you will collect it
- What the goal of the compensation analysis will be
- Whether you'll be looking out to market, internally to your organization, or both
- The questions you would like the compensation analysis to answer
- What you will do with the answers you uncover
Your compensation analysis should showcase how and why you make certain pay decisions for your organization, and how that reflects on your company’s pay practices. Salary structures, a visual approach to managing pay for your organization, can help streamline your compensation analysis process by making it easier to keep ranges in line with the market, assess internal equity across job and employee groups, and quickly spot job and employee outliers.