Written by Stephan Duncan
June 16, 2019
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.
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.
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:
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.
All companies perform compensation analyses somewhat differently. When planning your compensation analysis, map out:
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.
Download our white paper and learn how organizations across the country are using market data, internal analytics, and strategic communication to establish an equitable pay structure.