Median and average salaries are both measures of central tendency or the “middle of the market” regarding compensation.
Many organizations target employee pay at either the average or median rate to ensure employees receive competitive compensation while the business is still managing overall costs. However, knowing why average and median salaries differ is also important, as it may drive different compensation decisions in your organization.
How is Average Salary calculated?
You can calculate the average base, mean salary, or average salary by adding all the salaries for a select group of employees and then dividing the sum by the number of employees in the group.
Average Salary Example:
Employee 1 earns $40,000, Employee 2 earns $50,000, Employee 3 earns $100,000. The total of $190,000 is divided by 3, providing an average salary of $63,333.
The average salary represents what the “typical employee” earns and can be pulled higher or lower by high salaries or low salaries at the extreme ends of the distribution.
How is Median Salary calculated?
You can calculate the median base salary by arranging the salaries for a group of employees in descending order and then locating the salary that represents the midpoint of the distribution. Fifty percent of the salaries are less than the median and fifty percent of the salaries are greater than the median.
Median Salary Example:
Employee 1 earns $40,000, Employee 2 earns $50,000, Employee 3 earns $100,000. The salary in the middle, or the median salary is $50,000.
As the median salary represents a specific point in the distribution, it cannot be pulled higher or lower by salaries at the extreme ends of the distribution. It is therefore considered a more neutral measure of central tendency, especially in a small group of salaries where one extreme value can disproportionately affect the calculation of an average.
Winning the Wage War: Average Salary vs. Median Salary
Average and median salary are both helpful calculations, but which is more important?
Compensation practitioners generally prefer to benchmark against the median salary, as it is considered more neutral than the average.
However, knowing if the average is above or below the median, and by how much, can help HR pros understand the overall shape of the salary distribution. For instance, an average salary that is much higher than the median salary indicates that there are probably a few employees earning significantly more than the overall group.
In the end, it is the relationship between the two numbers that is most instructive.