Compensation Analysis: Terms, Process & FAQs
Organizations conduct compensation analysis to review pay practices, ensure fairness, and stay competitive. While it provides useful data, the terminology can sometimes be confusing.
Understanding compensation analysis terms is important because they explain the statistics used in the analysis, showing both the type of an employee’s pay and how pay levels compare within their peer group. But first, what is compensation analysis?
What is compensation analysis?
Salary.com defines compensation analysis as an "organization-wide review of how your jobs are classified and compensated." Performing it is an effective way to review employee pay and ensure fair compensation for their work.
A comprehensive compensation analysis matters for organizations as it measures:
External competitiveness
Internal equity
Talent retention
To support your organization’s compensation analysis, Salary.com’s Compensation Software provides tools to manage the entire process. From market pricing to pay equity, it helps you customize and analyze your pay practices easily.
Compensation analysis terms
Making sure you know the terminology and data before a compensation analysis ensures all information is organized and ready to provide a clear view of your compensation practices.
Below are the key compensation analysis terms and data:
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Base (Base pay)
The fixed portion of compensation paid for an employee’s fulfillment of a job’s essential functions. Base pay does not include differentials, premiums, overtime, employee benefits, or any pay element other than the base salary rate. By default, it is expressed as an annual value based on a 2,080 hour year for full-time positions and 1,000 hours for part-time positions, but can be adjusted to be expressed as an hourly value.
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TCC (Total Cash Compensation)
The combined value of base pay plus short-term incentives (STI) such as bonuses, incentives, and commissions, as actually paid, regardless of incentive plan eligibility. Note: The TCC figures shown include data from jobs which were not eligible for STI and data from incumbents who earned no STI (even though eligible). In these cases, the value of the STI was $0 and TCC was equal to Base pay.
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#orgs (Number of organizations)
The number of best-matched employer organizations whose data were used to produce the composite pay data shown. Data from additional organizations (potentially thousands of organizations) beyond the value shown were used to “cross-check” the values for reasonableness.
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#incs (Number of incumbents)
The number of best-matched individual jobholders whose data were used to produce the composite pay data shown. Data from additional incumbents (potentially tens of thousands) beyond the value shown were used to “cross-check” the values for reasonableness.
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25th% (Twenty-fifth percentile)
The lowest quarter of salaries for this job fall below the twenty-fifth percentile. The “middle half” of people in this job have salaries that fall between the 25th and 75th percentile.
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50th% (Fiftieth percentile or median)
The lower half of salaries for this job fall below the fiftieth percentile while the upper half are above it. The 50th percentile is the most widely-used measure of the “middle” of the possible pay values for a job.
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75th% (Seventy-fifth percentile)
The highest quarter of salaries for this job are above the seventy-fifth percentile. The “middle half” of people in this job have salaries that fall between the 25th and 75th percentile.
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Avg. (Average)
The sum of all salaries divided by the number of salaries. This value is less widely-used than the 50th percentile (above), because it can be skewed higher or lower by a few unusual values.
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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.
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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.
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Years at company
Another compensation analysis term that needs to be understood is years at company. This refers to the number of years an employee has been with the organization. In a compensation analysis, employees with longer tenure typically earn more than their less-tenured peers, while the opposite may indicate pay compression.
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Performance rating
The score a supervisor assigns to an employee based on performance. Importing these ratings into the compensation management solution allows full integration with compensation data, helping show whether top performers are being appropriately rewarded.
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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.
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Merit increase
The percentage of base salary given to an employee as a reward for individual performance. Merit increases are usually awarded annually during performance evaluations and merit planning.
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Compa-ratio
This compensation analysis term assesses how competitive an employee’s pay is within a defined pay range. The compa-ratio is calculated by dividing the employee’s actual salary by the midpoint of the salary range and is expressed as a percentage. Ratios below 100% indicate pay below the market average, while ratios above 100% indicate pay above it. Compa-ratios are a key part of compensation analysis, clearly showing the competitiveness of an employee’s pay.
How to conduct a compensation analysis
Now that you understand key compensation analysis terms, the next step is to conduct the analysis itself. The U.S. Chamber of Commerce offers a step-by-step guide for performing a competitive pay analysis.
Here’s how to do it correctly:
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Gather reliable data: Collect internal and external data from multiple sources to get an accurate view of market pay, including salary surveys, government databases, crowdsourced platforms like Salary.com’s Compensation Software, and industry salary guides. Using several sources helps avoid skewed results and gives a balanced view of compensation trends.
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Conduct a job analysis: Examine each position to understand its responsibilities, required skills, and experience. Gather information through interviews, observation, and surveys to create accurate job descriptions. Compensation Software's Job Match feature helps compare jobs to benchmarks for proper market alignment.
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Set salary ranges for each position: Establish minimum, midpoint, and maximum salaries for each job, considering experience, performance, and equity. These ranges guide fair pay decisions. To simplify the process, Compensation Software’s drag-and-drop editor makes it easy to adjust ranges, move jobs, and create a new compensation structure.
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Factor in non-salary compensation: Employees also value other benefits, not just base pay. Include bonuses, commissions, profit-sharing, stock options, health and retirement benefits, paid time off, and other perks. Sharing the full value helps employees and candidates see the total compensation package.
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Be transparent: Share pay ranges and explain how compensation decisions are made. Train managers to communicate clearly and know when to involve HR. Remember, transparency builds trust and shows employees paths for growth.
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Re-evaluate compensation regularly: Compensation changes over time. Review pay structures every 2 to 3 years to stay aligned with market trends and organizational goals. Regular checks help attract and retain top talent.
FAQs
Here are some common questions related to the topic:
Why do we conduct a salary analysis?
As mentioned, HR conducts a thorough compensation analysis to support the organization’s compensation strategy and ensure pay is fair, competitive, and aligned with company goals. It helps compare salaries with the market, maintain fairness among employees, and keep valuable staff motivated, which contributes to higher employee satisfaction.
How often should we review market data?
As per the U.S. Chamber of Commerce, organizations should review pay structures every two to three years. Since reviewing pay structures involves analyzing external and internal data, organizations should also review this data every two to three years to ensure salaries remain fair and aligned with company goals.
How do we ensure pay equity?
Over 70% of HR professionals agree that women face discrimination in the labor market, according to a SHRM research. For ensuring pay equity, HR should regularly review compensation data and compare salaries across roles and employee groups. If any gaps are found, salary adjustments can be made. Solutions like Pay Equity Analytics help identify these differences and guide HR in taking corrective action.
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