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What Are Compensation Metrics?
Compensation metrics are measures that employers use to help monitor and improve the effectiveness of their compensation system. Employee compensation refers to all salaries, wages, bonuses, overtime, and more. Some of the most used compensation metrics include pay range, target percentile, market ratio, and compa-ratio.
Why Are Compensation Metrics Helpful for HR?
- Internal comparison. Compensation metrics help you understand how your employees compare to one another. You can compare employees who have similar roles and similar traits (tenure, experience, etc.) to ensure your pay is fair across the company.
- External comparison. External comparison helps you understand how you pay your employees compared to the market.
- Attraction and retention. Using internal and external comparison, you can keep your pay fair and competitive, therefore attracting and retaining more employees at a higher rate.
- Ease of use. Using metrics can allow you to create pay ranges and bands to make administration easier. When creating new positions or promoting, you can use these bands to ensure fair wages.
- Compensation packages. Having compensation metrics makes it easier to create compensation packages that align with your business’s values and strategies.
- Overall program awareness. Using compensation metrics can help ensure that your compensation program is working overall. Metrics will let you know if there are any noticeable errors or differences.
Useful Compensation Metrics to Measure
There are many compensation metrics you can use to measure where your business stands. Below are some of the most commonly used metrics that companies use.
Pay ranges, also known as pay scales, salary ranges, or salary bands, are always a good place to start. Pay range metrics can help you understand how each role fits within the company. Through pay ranges, a company can identify employees who fall above or below the established ranges and then adjust as necessary.
Range penetration is an important metric that can accompany pay range.
Range penetration shows the salary of an employee in comparison to the total range of their position in the market. In addition, pay range can use other metrics such as range minimum, range maximum, range spread, and range midpoint.
The target percentile metric is helpful for recruiting. A target percentile is the amount you will pay to bring in new employees. Based on each industry, a target percentile will vary. A target percentile of 50% means that in the market, 50% of the industry makes more and 50% of the industry makes less. If a company wants higher talent, it will require them to raise their target percentile above 50%.
The market ratio compares an employee’s average salary to those in similar jobs outside of the company. A company can see if it’s paying its employees more or less than other industries.
There are multiple ways to calculate a market ratio. The simplest and best way to start is simply gathering salary data from job postings and online portals and comparing it with your employee’s current salary.
Sometimes known as a comparison ratio, a compa-ratio helps employers see if an employee is being paid comparatively to the defined salary range. You can read more about this in-depth in our compa-ratio article.
Internal equity is an important compensation metric a company can use. Internal equity means equal pay for employees of similar positions, skill sets and experience. Read our internal equity entry for more details.
If you’d like to explore more compensation metrics, here are additional ones to look at:
How to Use Compensation Metrics
From doing it yourself to finding a program that calculates it, there are multiple ways to use compensation metrics.
Step 1: Conduct Research
Doing research yourself, through job boards and the market, you can do many compensation metrics yourself. This is the time to start monitoring compensation, especially if you don’t have formulas or metrics set up yet.
Step 2: Utilize Spreadsheets
Spreadsheets are great tools to use for metrics. Excel has more capability, but Google Sheets can get the job done too. Creating formulas and the metrics in a spreadsheet can make it easy to save and reuse the metrics.
Step 3: Take Advantage of Compensation Tools
There are many different compensation tools out there. There are companies and softwares solely for compensation benchmarking. Certain payroll softwares can also package compensation metrics with their payroll services. Some highly rated compensation packages are CompTrak, Comp Accelerator and Salary.com’s CompAnalyst.
Questions You’ve Asked Us About Compensation Metrics
How often should compensation metrics be measured?
Ideally, compensation metrics should be measured weekly or monthly. Many software systems will update them daily, but there isn’t the bandwidth to do that when running the metrics yourself. In those cases, it’s best to have compensation metrics measured before pay raises, promotions and hiring. This will help make sure that all of these actions are done with correct compensation numbers.
Are compensation metrics useful for organizations in any industry?
Absolutely! No matter the industry, compensation metrics can be useful. They can help you stay organized, ensure fair pay and ultimately result in happier employees.
Katie is currently studying at BYU, with a HRM major and Statistics minor. She works there as an HR research assistant and also works as an HR Generalist at a local company, and both jobs provide her with a wide variety of experiences. Katie’s passion lies in HR and People Analytics, where she can discover and use data to help everyone understand and improve the workplace for a universal benefit.