This is intended to help anyone new to compensation but also to clarify some terms that can be confusing or that have multiple interpretations that we should be aware of. If I am missing anything or need to clarify further, please let me know in the comments below. For considerations on salary structure approaches, take a look back at some of my previous blogs.
Compa-Ratio
Or “Comparative Ratio” to use the full name. To my knowledge, this abbreviation only gets used in the world of compensation so bear that in mind when using in conversation with others. This might also be referred to as “Position in Range”.
This refers to relationship between an individual’s pay and their respective midpoint. This is usually expressed as pay/midpoint*100. As an example, an individual with base pay of $150 and a respective midpoint of $200, would have a compa-ratio of 75. You might also see this expressed (more rarely) as a +/- percentage meaning this example would be expressed as -25.
Technically to meet the definition of a ratio, it should be multiplied through by 100 however I’ve frequently seen it expressed as a percentage and still referred to as a ratio e.g., “A compa-ratio of 75%” instead of “A compa-ratio of 75”.
A word of caution with Compa-Ratios – many people unfamiliar with salary ranges may assume the midpoint is a target, that a Compa-Ratio of 100% is what they should be striving for. This is, of course, not the case and all manner of Compa-Ratios can be appropriate in the right circumstances. I prefer to use this at a “macro” level to analyze how effectively we are adhering to our stated philosophy but avoid communicating it at the individual employee level, focusing on Range Thirds for pay decisions.
Lower/Middle/Upper Third
A tried and tested approach to salary range management is to divide the range into thirds for the purposes of pay management. This is most commonly used in the merit cycle since, all else being equal, individuals lower down in the range receive higher increases than those further up in order to even out pay differences.
This creates two additional points in the salary range at 33.3% and 66.6% of range spread respectively, creating three zones that an employee may fall into.
Midpoint Progression
This refers to the relationship between one midpoint and the next higher midpoint within a set of ranges. This is typically calculated as (higher midpoint – lower midpoint)/lower midpoint. If two midpoints are $150 and $200 respectively then the Midpoint Progression is 33.3% (($200-$150)/$150).
Min/Mid/Max
Refers to the minimum, middle, and maximum points of the band.
The midpoint is the arithmetic middle of the band i.e. halfway between the max and the min (Min + (Max-Min)/2). In some more exotic scenarios (that I have encountered but wouldn’t suggest), there may be something other than a midpoint featured.
The minimum and maximum are the theoretical limits of where the pay of someone in the range should fall. That said, there are always exceptions. Exceptional individuals, under-qualified individuals filling more senior roles, or that one ex-Googler that someone had to hire – “Outliers” are surprisingly common.
Percentiles
Dictionary definition time: “A value on a scale of 100 that indicates the percent of a distribution that is equal to or below it”
I find it easier to put this into a sentence with an example percentile – “In a distribution of numbers, the 75th percentile is the number below which 75% of the population falls at or below”.
To be extra clear, and to address a common misconception, a percentile and a percentage, are not the same thing – the 75th percentile, is not “75% of the market”.
Extra credit:
The definition gets a lot more complex as there are technically several definitions of a percentile and depending on the interpretation could be calculated differently. For example, if a true percentile doesn’t exist, then an interpolation is required to extrapolate a percentile number that may not truly exist in the data sample – this methodology can differ between definitions. There is also debate around whether the 100th percentile and 0th percentiles really exist (Technically there is no number below which 100% of the population falls). This is the difference between the “exclusive” (excludes the 100th and 0th), and “inclusive” (includes the 100th and 0th) definitions. In Excel this is represented as the functions percentile.exc, and percentile.inc respectively.
A common group of percentiles are the “Quartiles”, which are the 25th, 50th, and 75th percentiles and divide a distribution into four. You can also have Ventiles, Deciles, Quintiles which divide a distribution into 20, 10, and 5 parts respectively.
The Median, for all intents and purposes, is the same as the 50th percentile and the terms often get used interchangeably. Technically though, it is a simpler number than the 50th as it is just the middle number in a range (or an average of the two middle numbers) if the range has an even set of numbers.
Range Overlap
This refers to the amount one range crosses over with the next.
Overlap is typically expressed as a percentage of the previous band so with a range of $100-$150, and a second range of $125-$200, the overlap would be 33% (($150-$125)/($200-$125)). Equally this could be expressed as a percentage of the lower range although I haven’t seen that as often.
This isn’t a number that gets a great deal of attention and usually we want to just make sure that there is some overlap after setting range spread (unless it is a stepped salary structure with an overlap of zero).
Overlap is usually considered a positive thing as it allows for greater freedom when it comes to promotions without creating outliers. However, one could argue that if there is a situation with insufficient promotional budget to take them to the lower third of the next band, then this points to a bigger issue of potentially low historical pay or a new level of pay that puts them at odds with their peers and needs to be addressed. So there is an argument that these are better left as outliers to be urgently addressed rather than using wide ranges and overlap to “hide” the problem away.
Range Penetration
The degree to which a given individual has moved through the band. This is usually expressed as a percentage of the range spread i.e. Salary/(Max – Min). For example in a range of $100-$200, an individual with base pay of $125 would have range penetration of 25%. In other words, they have “penetrated” the range by 25%.
0% would mean that they are at the minimum, 100% would mean they are at the max.
Note that it is possible to have scenarios where an individual has a negative range penetration, or over 100%, if they are below or above the range respectively.
Range Spread
Range spread refers to the “width” of the band i.e. the distance between the Min and the Max. The higher the range spread, the more room for maneuver with pay decisions, and the greater the Range Overlap. A common question is “what is an appropriate Range Spread” but there isn’t a simple answer. Generally fewer grades, greater latitude for managers on pay decisions, and a large number of outliers will make larger spreads more appropriate. A large number of grades at a company that doesn’t like to allow for much manager discretion and is able to do a good job managing pay, will likely opt for a narrower Range Spread. This is a variable that often changes once we understand the impact of the ranges, namely, the number of outliers that are created.
The calculation gets surprisingly confusing as there are several ways that I have seen this number expressed including: (Max-Min)/Min; (Max-Min)/Mid; (Max-Min)/Max; and (Max-Min)/Mid/2 (this one is usually expressed as a “+/-“).
I don’t think there is any “best” option here. For example, SHRM calculates it as (Max-Mid)/Mid, whereas PayScale suggests (Max-Min)/Mid.
The approach I was taught to use is (Max-Min)/Min and I have tried to be relatively consistent with this unless a company is already familiar with a different definition. Whichever approach you take, just be sure that everyone is on the same page when discussing the number.
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