What Is Salary Range Penetration? Definition, Use, and Examples
You want to pay your employees accurately and at market levels. There are several metrics you can use to ensure fair pay. Salary range penetration is a crucial compensation metric to help you understand and manage pay differences at your organization. Let’s have a closer look at this metric and find out how HR can enable managers to use salary range penetration in their hiring, salary raise, and promotion decisions.
Contents
What is salary range penetration?
How do you calculate salary range penetration?
Why is salary range penetration a useful compensation metric?
How can HR enable managers to use salary range penetration?
What is salary range penetration?
Salary penetration looks at the position of the salary in its pay band. It lets employees and HR and compensation professionals know where someone stands in relationship to the entire salary band. If your salary bands are too broad, then the information isn’t helpful. Still, with properly calculated salary bands, you can clearly see where someone stands with their relationship to market rate.
It gives you very similar information to the compa ratio metric. One key difference is that salary penetration looks at the salary compared to the entire pay range, while compa ratio focuses only on the midpoint of the salary range.
This compensation metric is a valuable tool for comparing pay and across the organization. You want to make sure that your compensation strategy and pay practices are consistently applied throughout your entire company, and this tool can help you compare across ranges. This and other compensations metrics should have a solid place in determining what your organization does in terms of compensation and benefits.
How do you calculate salary range penetration?
To calculate salary range penetration, you need to know three numbers: Salary, range minimum, and range maximum. The formula is:
Salary Range Penetration = (Salary – Range Minimum) / (Range Maximum – Range Minimum)
So, if you have an employee with an annual salary of $50,000, with the range being $45,000-$60,000, here’s how this would look.
($50,000 – $45,000) / ($60,000 – $45,000) = 33 percent
You can see how this value can change drastically depending on the range. If the range for the position is $45,000-$55,000, the salary penetration changes, even though the base salary itself did not change.
($50,000 – $45,000) / ($55,000 – $45,000) = 50 percent
Compa ratio (or compensation ratio) is more commonly used and more well-known, but it is just based on the midpoint and not the range. In compa ratio, it’s simply the salary divided by the salary range midpoint. So, in the above examples, the first one would be:
$50,000 / 52,500 = 95 percent compa ratio
In the second, you’d get:
$50,000 / $50,000 = 100 percent compa ratio
It can be a bit of a brain switch to comprehend the difference between penetration and compa ratio. An employee with a 95 percent compa ratio may be perfectly happy with their salary. In comparison, if you present it as a salary penetration of 33 percent, the employee may be furious and think that they are underpaid.
Why is salary range penetration a useful compensation metric?
Salary range penetration helps you:
- Explain to employees where they stand in terms of salary. Show them how to make a salary range penetration calculation and also explain what the results mean.
- Help employees know what their potential is. Having a salary penetration score can help your employees know whether they have room to grow within their current band or if they should be looking for a promotion. Make sure your employees understand why they are where they are and what they need to do to receive an increase. Managers should clearly articulate that an employee needs, for example, an additional skill or a higher performance score to move up in salary penetration.
- Discover whether your salary ranges are too wide or too narrow. Because this metric looks at the entire range, you can easily see if things are too wide or too narrow, and make adjustments. For instance, as some governments require job postings to contain salary ranges, you will see huge ranges. That type of range makes this metric not valuable.
- Set target salary levels for different categories of employees. This can be valuable when distinguishing between groups. For instance, your goal could be a salary penetration level of 35 percent for new hires and a goal of 70 percent for your long-term top performers. It makes it easy to compare across the organization. Different positions could have wildly different salary ranges. Still, you can take a look and see that everyone with less than two years at the company has a salary penetration between 35 and 40 percent and know your compensation program and strategy are working.
- Plan salary increases and promotions. For example, employees on top of the range might be ready for a promotion and moving to another salary grade. Employees at the bottom end who perform well will need to receive significant increases to keep them receiving a market rate salary.
- Understand the state of pay equity at your organization. Doing salary penetration calculations, like compa ratio, lets you compare salaries across organizations. You can see how different groups perform and if wages are comparable in similar roles, and what the state of internal equity is.
How can HR enable managers to use salary range penetration?
While HR leads compensation, managers play a critical role in ensuring equity among employees and across the organization. While managers see their own employees’ salaries, they don’t often see the salaries of people who report to other people. Salary range penetration can help managers keep salaries balanced across the organization, even without knowing other groups’ salaries.
Here’s what you should put into a salary range penetration guide to help managers use this tool.
- Explain what salary penetration is. Show them how to calculate it and explain what the results mean.
- Provide up-to-date salary range penetration information. This would include information about company targets. For instance, managers need to understand where high, middle, and low performers should land in the salary penetration ranges, and what your organization’s pay structure is.
- Coach managers on how to have a salary discussion. Employee salary discussions can be awkward, and having salary tools can help. When a manager can sit down and say, “Your salary penetration is at 35 percent, and we want to work on a plan to get you to 50 percent over the next two years. To do that, you need to finish your bachelor’s degree, improve your Excel skills, and take on the monthly reporting function.” This type of clear information can help everyone involved manage expectations.
- Explain that salary ranges will change with the market. The advantage of using salary penetration as a measure rather than straight salary is that this metric includes market changes. As the range increases, someone’s salary penetration may decrease even if they get a raise. This helps managers make salary decisions that make sense in the current market.
Over to you
Salary range penetration not only helps you understand and manage employee pay, but it also allows your organization to adjust its salary structure and build competitive compensation packages. Compensation is a critical piece to keeping employees happy and your business competitive.
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