Determining Compa-Ratios: How much should we pay?
Have you ever applied for a job and wondered what the salary range is before applying? This is a common complaint of job seekers, not knowing what a position pays. While I believe we should definitely allow for pay transparency, this can sometimes be a slippery slope. Imagine if you saw a role posted and the compensation range was between 75k and 95k. Naturally, you’re going to want the 95k right? Let’s be honest here- what job candidate would go into the interview knowing that a role pays up to 95k and ask for the 75k?
It’s tempting, I know. But this is where I caution you to spend a little time considering how these ranges really work. Many roles have pay ranges that are about 10 to 20 percent above and below the midpoint of each role. This 10 to 20 percent is called the range spread. In the example I gave above, 75k would be the minimum and 95K would be the maximum for this particular role. And for the sake of this example, let’s assume that 85k would be the midpoint.
When new employees are hired, depending on their experience, they are typically paid at the minimum of the pay range. The reason here is not because an employer simply wants to short change the employee- it’s primarily because they know that they will have to invest in the employee and want to allow room for the employee to not only grow in the role but also grow in the pay range. There is typically a learning curve and it may require additional time to get the employee up to speed. It’s not uncommon for new employees who started at the base of the pay range to receive an increase within 6 months to a year of being on the job. This happens because as they become more proficient in their roles, they are eligible for salary increases and they have enough room in the band for that increase.
These ranges are critical to pay attention too because failing too could result in a retention issue. The top of ranges are typically reserved for experienced hires. These are people that typically hit the ground running when they start. It’s not uncommon that a company would hire someone into these roles. However, we’d have to ask ourselves- (1) How quickly will people getting bored in these roles and (2) How can we retain them if we can’t pay them? Recall that we started them at the top of the pay range. There is no where else to go in the range.
There are also some instances in which candidates may ask for salaries below or above the pay range. For employees asking for compensation higher than what the position pays- these poses a problem similar to the one I just described with paying at the top of the range- this will cause employees to be considered red circled as they are outside of the pay range. A bigger problem that this creates is overpaying for the role. Recall from the job evaluation video that I mentioned evaluating jobs based on the critical elements of a job and not the person doing the job. You don’t want to find yourself in the business of changing salary ranges based solely on a job candidate. (A note that I’d like to mention is a good practice for compensation analyst and HR generalists is to review market data for salaries on an annual basis. These things could fluctuate due to things like demand, inflation, etc. These are the only reasons I could see adjusting a pay range).
Taking a look a comp ratio’s help us to identify where employees are in the pay range and how much more room we have in the pay range for increases. We get the comp ratio by diving a person’s wage rate by the midpoint of the range and multiplying by 100.
Let’s take a look at an example:
We are looking to hire Danielle into the company as an HR generalist. The minimum salary for this role is 75k, the midpoint is 85k and the maximum is 95K. Danielle is requesting a salary of 80k annually. How would we calculate Danielle’s comp ratio?
If we take 80k/85k x 100= 94% would be Danielle’s compa-ratio.