The Insider Guide to Careers
Insider information, secrets and tips about getting hired and building careers. For employees and job candidates.
Most salary ranges have a lower limit and an upper limit. The ranges may not disclose the midpoint. Note that any compensation in the salary range is considered a fair salary by company standards. While I will shed light on how the ranges work, there can never be employees who are all paid close to the upper limit or a case where all employees are paid at the midpoint of the range. Everybody’s compensation is unique. Ideally, there should be a spread of compensation numbers across the range and some rare scenarios of employees outside the range.
Dealing with recruiters:
Suppose you are looking for jobs in locations like California, Colorado, Connecticut, Maryland, Nevada, New York, Rhode Island, and Washington. In that case, you have the right to ask about the salary range from the recruiter, and they are duty-bound to respond with the numbers. They may respond with information about the midpoint and only reveal the range if you ask them specifically. A range is no guarantee that you will get a compensation number anywhere close to it, but it is helpful information for a bunch of leading questions you can ask your manager.
Ranges are not perfect:
Every salary data point from either inside or outside the company will never fit into the salary range. Remember that salary ranges are created by benchmarking with a limited number of competitor company salaries. For some jobs, the data points may be too few, certain companies may pay like crazy for specific roles (like Facebook paying for game and VR developers at one point), or there could be sampling issues with every survey. So the company chooses a valid range to cover most of the data points but not all. Typically, the company should ensure at most 10% of employees are paid less than the lower limit. Similarly, the company should pay at most 10% of the employees above the upper limit. Of course, in a utopian world, there should be no employee both under the limit or over the limit, but it never happens.
Some companies list the maximum compensation possible for the salary range, and many companies do not. The reason is that while 90th percentile data can be obtained through surveys, there are few data points above that percentile. The scarcity of data points makes it more challenging to estimate the 95 percentile and above. Simultaneously, some employees may get paid many standard deviations above the mean for all sorts of reasons. Maybe they are the only Ph.D. in that field worldwide, or the company’s founder decided to compensate their child generously as an employee. If the compensation is extreme, it is sometimes higher than even the comp for the ranges above it. The estimates of fair compensation become tricky. The trick is to balance the highest numbers to ensure the overlap with the following compensation range is not high.
Managing employees outside the range:
If an employee is below the salary range, there could be many reasons for it. It is common to find employees at that place because of factors like not negotiating compensation when they joined the company, a result of a recent acquisition, limited work experience, or limited education. Typically, the managers are expected to focus on those employees and bring them within range in 3-4 years. For example, let us assume that the compensation gap between the lower limit and actual comp is 5%. If the manager gives a 3% increase and the pay ranges move upward by 2% that year because of compensation benchmarking, the gap only reduces by 1%. Hence managers are advised to give an additional top-up & increase to handle these cases. This top-up budget is a challenge during times like the recession when there is not much of a salary budget for all employees, including top performers.
If an employee is well over the upper limit of the salary range, there is an issue. Managers should not increase the gap between the current compensation and the upper limit of the range. Since base compensation cannot be decreased, managers freeze the base salary. Hence, most managers end up giving high bonuses but no salary increase to that employee. This idea that base salary can be frozen can be upsetting to some employees, who may feel that top employees are being penalized. This sad consequence is the consequence of going overboard in compensation negotiation. Getting paid a very high base can be a double-edged sword, so be watchful about what you ask for. HR typically recommends that that person be evaluated for promotion as soon as possible. Very high pay indicates high performance, so promotions are an excellent way to incentivize the employee and bring the employee’s compensation within range, as the comp benchmarks after promotion are much higher than the numbers before promotion.
Mapping employees and performance to compensation distribution:
The midpoint of the range is an approximate estimate of the market midpoint. This midpoint is a significant number in the world of HR and compensation; it represents the Compa ratio of 1. In other words, it represents the 50th percentile. Compa ratio is an estimate of how you are paid with respect to the market. A Compa ratio of less than 1 means that you are probably underpaid, and a Compa ratio of more than 1 means that you are overpaid to the market. Some companies follow a philosophy that all employees need to be paid within 80% to 120% of the midpoint. For example
While this is old school philosophy, a more modern approach is to have a majority of employees (around 70%) in the 80% to 120% of Compa ratio 1. There will be 10-20% of employees who are below this 80% of Compa ratio number (and above the lower limit of the range) and 5-15% of employees above the 120% number (and below the upper limit of the range). Paying over the upper limit is especially true in the tech industry, where top talent in competitor companies has to be lured by paying way above market.
Problems with new hires:
While new hires should generally be paid the least and well below the midpoint of the market, it is often challenging to recruit tech talent from top universities if the pay is not up to expectations. To fix this problem, companies offer high sign-on bonuses and high equity. These are one-time grants and vary based on performance. Compared to base pay increases, these one-time payments are easier for the company to deal with. When it comes to bay pay, some companies keep a centralized corporate budget where new hires (typically on a rotation program) are paid at the 60th or 75th percentile for a couple of years before they are shifted to the business (where they get paid slightly above the 50th percentile). As a result, a new hire may see a sudden drop in base compensation after 2-3 years of work experience. If they read this article, they should know the reason. The difference in budgetary cost centers is something kept away from employees.
Pay inversion is another problem. If you work in a company for more than two years, your pay will begin to lag the market. If you stay in a company for 15-20 years in the same role, it is probably well below the 50th percentile, the midpoint of the market. Compensation research sheds light on why employees stick around in companies even when their compensation is below market. Since companies reward loyalty when it comes to promotions, early-in-career employees find it challenging to get promoted. Even if you get underpaid in your current job after a couple of years, your chances of promotion are much higher. Hence, if you want to get paid well in the same company you are in, the compensation increases will come through promotions rather than changes to base compensation.
Conclusion:
Compensation is a complex topic. Every company has its practices, standards, and exceptions. I have summarized extensive observations into simple bytes so that anyone can understand. Business leaders need a better understanding of compensation, and this article should go some way to getting you interested. Chat with your compensation managers or HR Business Partners if you have more questions. Otherwise, you can always comment on this article with your questions. In making this topic simple, I may have watered down the complexity of compensation. So, again comment and let me know.
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