‘Comp speak’ impacts most of us. What is it?
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Most industries and professional disciplines have unique – and often confusing – jargon. The world of employee compensation is no different, with compensation terminology (“comp speak”) that can be downright puzzling to outsiders. Nonetheless, understanding employee compensation is vital to American workers; so, here’s a quick primer to help demystify “comp speak.”
What is Comp Speak?
Comp speak is simply the set of employee compensation terms used by compensation and human resource professionals. Some terms deal with the practice of compensation administration while others deal with relevant state and federal regulations and still others reflect usage in industry and competitive landscapes.
Simplifying Comp Speak
To simplify “comp speak,” here are answers to common questions:
What Do “Fair Pay” and “Pay Equity” Mean?
Fair pay is established when an organization completes a market benchmarking study and creates pay ranges aligned with the market. Equitable pay, on the other hand, is determined through an internal equity analysis. With that in mind, pay equity is the result of ensuring each employee is appropriately placed in their pay range based on their total relevant experience, time in job, and performance compared to others within their same and similar roles. Note however, that not all experience is relevant experience for every job.
What Does “Pay Transparency” Mean?
Pay transparency exists when an organization communicates pay ranges in their job postings and shares with each employee where they are positioned within their pay range. Full pay transparency (required by many state and local government agencies) can include each employee knowing all employee salaries. Full transparency is also more likely when an organization shares their compensation philosophy, how they benchmark their jobs, scopes used to compare to other companies, and openly communicates other compensation policies and practices. Irrespective of regulatory requirements, each organization has a pay transparency comfort level. For example, some organizations have valid concerns over competitors learning their pay practices and consider compensation to be proprietary information to be kept confidential.
What is “Market Benchmarking”?
Market benchmarking involves analysis of job position compensation rates in a defined marketplace, such as local or regional. Some companies perform this analysis internally while others use outside compensation consultants. Job documentation is compared to third-party published and validated pay data surveys of employer-reported data. Once matches are finalized, the data is typically aggregated at the 50th percentile for all matches from all surveys used.
What Does “50th Percentile” Mean?
The term “50th percentile” is also referred to as “100% of market” or market average. It means an organization on average has an overall “comp-a-ratio” (see below) of 100%. However, an organization with many new and inexperienced employees who are, and should be, paid lower in their range, can have a 50th percentile philosophy, but an average comp-a-ratio lower than 100%.
What is a “Comp-a-Ratio?”
“Comp-a-ratio” is a calculation whereby the employee’s annual salary is divided by their salary range midpoint. For example, a $55,000 annual salary divided by a $60,000 midpoint is a comp-a-ratio of 92% (rounded). A common myth is that all employees should have a comp-a-ratio of 100% (so their pay is on average at the market value for their role). Not true! Why? Because comp-a-ratio placement is based on years of previous relevant experience, time in job, performance, and how an employee compares to similar employees in the same or similar job. So, some employees will have a comp-a-ratio of less than 100%, and others will have a comp-a-ratio higher than 100%. Employees with more time in a job title will typically achieve or exceed a 100% comp-a-ratio based on their education and experience when compared to the role’s requirements.
How Are Pay Ranges Determined?
Similarly-valued jobs should be grouped together in a pay range with a minimum, midpoint (based on the organization’s compensation philosophy), and a maximum rate of pay. Depending on the job level, the spread from minimum to maximum can typically be 50% to 80%. Jobs narrower in scope (typically lower-level roles) usually have a 50% spread while executive positions often have wider scope jobs, typically 80%.
While not all organizations use the same methodology when determining pay range placement, it is common to think of pay ranges in thirds. The lower third typically encompasses new and untested employees with little to no experience and those who may have been recently promoted to a new role. The middle third is for employees with relevant education and experience to the job requirements, who can perform all aspects of the job with little supervision, and who can also mentor and train other employees. The upper third is for employees with sustained and outstanding performance over a prolonged period of time. An employee’s experience relative to the job requirements, time in job, and performance are also compared to others in the same or similar job.
The Bottom Line:
Professionals in any industry can easily fall into the trap of using jargon and assuming outsiders understand it. However, human resources and compensation professionals have a duty to strive for clarity and ensure “comp speak” doesn’t create confusion.
Cassandra Faurote is the CEO of Total Reward Solutions, a compensation consulting firm and author of Compensation Sense 101: Common Sense Answers to Your Questions About Employee Compensation and Total Rewards. Reach her at cassandra@totalrsolutions.com.