Salary range penetration compares an employee’s current salary with the pay range for their position. Essentially, it allows managers to see where an employee’s pay falls within a pay range to make it easier to determine how far they’ve moved in a pay range and potential opportunities for more pay.
Salary range penetration is an important part of determining compensation and designing a fair and equitable pay structure.
How To Calculate Salary Range Penetration
Salary ranges are sets of numbers that define how much a position can pay, from the low end to the high end. For example, an organization might set its salary range for software engineers at $80,000 to $120,000, with more experienced professionals earning in the upper quadrant.
Organizations create salary ranges to close pay gaps and make pay fairer among employees. There’s a lot that goes into creating salary ranges within a company, like researching competitor salaries, analyzing pay equity in the company, and aligning salary ranges with the company’s compensation philosophy.
Salary range penetration shows exactly where a worker’s pay is compared to the salary range. The minimum and maximum amounts in a salary range are the metrics used to calculate salary range penetration:
Salary range penetration = (Worker’s salary – salary range minimum) / (salary range maximum – salary range minimum)
A salary range penetration percentage near 0% shows that an employee’s pay is close to the minimum of the salary range. If the number is closer to 100%, the employee’s pay is near the maximum. A 50% salary range penetration denotes pay that’s right in the middle of the salary range.
Let’s look at an example of how to calculate salary range penetration.
Say an employee, Evan, earns $85,000 a year. The salary range for his position is $70,000 to $95,000.
($85,000 – $70,000) / ($95,000 – $70,000) = $5,000 / $15,000 = 0.33 or 33%
In this example, Evan’s salary has progressed through 33% of his salary range. This could be a fair salary for someone who has some experience in the field, but it likely wouldn’t satisfy an employee who’s worked with the company for five years and earned multiple relevant certifications.
Salary Range Penetration In Context
Salary range penetration is much more than a calculation. There’s meaning behind it for both employees and employers. Let’s look at how salary range penetration works in real applications.
What Salary Range Penetration Says to Employees and Managers
To an employee, SRP shows where they stand in terms of compensation for their role and how much room they have to grow in that position. To managers, SRP makes it easier to explain to employees what they can do to continue advancing in their positions.
For example, let’s say Julie’s SRP is 50%. Her manager explains the number to her, so Julie recognizes that she’s reached the middle mark for her salary range. Julie asks her manager what she can do to increase her earnings, and her manager gives her a few pointers, like meeting quarterly goals more consistently and gaining a new certification.
Managers can also use SRP to explain to employees how the company creates fair pay using salary ranges and evaluating those salary ranges annually or biannually to maintain consistent pay practices. Some companies also use SRP to set reasonable compensation goals for their employees.
For instance, Julie’s manager might set a goal for her SRP to reach 60% by the end of the year, perhaps offering a bonus if she’s able to complete the steps necessary to reach that goal.
How Salary Range Penetration Can Help Assess a Compensation Strategy
SRP is also extremely helpful in assessing the success of a compensation strategy.
For example, let’s say your company has a goal of keeping at least 80% of its employees at an SRP of 50% or above. However, when looking at every worker’s SRP, only about 50% have met that goal. This could be a sign of a lack of training or low employee performance, which can prohibit workers from achieving a 50%+ SRP.
SRP can also highlight other compensation problems, like salary compression, salary ranges that are too broad or narrow, or your pay parity strategy not working.
To illustrate, let’s look at how SRP can detect salary compression.
Ron just started with the company a month ago and is earning a salary of $50,000. The salary range for his position is $40,000 to $60,000, making his SRP 50%.
Will has the same position as Ron and is in the same salary range. He’s worked with the company for three years and earned a certification last year. Will makes $52,000, making his SRP 60%.
With only a 10% higher SRP than Ron for three years of experience and an additional certification, Will’s SRP shows that he could be experiencing salary compression.
Other HR Calculations for Informed Compensation Decisions
SRP isn’t the only calculation HR should use to make informed compensation decisions to improve pay equity. In fact, SRP works best when it’s used alongside other compensation metrics, including the following.
- Compa ratio: Compa ratio considers a salary range midpoint to show how an employee or group of employees compares. Calculate compa ratio by dividing one’s salary by the salary range midpoint. So, an employee earning $60,000 a year in a salary range with a midpoint of $55,000 has a compa ratio of 1.09. Some companies use the salary midpoint of market salary ranges to determine starting salaries of their employees. For example, a company with a target compa ratio of 1 for starting salaries would align salaries with the market salary midpoint for each position.
- Target percentile: Target percentile explains how a company wants salaries to compare with the market rate. Say the market rate for a position is $60,000, and the company’s goal is a target percentile of 60%. This means the company wants to pay 10% higher than the market rate, which is designated by 50%, so the company should pay at least $66,000 for the position.
- Market ratio: Market ratio compares company salaries with average market salaries. You can find it by dividing a worker’s salary by the average market salary. If the average market salary for a position is $80,000 and the employee’s salary is $75,000, the market ratio is 93.75%, meaning the employee gets paid 93.75% of the average salary for their position.
Using Salary Range Penetration to Close Pay Gaps
Pay gaps are never a good sign, and SRP can help detect them.
When a pay gap exists, employees can become unhappy, and rightfully so. It’s not encouraging to see that you’ve barely moved up in your pay range in the last three years or that your pay is close to someone who just started with the company despite the years of hard work you’ve put in.
Pay gaps lead to resentment and turnover among employees. At worst, they can even lead to lawsuits over unfair pay practices.
Think of SRP and other compensation metrics as early warning signs that something is wrong with your company’s compensation strategy. A few examples:
- On average, women working for a company have an SRP of about 10% lower than men for comparable roles. This shows that there may be gender-based pay inequity in the company.
- Three out of five workers in the same position have been at 95% to 100% SRP for the past two years. This signals a potential problem with promotions not being rewarded when earned.
- Workers aged 50 and above have SRPs of 20% to 50% at a company. Meanwhile, workers aged 40 and below have SRPs of 40% to 80% at the same company, highlighting a potential issue with age bias.
The best way to prevent these problems from happening is to complete a full pay equity analysis and continue to do them at least annually, but biannually or quarterly are excellent goals to strive for.
Pay equity analyses ensure that people in your company who are in similar roles get paid equitably and fairly for their work. PEAs use multiple data points, including information about the employee, the job, and the pay, to see whether certain employees or groups of employees have lower SRP than others.
After gathering this data, companies can begin digging into the whys behind pay inequities, such as salary compression or outdated salary data being used to create salary ranges for some roles.
