In the world of compensation, we often talk in percentiles (usually the 25th, 50th, or 75th) when benchmarking salaries.
In this post, we’ll answer the most frequently asked questions about how to interpret the percentiles in a salary survey and use them to set your own salary ranges.
Understanding this fundamental statistical concept will enable you to confidently select the right salary benchmarks for your business!
So, what is percentile?
Percentile is a concept in statistics that identifies a specific data point in relation to a group of data, taking into account the distribution and frequency of the data.
You might be familiar with percentiles from your school days, especially if you were ever graded on a bell curve or took any standardized tests.
Take any group of numbers - let’s say scores on an exam - and sort them in ascending order. The 60th percentile is whatever number 60% of exam-takers scored at or below.
Percentile is not the same thing as getting a 60% or a 60 out of 100 on an exam. If it was a really easy exam and everyone aced it, the 60th percentile could be an A. If it was a really challenging exam and everyone flunked, then the 60th percentile could be a C or even an F.
A percentile is a value below which is a percentage of the data falls.
What do the percentiles in a salary survey mean?
When you buy a salary survey, you’ll open it up to find that there are several different rates of pay for each role.
These rates of pay correspond to percentiles, usually the 25th, 50th, and 75th percentile. Some salary surveys will also include data points for the 10th and 90th percentile.
The percentiles in salary surveys show where a salary falls relative to all the other salaries submitted for that industry, job function or job family, and region or location.
What is the market rate of pay?
The market rate of pay is considered to be the 50th percentile, which is the median salary.
The 50th percentile is not the same thing as an “average” salary.
Instead, think of it like chopping your benchmarking data set in half. Half the companies will pay below and half will pay above this number. It doesn’t matter what the dollar value of those salaries are.
What if I want to pay less than the market rate?
Choosing to pay at the lower end of the market is a valid strategy.
If you anchor your salaries to the 25th percentile, that means that 25% of companies will be paying less than you, and 75% of companies will be paying more.
With lower cash compensation, you may want to think about the other forms of compensation or rewards that you provide to your employees (and also how to best convey that value).
For example, you could offer a more extensive health and wellness program or you could make up for the lower base salary with a higher emphasis on equity compensation (like stock options or RSUs).
This compensation philosophy is used successfully by some universities where lower salaries are offset by the job security of getting tenure.
What is the top of the market?
Paying to the top of the market means anchoring to the 75th percentile or 90th percentile. This means that you are paying higher salaries than the majority of companies.
The higher up you go in percentiles, the more likely you are to capture outliers or extremes in salary survey data. Paying the 75th percentile could mean a $150,000 salary, but going up to the 90th percentile could result in a jump to $200,000 if there is a subset of companies paying very high salaries for a certain role.
Remember, the 90th percentile means that only 10% of all salaries for that role are higher than that number.
If you’re in a hyper competitive market and you’re looking to attract the very best of talent (and you’ve got the budget and financial plan to match), then this could be the best option for you.
How do you use these percentiles to build salary ranges?
First, select the percentile to which you want to anchor. The salary at that percentile will be the midpoint (or target pay) of your salary range.
Then, decide how big you want your salary range to be. One very common approach is to set the minimum of the range at 20% less and the maximum of the range at 20% more than your midpoint.
For a deeper dive into building your salary ranges, check out this step-by-step guide.
Do I have to anchor all the jobs in my company to the same percentile?
The short answer is no. Many organizations choose to anchor salaries for different departments or even certain roles to different percentiles, especially if some roles are particularly hard to hire or mission-critical.
For example, some companies choose to anchor their Product, Design, and Engineering organization to the 75th percentile, while anchoring all other roles to the 50th percentile.
With this approach, you run the risk of inadvertently creating pay inequity. To avoid this, you need to create a pay structure (a framework of job levels, salary ranges, and pay zones) that ensures you are paying your people consistently and equitably for repeatable roles.
That was a lot of math. Can you highlight the big takeaways?
Absolutely! Here are the most important points you need to know:
- In a salary survey, the percentile shows you what percentage of companies are paying at or below that salary
- Percentile is impacted by the distribution or clustering of companies around a salary, rather than the absolute dollar value of that salary
- Choosing what percentile to anchor to is a fundamental part of your compensation philosophy
- You have a lot of flexibility in how you use percentiles to set your salary ranges, but it’s important to develop a pay structure to implement your comp philosophy consistently