Posts Tagged ‘Ratio’

On “Range Penetration’

May 25, 2010 Leave a comment

One of the popular compensation position indicators is Range Penetration. This ration gives position of an individual’s salary with respect to the maximum salary.

And here lies the problem. The rapid growth of IT industry resulted in shortage of manpower. To attract and retain employees companies pay salaries which may not be in line with market and internal salary bands.

In a situation where salary bands are loosely defined and internal equity is not maintained the Range Penetration gives grossly distorted analysis.

Consider following case: Employee is drawing 0.9 M salary and the actual salary range for the position is from 0.5 M to 1.5 M.

In this case, the Range Penetration is (900000-500000)/(1500000-500000) = 40% This means that the employee is at the 40% in the salary range.

However, the salary of 1,500,000 might not be a desired max salary for the band. It might be an exceptional salary offered to that employee due to niche/critical skill. At times such salary might have been offered to get the person on board quickly to prevent the billing loss.  

Therefore, comparing everyone’s salary to 1,500,000 would be disastrous. There can be two approached to address this issue.

First, instead of 1,500,000 take the actual max salary defined as per the salary band (if it’s available). Assume it’s 1.1 M.

In this case, the Range Penetration comes to  67% which is actual representation of the person’s salary with respect to the band. However, salary bands are not strictly defined and governed in many IT companies. In such a scenario the best way is to use Compa Ratios.  

I will take this up for the next blog.