Your Company’s Pay Philosophy May Impact Your Wages More Than Your Performance…

“High Pay” is based largely on frame of reference.

First things first: This is post number 100 1. As such, I want to thank everyone (anyone?) who has read every day since the beginning.

…With that said, today I want to write a post inspired by an interesting conversation a friend and I had late Tuesday evening. We were discussing what degrees / skills etc. have the most compensable value in the market, before eventually touching on something relatively fascinating:

In many instances a company’s compensation philosophy has a larger impact on salary than performance and skill-set(s) do.

Allow me to illustrate:

In the above bell curve graph (courtesy of, we see that the median salary for an HR Manager is roughly $88,186. No data set is perfect, but let’s assume for the purposes of this post that this is an accurate picture of the market for HRMs.

Now, let’s look at how drastically compensation philosophy can impact what the median employee in a population earns:

In this hypothetical we would get the following

We took our identified median (p50 of the U.S. national average for HR Managers), and divided it by half of the range spread. This is expressed formulaically as Min=Mid/(Spread/2). Put another way, we took $88,186 and divided it by 1.25. To get the maximum, we took the minimum and multiplied it by the range (in this case 1.5).

This is expressed formulaically as: Max=Min*Spread. We can check our math here by taking (Max-Min)/Min to get the range spread (it should be 50% in this case).

For our first example, let’s assume a hypothetical widget technology company wants to target the 50th percentile of the U.S. national average salary for the midpoint of their HR Manager pay grade. Let us further assume that the company intends for the median employee in the HR Manager population to fall at the midpoint of the job’s pay range. Finally, let us assume that the pay range spread (i.e. the distance between the bottom and top of the range) is 50%.

These are all reasonable assumptions, and in line with best practice for what a company might do with its compensation plan design.

No let’s look at what happens if we hold everything else the same, but target p75 of the market as our midpoint:

Now finally, let’s look at an HR Manager working at a company targeting p10 of the market as a midpoint:

WOW! The maximum of the p10 company’s range is lower than the minimum of the p75 company’s range! This means that the lowest paid HR Manager at a company paying at p75 of the market for its midpoint (with a 50% wide range) makes more than the highest paid HR Manager working at a company paying p10 for its market midpoint (50% wide range).

Finally, as you can see above even the difference between a p50 and p75 company is substantial (nearly $14,000 at the midpoint). Put another way: In this example, an employee at a p50 company has to be in roughly the 90th percentile of wage earners within his population to earn the same amount as someone in the 50th percentile at the p75 company.

The pay for performance implications here are troubling to say the least, but they illustrate an interesting fact about pay in the marketplace: It is highly variable.

With that all said…

Closing, I want to point out that this *doesn’t* mean you’re better off finding a company with a market-leading pay philosophy and trying to get a job with them. Even if your goal is to maximize lifetime earnings, you’re ultimately probably best off sticking with the company that offers you the greatest opportunities for progression.

An HR Executive at a company targeting just p10 of the market for their midpoint is still likely to out-earn an HR Manager working at a company that3. Caveat: One should always consider the time value of money when doing these sorts of cost benefits analyses as well. If it takes 25 years to make the move from HR Manager to HR Executive at a p25 company, it’s entirely possible you’d have been better off financially having spent your career as an HR Manager at a p75 company (even if you never actually make the leap to executive).targets p90 of the market for their midpoint. 3

As a general rule the biggest jobs pay the best, so look to work at places where you have the greatest opportunity to move up.


Categories: Compensation