What is 25th, 50th and 75th Percentile in Compensation?

What is percentile in compensation?

Percentiles in compensation indicate where workers' wages fall relative to others. They help compare salaries in a field to determine if compensation is higher, lower, or typical for the position.

The main goal of percentiles is to serve as a benchmark for determining salary competitiveness in a market or industry. This helps individuals and employers understand salary competitiveness and make informed decisions.

Common salary percentiles

Salary percentiles are commonly used in compensation analysis and benchmarking. Here are some of the most frequently used ones:

What does 25th percentile mean?

The 25th percentile is the salary that 25% of workers in a job earn less than. For example, if the 25th percentile is $200,000, it means 25% of companies pay less than $200,000, and 75% pay $200,000 or more.

What does 50th percentile mean?

The median is the 50th percentile: half of workers earn more, and half earn less. It's a good indicator of a typical salary. For example, if the median salary for software engineers in San Francisco is $150,000, half of them earn more, and half earn less than $150,000. This helps companies set competitive salaries.

What does 75th percentile mean?

The 75th percentile is the salary that 75% of workers in a job earn less than. For example, if the 75th percentile salary for data scientists in a specific industry is $130,000, it means 75% of data scientists in that industry earn less than $130,000 annually. The top 25% of data scientists, who earn $130,000 or more per year, would be considered high earners in this industry.

Why are these percentiles important in compensation analysis?

Percentiles are important in compensation analysis as they indicate how salaries stack up within a particular job market. Here's why they matter:

• Comparison and context: As mentioned, percentiles help compare an individual's salary or a company's pay structure to the broader market, providing insight into how competitive the pay is compared to others.

• Data interpretation: Percentiles simplify understanding a specific salary data point. For instance, a salary at the 70th percentile for a position indicates that 70% of salaries in the market are lower.

• Strategic benchmarking: Companies use various percentiles to guide their compensation strategy. Some target the median (50th percentile) to remain competitive, while others aim for higher percentiles (90th or 75th percentile) to attract top talent.

Salary.com's Compensation Software includes an Analytics feature that offers data and insights to help ensure your organization's pay is competitive in the market. It allows you to create, edit, and share reports easily, and export presentation-ready reports directly to stakeholders.

Challenges and considerations in using percentiles

Here are some things to remember when using percentiles for compensation analysis:

Limited data

Percentiles, including the 25th percentile, may be misleading with a small sample size. Make sure the data source for percentiles is reliable and reflects the target market accurately.

Compensation Software provides access to a large and reliable HR-reported compensation dataset. This helps ensure that the percentiles used for compensation analysis are based on a representative sample of the target market.

Job title variations

When comparing compensation using percentiles like the 25th percentile, ensure the job descriptions are similar. Job titles can differ, so it's important to use descriptions that closely match the roles for accurate comparisons.

The software offers AI-recommended job matches and automated scopes, which can help ensure that the job descriptions used to define the percentiles are comparable across different companies.

Total compensation

Percentiles usually look at base salary and might not include bonuses, benefits, or stock options. Consider total compensation for a more complete view.

FAQs

Here are some common questions about the 25th, 50th, and 75th percentiles in compensation:

What is the market rate of compensation?

The market rate of pay is usually the 50th percentile, or the middle salary for a job in a specific market. This means half of the workers earn more, and half earn less than this amount.

Do percentiles vary by industry or location?

Percentiles can vary significantly based on factors like industry, location, and company size. Different industries and locations can have distinct salary ranges and percentiles.

How often should companies check these percentiles in their pay plans?

Companies should regularly review and update their pay plans to remain competitive and align with their compensation strategy. This is typically done annually or biennially.

How can companies get market pay data for these percentiles?

Companies can get market pay data from surveys, tools, and consulting firms. These sources offer salary ranges and percentiles for various jobs and industries, including the 25th, 50th, and 75th percentiles, helping companies remain competitive.

Compensation Software provides companies with easy access to salary data for 15,000 job titles across 225 industries, allowing them to compare their current pay levels with market standards and make informed decisions. This market pricing information is updated monthly by Certified Compensation Professionals.