Internal Equity Analysis

PGN HR's Rank-Ratio Method

Internal equity issues are the creation of several contributors. One such contributor is the salary structure. The others are the job architecture, market rate movements, talent competition, demands for specific skills, labor unions, and of course, policies and practices.

Our work involving internal equity analysis comes after we determined the Levels of Work Complexity© of each job position in the organization. The purpose of PGN HR’s Rank-Ratio Method for Internal Equity Analysis is to standardize salary ranges and promote equity among similarly classified positions.

We determine salaries that have become out of alignment over the years, by examining records on individual basis and on a job classification (group) basis.

To determine quantitatively where imbalances in salaries exist, PGN HR’s uses its "Modified Rank-Ratio Method". It is a process that utilizes the mean salaries of a group of employees in either a job family, classification or a grade. It also uses 1 & 2-Sigma standard deviation calculations, incumbency (time in job), and Compounded Salary Growth Rate (CSGR).

Taxonomy for Grouping Data

PGN HR will establish a taxonomy system for grouping data. This can be: Budget Center, Department, Levels of Work Complexity© Classification and Job Family.

We compare salaries against the mean salary of the group (compa-ratio). To validate the results of the simple compa-ratio, we will further test for internal inequity by expanding the inquiry to 1 sigma, and 2-sigma standard deviations. These tests are part of the “Rank-Ratio” calculation. So, if an employee's salary is outside the 68% range (1-sigma), and/or outside the 98% range (2-sigma) standards then the salary is either below or above the group’s rank-ratio. If this is true even with just one incumbent (given the years in position,) then an internal equity issue may exist.

Differences Between Simple Compa-Ratio and Rank-Ratio

It is important to discern the differences in results provided by simple compa-ratio and rank-ratio calculations. Simple compa-ratio is a straight-forward comparison between an individual salary and the average salaries of a group of incumbents. This is done by simply obtaining the percent difference between the two numbers.

PGN HR’s Rank-ratio is an in-depth inquiry into the comparison. The purpose of rank-ratio is to provide patterns that show compression between and among salaries. Rank-ratio validates the results obtained through simple compa-ratio by looking into ranges of salaries. Ranges of salaries include lower limits and upper limits (or lower boundaries, upper boundaries) calculated from 1-sigma standard deviation (where 68% of data points fall into the range), and 2-sigma standard deviation (where 95% of data points fall into the range). Any values found to be outside the ranges established are either paid lower than the lower boundary of the range, or paid higher than the upper boundary of the range.

Both compa-ratio and rank-ratio utilize the established taxonomy (explained in previous page) we will prepare for this study. The use of compa-ratio and rank-ratio together makes it is easier for anyone to point out exactly where internal equity issues exist; since together, they provide patterns that reveal current situations which in turn help with prioritization later down the road.

Predictive Analytics For Internal Equity (Compression/Inversion)

For determining if "salary compression or salary inversion" exists within the salary structures, PGN HR establishes matrices using linear algebra for predicting internal equity issues. The process takes into account the taxonomy (data grouping) that we develop, as well as the compounded growth rates of salaries over a certain period of time (time value of money).

Our predictive analytics takes compounded salary growth rate as "scalar", time value of current salaries as "velocity" and market movement as "vectors". This approach allow us to pin-point exactly where problems reside and build solutions appropriate to the gravity of the issue.

The Role of Policies and Practices in Internal Equity Issues

Policies affect the end-results of internal equity analysis. One particular policy that always creeps up towards the end of the study is the “Policy on Initial Hiring”. Initial hiring policies always confuse clients and consultants alike. Very often, the study analysis will adjust salaries based on the employees’ incumbency in the job. Jobs are then assigned to newly updated salary structures using factors that include “years in position”. Problems arise when few months down the road, clients try to hire someone and count “years of experience” as creditable item for assigning new hires into the structure at a 1:1 ratio.

This causes compression issues and internal equity problems because now, the new hire will be placed at the same or a much higher rates in the range than the existing incumbent, because clients invariably used years of experience with 1:1 ratio credit. Meaning, a one-year experience outside equates to one-year experience within.

All these issues can actually be addressed in the beginning by proper communication, understanding, and technical guidance for updating or amending policies and practices.

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Wage Structuring Strategy

With best practices in mind, we endeavor for pay structure designs that are 100% synonymous to the market midpoint. This is an admirable maxim, but one difficult to observe.

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State of Washington Changes FLSA Rules by January 1, 2021

Because of the state’s decision to change the threshold for FLSA, many employers (including our clients) will be forced to either raise employee salaries to maintain exemptions for overtime pay or reclassify employees as non-exempt and pay overtime, offer paid sick leave and of course meal breaks.

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