New Article! Salary Data: Company Weighted or Employee Weighted

by | Published on Nov 28, 2020 | Last Updated on Mar 31, 2024 | Academy

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Company Weighted vs Employee Weighted

There are two schools of thought regarding salary data statistics.

There have always been two schools of thought regarding what “distribution method” is best for creating the statistics used in salary data analysis and salary benchmarking. The two distribution methods are Company Weighted Statistics and Employee Weighted Statistics. The preferred method is somewhat of an age-old debate that goes back to the beginning of salary benchmarking.

So which method is right?

Ultimately, it depends on a few factors which we will cover in this article. Therefore if you are utilizing market pricing for jobs, the data type that you use can have a significant effect on your compensation recommendation and its associated labor cost as well as overall competitiveness.

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Let’s first discuss the difference between organization weighted vs incumbent weighted.

Incumbent-weighted market distribution.

Salary statistics use every individual employee regardless of the company. Each employee is weighted equally. All employee records are ranked together, and the average salary, median salary, and salary percentiles are based on this ranking regardless of company affiliation.

Company-weighted market distribution. (Organization Weighted market distribution)

Salary statistics are computed based on the company average of each job and level. Salary statistics use the average pay for each job and level, and each company is weighted equally. These averages represent what a company would pay for a job, and then each company average is used to create an average salary, median salary, and salary percentiles.

Which method should I use?

The choice of which type to use depends on three factors: Philosophical alignment, Pay Strategy goal and Analytic purpose.

  1. Which market factors or organizations are you benchmarking against?
  2. What market comparison target do you have in mind, such as the median (P50), P75, or P30?
  3. What is it that your pricing analysis seeks to address – annual planning, recruitment, retention or something else entirely? With these considerations in mind, you can arrive at the best solution for your specific situation.
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When to use the Company-Weighted Distribution method

The Company-weighted distribution statistics are determined by computing the average pay for employees within each company prior to developing the distribution. As such, this calculation is based on every organization’s respective wages. Consequently, a company’s position in the market has an big effect on constructing the overall distribution.

Pay Philosophy:

When analyzing the average salary of your organization compared to other companies, it can be helpful to use a company-weighted market distribution. This will enable you to compare and contrast with businesses in similar industries and more accurately assess any competitive edge held by your own firm or the competition.

Pay Strategy:

By taking the average of the data before computing market distribution, we can observe a decrease in variance between the 25th and 75th percentiles. If your company sets its pay strategy target at the P75 mark, it will result in labor costs that are lower than average, as long as your employees receive salaries comparable to those of other companies operating around this benchmark. On the contrary, aiming for a P25 objective can raise market values and increase overall cost.

Pricing purpose:

This distribution is ideal for situations where you are comparing pay between all employees within a job, rather than on an individual or sub-group basis. During the implementation of a P75 strategy, if upper management perceives their competition as other high-paying companies instead of an 45 year old experienced IT manager with a notable compa-ratio score, then company weighted market data becomes the suggested option.

In this case, Company Weighted Market Pricing acts as a marker of competitive fairness since most companies want to keep themselves on par with the market rates with their pricing. For instance, annual market planning for multiple incumbent jobs is an appropriate example where the Company Weighted Market Pricing method should be used.

When to use Incumbent-Weighted Market Distribution

Remember, this statistic is calculated by ranking all incumbents in the sample regardless of company, and then calculating the market average.

Pay Philosophy:

This analysis compares your company’s salary against that of other individuals in the market or more specifically, assesses how it stacks up to its competition. In this distribution, P75 is set as a benchmark for top earners who are earning higher than 75% of those examined in the sample.

Pay Strategy:

The end-points (P10, P25, P75, and P90) are usually either higher or lower than the company-weighted values. If you are aiming to target the P75, the Incumbent Weighted Market pricing will generally produce a higher market level than a Company Weighted Market distribution.

Pricing purpose:

If you’re aiming to attract individuals in a competitive job market, the incumbent-weighted distribution is your go-to option.

When it comes to recruiting, either as an individual or a group, in high-demand skill areas like the tech industry, you need to take into account the incumbent-weighted distribution. This will give you a better indication of what kind of compensation is needed to entice qualified professionals away from their current positions and onto your team. In such dynamic markets where individuals rather than businesses are driving competition and wages higher – looking at this type of measure can be invaluable when making hiring decisions.

The extremities in the incumbent-weighted market distribution can give us a better glimpse into where prices at the margin may be headed and what price level must be presented to keep our most valuable employees. Nonetheless, if markets are stable, then CWM is recommended, or one could compare outcomes of both distributions prior to determining which suggestion should come first.

Conclusion

While there is no single correct answer that is good for all situations, there are now three criteria that can help you determine which method is most appropriate for your current situation and pay structure. Keep in mind, survey vendors that collect data on incumbent pay by job have the ability to craft either a company-weighted or an incumbent-weighted market distribution. Whereas. survey vendors that only retrieve average pay by job, however, will generate only a company-weighted market distribution. It is notably tough for these providers of services to create an accurate and precise incumbency weighted market distribution with exact measures for every single statistic (e.g., P25, P50, P75). At SalaryCube, we collect incumbent based pay, and therefore have the ability to calculate either method.