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Be Careful with Averages (Especially with Compensation)

Posted by Alex Drexel on March 17, 2010


The Department of Labor put together this chart that compares the average amount spent on compensation and benefits between private and public sector employees.  At first glance, you might think that those interested in high paying jobs should look to public sector employment, or that public sector employees are overpaid.  However, drawing such conclusions from a simple average is premature.  In this case, the problem is that we aren’t looking at pay for the “average employee” across these two dimensions; we’re looking at averages calculated from entire groups of very diverse people.  Nancy Folbre, an economics professor at University of Massachusetts breaks these numbers down into a distribution of earnings in an effort to discredit initial interpretations of these averages, and to come up with some meaningful takeaways from the data.   

Comp is much more polarized in the private sector, where private sector employees are over-represented in lower and higher income brackets, while most public sector employees fall in the middle ranges.  43% of private sector workers earned less than $25k per year and more of them are part time (26%).  More public sector employees are college educated (45% of public sector workers have a college degree v.s. 29% of private sector workers).  The data suggests that employees performing similar jobs in the upper end are paid significantly more in the private sector than they are in the public sector.  And if you’ve got a lower skilled job, then it’s probably better for you to work for your local municipality.

Averages often offer poor and sometimes misleading insight when it comes to compensation reporting.  Too much is lost when data is aggregated.  The fact that the average salary for a US subsidiary is lower than a Mexican one may or may not be a problem; if they are the same, it may or may not be a problem; or, a problem may exist when the average salary in the US is higher than it is in Mexico.  Then you ask yourself, who cares about salary averages broken out by country, or business unit, etc..  I see too many compensation reports that just offer these higher end aggregates and don’t allow someone to look deeper into the numbers to draw meaning.  If you’re going to show an average, then be sure to allow someone to cut that average across multiple dimensions to get to some level of granularity; otherwise, an average is just a tease.

One Response to “Be Careful with Averages (Especially with Compensation)”

  1. Spot on, Alex! Averages are incredibly misleading at times, sometimes leading you to exactly the opposite conclusion than what is really the case under more careful scrutiny. The problem is that averages do work a lot of the time and are a very, very simple and quick way to shortcut analysis. It’s one number that “summarizes” a whole bunch of data and is easily comparable against another one for a whole different bunch of data. See “The Flaw of Averages” (http://www.amazon.com/Flaw-Averages-Underestimate-Risk-Uncertainty/dp/0471381977/) by Sam Savage and “Why Can’t You just Give Me The Number?” by Patrick Leach (http://www.amazon.com/Number-Executives-Probabilistic-Thinking-Decisions/dp/0964793857/) for more about this. Also, Ann Bares’ Compensation Force blog had a discussion about Mean vs. Median, etc. here: http://compforce.typepad.com/compensation_force/2010/02/survey-statistics-are-you-a-mean-or-a-median-aficionado.html

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