I have been reading from research reports and leading business newspaper daily's about XYZ banks average salary is 650K leading the 2nd best bank on wall street with 275K. It always amuses me why the reporting agencies and newspaper report average salaries and question my mind:
- what significance does it represent.
- is average salary more important or should it be median salary?
- does average salary mean higher standard of living for all employees of the firm or atleast 50% of the firm employees?
Let me put down some points as below:
Consider the following scenario.
A company has 100 employees each earning in the range of 90K to 110K with average salary of 100K, now the company does amazingly good while coming out of the recession and offers 20% bonus to each employee along with 100M of bonus to the CEO for the extraordinary efforts and his wisdom. XYZ company's Nth year average salary is 100K while in the N+1st year the average salary goes upto 1.1M. Amazingly the firm gets into reports and newspaper everywhere about the generous pays the company offers. While the 99 employees of the firm are still earning in the range of 110K to 130K only based on 20% "generous" bonus offered by the firm and their lifesyle does not change much because of 20% bonus.
Facts:
Many of the investment banks and partnership firms pays are highly dependent on the year-end bonuses. In partnership firms, the bonuses many-a-times exceed the base salaries. And generally a firm holds ~1-2% of the total employees as partners and these partners earn major chunk of the firm's profits. So, taking an average as calculation in salary standards does not help to measure or analyze the living standards of the employees. Though it can give good analysis point for how good the firm's businesses doing.
Analysis:
The average of the firm's salary falls 1.1M, almost 1000% rise over last year's average salary of 100K. 1.1M is average salary, but it does not signify what is the take-home salary for most of the firm's employees.
if we take median into consideration for computing the salary then it was 100K in Nth year while in N+1st year it increased upto 120K based on 20% bonus paid by the firm, and it shows 20% year-over-year growth. These numbers gives us some form of understanding about salary perspective.
Similarly, as an entirely different point of view average of 90% or 95% would give us different and more meaningful results than the results by average. As in the mentioned scenario, average of 90% and average of 95% would give us 120K in N+1st year and it co-relates that of the median. The average of 90% and average of 95% of terminology is widely used across technology for analyzing different
So what are the scenarios average does not help us analyzing the outcome?
- where distribution is very high(in the given scenario, only 1 person is earning 100M while rest all the employees are earning 110K to 130K, so 99% of employees earn in the range of 110K to 130K, or average 120K)
Anyways, users are can put down more points to clear the distinction between average and median in practical usage terms.
-Amit
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2 comments:
Avg, Median etc are statistics. If you have a normal distribution, then average=median. For all non-normal distribution, average is not equal to median and average do not represent the central value of the distribution. In such, non-normal distribution, median represents the true central value (in our case, 50% earned more than median value and 50% earned less than median value). Median takes into consideration the outliers (in our the case the CEO with envious salary). Statistics that provide useful information even if applied to not-"normally" distributed data are call robust statistics. Median and average deviation are considered robust statistics. On the other hand, median does not give us information about the 100M salary of CEO. Therefore,in order to get the information about the compensation of the typical employee of a company, median is a useful statistic while to get the information about the total compensation of the company, average would be useful.
Thanks Nirvish, for adding some more points about Statistics.
During the write-up, I actually wanted to emphasize the importance of the terms used by the media about average compensation, that actually does not provide vital information about how much most(bottom 90%) makes. Here, what media means is how much profits the banks generate per employee, rather than how much money each employee receives and this fact is generally not known to average people. Once upon a time, a friend of mine just discussed about willingness to join the top iBank and retire in few years of work life :))
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