What is the compa ratio?
In your opinion, are all of your employees fairly compensated? Are the pay scales offered by your company competitive? While industry, geography, and organizational size are all important considerations when setting salaries, knowing your compa ratio can help you make more informed payroll decisions by providing a clear picture of how competitive your worker compensation is.
This post will explain the compa ratio, show you how to get it, and explain how to apply it to your compensation plan.
A compa ratio, also known as a comparative ratio, is a statistic that contrasts the pay of an individual or group with the middle of a predetermined wage range. One of the most used compensation indicators, it shows if a worker or group of workers are paid above or below market rates.
A very low compa ratio suggests that you may lose your best employees to positions and companies that pay more, and that finding replacements may be difficult. However, an excessively high compa ratio may indicate that you are paying your staff more than the majority of other businesses, which might negatively impact your company’s bottom line.
To see differences between groups, you can examine the average ratios of teams or departments, for example. Determining those outcomes can help you identify potential for pay increases and promotions as well as ensuring pay equity within and between groups in your company.
Professionals in compensation and HR have discovered many uses for the compa ratio measurement. It is now among the most useful ratios in compensation and pay analysis as a result.
Compa ratio calculation
Compa ratio’s standard formula is as follows:
Compa Ratio (for a decimal figure) is equal to Actual Salary / Salary Midpoint.
For a percentage, Compa Ratio is equal to (Actual Salary / Salary Midpoint) × 100.
Calculating the compa ratio can be done using a percent or a decimal. Although most compensation experts use a decimal, a percentage may be simpler for others to grasp.
The actual salary may be for a single worker, a team, or the whole workforce.
The midpoint of a salary can relate to:
- The middle of a specified pay range
- The market middle or average rate
- A set of actual wage rates averaged
Compa ratio is an organizational metric that indicates how well you are adhering to your policy structure line.
How the compa ratio is calculated
This is an illustration of how the compa ratio would be determined in your company.
Assume that the market salary of $30,000 represents the midpoint for a Trainee Buyer position. At your company, Trainee Buyer A receives a salary of $35,000. This is how the compa ratio would be calculated:
$35,000 / $30,000 = 1.16
x 100 is 116.6%.
This indicates that the pay of Trainee Buyer A is marginally higher than the market average. This individual might already have some relevant expertise, or they might just be employed by a business that pays more than its rivals.
Definitions related to compensation
The definitions of some common compensation terminology that are used in discussions and calculations of compa ratio are provided below.
Salary
A salary is a steady, fixed amount made on a yearly basis to a worker in exchange for services rendered. But most businesses only pay salaries every two weeks or once a month.
The term “salary” is frequently used in calculations for hourly employees. Here, it refers to the total hourly rate for the year, or hourly compensation divided by 2,080 hours.
Bonuses, variable compensation, benefits, or another kind of non-salary pay are not included in salary, and as a result, compa ratio.
Range midpoint
To offer stability and equity across positions as well as the freedom to adjust plans in reaction to market changes, businesses allocate pay ranges to groups or categories of jobs.
For every job family and related positions, the organization establishes levels of pay and ranges (or bands) with:
Target percentage
Businesses establish their pay policies in relation to the going market rate. They specify in that strategy whether they plan to keep up with, outpace, or fall behind the market.
The target percentile is going to be 50 if the strategy is to stay in line with the market. Leading the market is anything that is above the fiftieth percentile. Market-leading targets are those that fall below the fiftieth percentile.
Hence, a specific percentage above, at, or beneath the market rate is the target percentile.
The equation is:
Market Rate × (1∑Policy Percent) equals the target percentile.
Employers modify the target percentile in response to changes in the market and the actions of their competitors in the talent war.
Analyzing compa ratios
A compa ratio of one, or 100%, indicates that the pay (or set of pay) is in the middle of the range.
A ratio less than 1 (or100%), on the other hand, suggests that the employee may be underpaid or that they are still learning in their position and consequently receive a somewhat lower compensation. Salary ratios for unskilled and new hires often range from 80% to 90%. However, underpayment needs to be watched because it can lead to a high turnover rate.
On the other hand, a ratio greater than 1 (i.e., 100%) suggests that the worker may have been overpaid or is prepared for a raise. Budgetary restrictions may arise if the department’s or the company’s overall group compa ratio is higher than the middle.
Different kinds of compa ratios
Individual compa ratio
The ratio of an individual’s pay to the midpoint of the wage range is known as the individual compa ratio.
Employee’s / Range Midpoint = Compa Ratio
For instance, the pay of an employee is $47,200, and $52,000 is the middle of the wage range. This will be the compa ratio:
Compa Ratio = 47,200 / 52,000 = 0.908
x 100 equals 90.8%.
Compa ratio in the absence of pay bands
If you don’t have a set salary range, you may use industry standards or market rates as a yardstick for comparison.
Employee A’s yearly compensation is $46,000 in this example, and the average or midpoint of your salary survey report is $50,000. This is the compa ratio:
Compa Ratio is equal to 46,000 / 50,000, or 0.92.
x 100 equals 92%.
This aligns with your pay strategy as well. For instance, the following calculation will be used if the rule is to pay employees 15% more than the $50,000 market rate:
Actual Salary / (Market Average x (1+0.15)) equals the compa ratio.
For Employee A, consider this example:
Compa Ratio is 46,000 / 50,000 × (1+0.15), which is equal to 46,000 / 57,500/0.8.
x 100 equals 80%
The following formula determines the employee’s compa ratio if new hires are paid 10% less than the market:
Actual Salary / (Market Average x (1-0.10)) equals the compa ratio.
This formula for our example is:
Comparative Ratio is equal to 46,000 / (50,000 × (1-0.9)) or 46,000 / 45,000, or 1.02
x 100 equals 102%.
How does the individual compa ratio work?
The majority of businesses begin hiring new workers at the low end of the range or a certain percentage above it. This enables them to raise compensation in line with the employee’s experience. At the start of an employee’s employment, increases are often larger and get smaller as the salary gets closer to the halfway point.
Pay for employees is often set between a range of ten to twenty percent below the midpoint and 10–20% beyond it. Top achievers, however, might achieve greater ratios, and you might pay more to hire seasoned workers.
Compa ratio is frequently used by businesses to determine how quickly to advance an employee toward the middle of the range or the industry standard.
Compensation and Seniority
Differences in compa ratio versus seniority can result in a compensation review of a whole class of employees in a civil service environment or other scenarios where seniority rules influence pay.
Comparative group ratio
Group compa ratio can be used to assess how different policy and practice are for a group of workers or the entire organization.
Total Actual Salary / Total Job Reference Point Rates = Group Compa Ratio
The group ratio can be used to identify problems with the policy or the way management is implementing it, as well as to plan and manage your pay budgets.
Disparities may be caused by strategy, employee traits, and outside variables such as:
- Location pay for various nations, regions, or places
- Duties that vary within a job type
- Tenure at the position
- Experience from prior roles that were comparable
For instance, a shorter tenure in the position could be the cause of a lower than typical group compa ratio. This could be because of:
- Higher resignation rates as a result of financial or economic decisions that eliminate merit raises
- Quicker promotions brought on by quick growth
- An increase in transfers due to internal mobility
Extended tenure may be indicated by a higher than average group compa ratio because of:
- A lack of upward mobility brought about by the organization’s shift from a hierarchical to a flatter structure
- Improvement in maintaining but not advancing individuals who perform well but lack managerial abilities
- Forces of the market that demand higher wages
Issues with the pay policy or compensation structure may also contribute to a low or high group compa ratio. These issues include:
- Pay scales that have not kept up with the market
- Problems following the implementation of a new compensation plan
- Reassessing jobs that have undergone changes
Group compa ratio can also help you identify examples of conscious or unconscious prejudice, like as variations in age, gender, or ethnic origin among staff groups.
It’s important to keep in mind that the compa ratio merely suggests potential issues. Performing a comprehensive analysis will help you identify the source of the issue.
Standard compa ratio
Standard Compa Ratio = Total of Individual Compa Ratio / # of Individuals
There may be perfectly valid differences. If not, they might require procedures like these:
- Increase pay more quickly until the group complies with your directives.
- Using single-time bonuses and slowing down raises to keep affected workers
- Gaining more authority over salary reviews and manager evaluations
- Working with executives on their pay allocation through HR business partners
A compa ratio calculator can help you with your calculations.
Constraints on the use of compa ratio in compensation measurement
Compa ratio has certain drawbacks even if it’s a useful indicator for compensation and HR RHR professionals:
- A restricted emphasis on base pay: The Compa ratio does not take into consideration an employee’s entire pay or any non-cash incentives. It solely takes into account base pay.
- Oversimplifies the intricate nature of pay: Compa ratio is unable to provide this more comprehensive view because there are numerous elements that affect compensation.
- Primarily concentrates on internal pay equality: Although compa ratio can reveal discrepancies in internal pay equity and guarantee that all sexes, races, and marginalized groups receive equitable compensation, it usually ignores external market comparison.
Including the compa ratio in your pay plan
In order to guarantee that workers receive fair remuneration and to increase employee satisfaction and retention rates, how can HR managers and company executives apply the compa ratio in their pay structure? You can put a few best practices into practice.
Review compa ratio statistics frequently in order to ensure that pay practices are in line with your strategy and that a fair compensation plan is in place to reward personnel. For instance, you should adjust your pay plan to address the issue if you often observe that women in the same roles have a lower compa ratio than men.
Compare ratios: When conducting your reviews, take the time to compare compensation to experience, responsibilities, and longevity. This will help you determine whether someone is really receiving a fair salary or, in light of their expertise and responsibilities, is really being underpaid.
Allocate a “next review date” to each job or position category. Keep note of these dates and make sure your review has an analysis of group compa ratio.
Maintain the development of your people analytics skills. Automate the combination of compa ratios with other quantitative criteria that influence employee pay.
Don’t depend just on the compa ratio. The compa ratio should never be used as a stand-alone equity indicator because it merely reveals possible problems, not the underlying causes of those problems.
For instance, you may discover that, in comparison to the industry midpoint, your managers’ compa ratio is lower than typical. There can be a deeper reason for this, including the fact that a lot of managers are less experienced because they were recently promoted.
Employ additional pay metrics: The competitiveness and fairness of your employees’ salaries may be assessed using a variety of criteria, of which the compa ratio is only one. To have a more full understanding of how competitive your pay is, you might consider additional indicators such as geographic differentials, goal percentile, market ratio, and penetration of salary ranges.
Communicate in an honest and open manner. Share with your staff the meaning and application of compa ratio.
To accomplish this, arrange a meeting for the entire company or send out an educational newsletter.
Provide instruction: Teach managers how to have a conversation with their team about compa ratio and provide them with the information they need to respond to typical questions.
In sum
The value of the compa ratio, like that of all metrics, is found in how you apply the data, not in the ratio itself. Compa ratio is not the endpoint, but rather the start of an investigation.
The ratios of an organization may be over or below the midpoint for a variety of reasons. In order to provide each and every one of your employees with competitive, fair pay, it is critical that you keep investigating and evaluating the data until you identify the root cause.
