What is a compa-ratio?
Compa-ratio is a calculation that measures current pay rates against salary range midpoints for the same or similar positions within the market. Expressed as a percentage of the range midpoints, which represents full market pay, compa-ratios indicate how far above or below employee pay is from the market midpoint.
Generally, the businesses’ goal is to reward employees as fairly as possible without mismanaging resources and hurting the organization’s bottom line. Businesses can use compa-ratios to identify points of opportunity and strategize organizational compensation plans.
Related: Building a Compensation Strategy for Your Business
How to calculate compa-ratio
There are several types of formulas and metrics to understand for calculating compa-ratios.
What is the compa-ratio formula?
The general formula for compa-ratio is:
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Compa-ratio = rate of pay / reference point of pay
Rate of pay refers to standard employee pay rates and doesn’t include bonuses, benefits, overtime or any other type of compensation. When calculating the compa-ratio, the pay rate should be expressed as a salary or annual fixed pay rate regardless of whether you pay employees on a salary or hourly basis. For hourly workers, the annual sum of hourly wages is: hourly wage x 2,080 hours.
The reference point of pay refers to the pay range’s midpoint. You can find this by adding the minimum and maximum pay and dividing by two. For example, if the maximum pay is $70,000 and the minimum pay is $50,000, then the midpoint is $60,000.
Three types of compa-ratios
Typically, when calculating compa-ratios, you’re analyzing individual compa-ratio. The formula for individual compa-ratio is:
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An individual’s salary / the midpoint of their pay range = individual compa-ratio
This formula shows you how an employee is paid compared to their target pay and provides insight into their value compared to seniority and experience. Consider this example for three separate employees where the midpoint pay range is $60,000:
- Employee A: $60,000 / $60,000 = 1 x 100 = 100%
- Employee B: $55,000 / $60,000 = 0.91 x 91%
- Employee C: $65,000 / $60,000 = 1.08 x 108%
In comparison, the average compa-ratio shows you if your compensation is on target across various sets such as salary bands, departments or the entire organization. The formula for average compa-ratio is:
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The sum of individual compa-ratios / the number of individuals = average compa-ratio
Group compa-ratio provides insight into the differences between your compensation policies and actual pay practices. The formula for group compa-ratio is:
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The sum of individual salaries / the sum of the group’s midpoints = group compa-ratio
Interpreting and applying compa-ratios
Compa-ratio analysis gives you quantitative and reliable ways to compare the pay of individuals and groups, but the right compa-ratio varies between businesses and industries.
Target percentile strategizing
Organizations develop target percentile policies to determine whether they want to lead, meet or lag the market. The target percentile is calculated as a percentage multiplied by the market rate. In a formula, target percentile = market rate (1∓policy percent). You can use compa-ratios to understand and plan where your compensation plans are in relation to target percentiles.
Benchmarking pay against market data
Benchmarking how your business compensates individuals or groups against market salary data can determine if your salary range is competitive and help strategize your compensation plan. For example, low compa-ratios may be an underlying factor in high turnover and indicate a need to create more value in your compensation plans.
Related: How to Create an Employee Compensation Plan that Attracts Candidates
Evaluating pay range progression
A typical pay range is around 80% and 120% of the midpoint for minimum and maximum salaries, respectively, and compa-ratios help define where that midpoint should be. Employees at the lower end of the pay range are typically less experienced or skilled, while those at the high end have longer tenures and exceed performance expectations.
If your compa-ratios don’t align with your expectations for your employees’ roles, it may indicate that you’re under or overcompensating them and need to implement promotions, merit-based raises, training or other measures that can help employee roles align with ideal compa-ratios.
Related: 5 Steps to Offering a Competitive Salary
Identifying inequities
In addition to ensuring that you’re paying employees fairly and sustainably according to the market, compa-ratios can help identify pay inequities across individuals and groups. For example, analyzing compa-ratios across diverse subcategories of employees can provide insight into whether your organization pays these groups commensurately, creating opportunities to give a more in-depth analysis of your business’ pay structures.
