Employers who want to control labor costs, implement fair pay practices and attract and retain talent often will perform a compensation analysis. Crucial to this process is a mathematical equation known as compa-ratio.
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What is compa-ratio?
Compa-ratio is a measurement of pay that compares an employee’s salary to the median compensation for similar positions within a company or a target market. Values are expressed as a percentage.
For the purpose of calculating compa-ratio, compensation is a base, annual salary. It generally does not account for bonuses, variable pay or the value of benefits packages.
How to calculate compa-ratio
The compa-ratio calculation is basic. Simply divide the employee’s annual salary by the median salary for similar positions and multiply the result by 100. For example, if an employee earns $47,000 per year and the median salary for similar positions is $49,000, the compa-ratio formula is:
$47,000/$49,000 x 100 = 95%
Interpreting the compa-ratio
Compa-ratio percentages generally fall between 80% and 120%, with 100% considered market value. New hires tend to receive compensation on the lower end of this spectrum so that they have room to grow, while longer-tenured employees and those with rare skills sets may earn salaries closer to the top mark. Any results that deviate from these norms, i.e., a consistent top performer who languishes at 80%, could indicate an issue that warrants attention.
Types of compa-ratios
Compensation ranges are merely points of reference and can be customized to suit an employer’s needs, whether they want to compare salaries within their organization or to industry benchmarks. Two of the more common use cases are the individual compa-ratio and the group compa-ratio.
The individual compa-ratio evaluates the salary of a single employee in relation to a business’s pay grades or the median salary for similar jobs in a specific market or industry. It’s commonly used during performance reviews to help managers and HR professionals determine how much to reward employees who exceed work expectations.
Though it can be used as a measurement against competitors, the group compa-ratio often compares one department or group of employees to another within the same organization. This metric is helpful when planning budgets or evaluating the effectiveness of pay policies.
How to use compa-ratio
Employers need to determine compensation levels that are both sustainable and competitive. Compa-ratios help them achieve this objective, though it’s a delicate balance. Paying employees below market rates makes it harder to attract and retain talent, while compensation that exceeds the median increases payroll costs. Companies with limited budgets and compa-ratios that are less than 100% often have to provide benefits and other perks in lieu of monetary compensation to compete.
Compa-ratios and pay equity
Compa-ratios are also useful as a starting point for advancing pay equity. Consider, for example, two employees of different genders who are in similar roles and have comparable skills and experience. If one of them is paid above market value and the other below it, the employer may need to investigate why and resolve any gender pay gaps that exist.
Note, however, that compa-ratios alone are not sufficient to determine pay equity or make employment-related decisions. Business size, location and industry, as well as employee performance and duties performed, among other factors, should be considered when evaluating compensation rates.
Common compa-ratio use in pay structure practices
Throughout the employee life cycle, it’s expected that workers will gain experience, acquire new skills and improve their job performance. Here’s how that generally translates to pay structures and compa-ratios:
- 80% to 90% – Inexperienced new hires and poor performers
- 90 to 110% – Experienced employees who regularly perform well
- 110% to 120% – Employees with rare skills or long tenure
Paying any employees outside of this structure, either below 80% or above 120%, may erode trust in the compensation strategy.
Compa-ratio use in merit increases
To maintain pay equity, employers generally do not increase compensation unilaterally, even if everyone was a top performer. Employees with a compa-ratio below 100% might receive large, merit-based raises to keep their pay competitive, whereas highly experienced employees who are already paid above market value may be rewarded for excellence in smaller increments.
Frequently asked questions about compa-ratio
Why is compa-ratio used?
Compa-ratio is used by employers to ensure that employee compensation is consistent with market and industry standards. In doing so, the business is more likely able to recruit top talent, reduce turnover, control payroll expenses and comply with fair pay policies.
What does a compa-ratio of 90 mean?
Employees with a compa-ratio of 90 are paid within 90% of the median salary for their specific jobs. Since 100% is considered the midpoint, these individuals are compensated slightly below market value.
What is the difference between compa-ratio and position in range?
Compa-ratio compares an employee’s salary relative to the mid-point of a given pay range, whereas range penetration shows how far the salary has progressed throughout the entire range. Therefore, a compa-ratio of 100% usually equates to a range penetration of 50%.
Where should my compa-ratio be?
Employers generally try to keep compa-ratio between 80% and 120%. If an employee’s compensation falls outside these bounds, it would be considered well under or above market value and may necessitate a closer inspection of the business’s pay policies. Yet, even when a compa-ratio falls between 80% and 120%, it does not necessarily mean that a pay equity issue doesn’t exist. Employers must periodically perform a pay gap analysis to help comply with equal pay laws and remain competitive in the market.
This article is intended to be used as a starting point in analyzing compa-ratio and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.