Compa Ratio

What Is Compa Ratio?

The compa ratio (also known as the comparative ratio) measures a person’s or group’s salary against a salary range midpoint for the same or similar positions at other companies.

The ratio is designed to reveal whether you’re paying a fair market rate based on how far the number is from the market midpoint. A ratio that’s too high can eat into your profits, while one that’s too low can lead to talent acquisition and retention issues.

The compa ratio is one way for you to determine whether your payroll decisions are fair and appropriate. As an HR professional, it’s beneficial to know what compa ratio is, how to calculate it, and how it fits into your overall compensation plan.

What Is the Compa Ratio Formula?

The compa ratio can be calculated as a decimal number or percentage. Calculating the compa ratio for any individual employee involves a simple formula:

• To get a decimal number: (Actual Salary / Salary Midpoint) = Compa Ratio
• To get a percentage: (Actual Salary / Salary Midpoint) x 100 = Compa Ratio

It’s important to know that the compa ratio formula can be used with different salary types, including individuals, groups, and the entire organization. Depending on how you plan to determine a competitive salary, you can use any midpoint you like, including that of a defined salary range, average market rate, or averages of real pay rates.

How to Calculate Compa Ratio: An Example

Let’s say you want to determine a competitive salary for a customer service agent in your call center. You determine that the midpoint of the average market rate is $24,000 per year. Your latest new hire is making $30,000 per year. To calculate compa ratio, you’ll need to take two steps:

1. Divide the actual salary by the market midpoint: $30,000/$24,000 = 1.25
2. Multiply the decimal by 100 to calculate a percentage: 1.25 x 100 = 125%

If you’re learning how to calculate compa ratios and end up with a decimal greater than one or a percentage over 100, it means the salary you’re currently offering is greater than the market average. You can interpret this in a variety of ways.

Perhaps you’re paying more than other companies because you want to attract the right talent. Or the position may require more experience or job responsibilities than similar positions at other employers. Whether your compa ratio is high or low, it’s important to take a deeper look into whether the compensation strategy is effective and if not, how it might need to change.

What Is a Good Target for Compa Ratios?

Your compa ratio may not always be perfectly in line with the market. As a general guideline, you want to try to keep it between 80% and 120% (or between 0.80 and 1.20).

If your compa ratio is much higher or lower than that, you may want to reassess your compensation strategy or pay policies to understand the underlying reason for this anomaly.

Even if you have a compa ratio that falls within these boundaries, you still need to periodically evaluate salaries throughout the organization. This will help you maintain compliance with equal pay and compensation discrimination laws. A periodic assessment will also help you identify when compensation trends may be shifting so that you can pivot with the market.

What Does the Compa Ratio Formula Reveal?

Ultimately, a compa ratio reveals how close you are to the midpoint of the salary range you’re using for the calculation. If your compa ratio is too low (less than 80% or 0.80), it may indicate that you’re paying too little compared to your competitors and thus lagging behind the market.

As a result, you may start to see your attrition rates rise and run into trouble securing new talent for your organization. It may also mean you need to update the job or reevaluate the responsibilities attached to it.

Conversely, a compa ratio that’s too high brings other issues. You may face budget issues as compensation starts to whittle away your profits and impact your bottom line.

Keep in mind that variations in the compa ratio can be due to differences in location or role responsibilities. Some locations simply pay more than the market average because the cost of living is higher. Others may get paid less because other companies require fewer responsibilities for the same position you’re hiring for.

Also, remember that new hires often start at the lower end of the spectrum, especially if they’re not as experienced as employees who have worked for the business for some time.

Employees with tenure or specialized skill sets that are difficult to replace may be compensated at a higher rate. If a newer or more inexperienced employee has a higher ratio or a top performer is consistently at the lower end, it may be time to look into why that may be happening.

If you find that group compa ratios for certain groups and protected classes (such as race, gender, or age) are vastly different, you may need to look into whether conscious or unconscious bias is present in your pay policies. If so, it’s important to address this immediately, as you may be violating labor and anti-discrimination laws.

A Comparison of the Different Kinds of Compa Ratio Formulas

While answering the question “What is compa ratio good for?” seems straightforward, it’s important for HR professionals to know that there’s more than one type of compa ratio formula. The formula you choose will be based on what information you need to obtain and what you’re trying to evaluate.

Individual Compa Ratio

An individual compa ratio compares the salary of one person to the midpoint or median salary for others in similar roles across a location or industry. This compa ratio is often used in a performance review setting to determine whether to raise an employee’s salary.

New employees may be hired at a salary 10-20% below the midpoint. As they gain skills and experience, their salaries will often increase. These increases are usually much larger in the beginning and get smaller as time goes on. Better performance may warrant faster increases.

While the ultimate goal is usually to move the employee as close to the midpoint as possible, some high performers may eventually have salary increases that exceed it.

Compa Ratios Without Pay Ranges

If you don’t have access to an accurate or well-defined pay range, you can use an industry average or market rate in its place.

For example, if an individual’s salary is $42,000 and the industry average is $45,000 for the same role, you can calculate the compa ratio using the following formula: (Actual Salary / Industry Average) = Compa Ratio. In this case, $42,000 / $45,000 = 0.93, or 93%.

Group Compa Ratio

Group compa ratios are most often used to compare groups of employees within the same organization. However, HR professionals can also use group compa ratios to compare their company’s compensation strategy to competitors’.

Group compa ratios are calculated differently than individual ratios. To get a group compa ratio, you’ll divide the sum of all the salaries in the group by the sum of all the salary midpoints.

You can use group compa ratios to evaluate potential issues with your pay policies and practices. For example, lower group compa ratios can signal that you have many new employees in a particular group, which may alert you to high turnover rates or higher rates of internal mobility. Higher group compa ratios may indicate a lack of promotional opportunities or a shift in market trends toward higher pay rates.

You can also use group compa ratios to detect serious compliance issues, such as disparate treatment among different employee groups. They may reveal a need to reevaluate jobs or change your compensation strategy altogether to meet new market demands. The most important thing is that you investigate compa ratio abnormalities and figure out how to ensure compensation is fair and competitive across your organization.

Average Compa Ratio

To get the average compa ratio, calculate an individual compa ratio for every employee in the group, add those ratios together, and divide that by the number of people in the group.

The average compa ratio will show you whether a particular group is within your expected salary range. If not, you may need to adjust the speed of salary increases. You may also need to evaluate how managers conduct performance reviews or make pay allocation decisions.

Limitations of a Compa Ratio Formula

It’s important to realize that the compensation figures used to calculate compa ratios are only base salaries. They do not take into account other parts of the compensation package, such as bonuses or non-monetary benefits like health plans, child care assistance, or paid time off. These benefits are also attractive to top talent, even when salaries may not be in line with industry averages.

Additionally, while you can use compa ratios to compare your company to the external market, they are most often used with a focus on internal pay equity. This limitation is exacerbated by the fact that HR professionals often have limited access to granular compensation data from industry competitors, so drawing conclusions from this information can be challenging.

Finally, compa ratios generally work best for salaried employees. It can be quite difficult to use these formulas for employees who receive hourly or variable pay.

Decoding the Compa Ratio and Making Data-Driven Decisions

There are a few different ways you can use compa ratios to evaluate your compensation strategy and make data-driven changes to your policies. As you do so, make sure to keep best practices in mind:

• Conduct regular reviews to ensure your compensation strategy aligns with your actual pay practices and that you comply with labor and anti-discrimination laws. Make sure to track these review dates so you don’t miss an opportunity to gather this information.
• Offer training to your managerial staff on how to discuss compensation in a way that is open, honest, direct, and compassionate. Model this behavior for them in how you communicate with employees across the organization.
• Always investigate further to compare compa ratios to tenure, job responsibilities, skill sets, and experience level. These can often be reasons why two people in the same position are earning vastly different salaries.
• Ensure you look at compa ratios in context with other information, such as promotion rates, salary range penetration, target percentile, and geographic differentiation.

Ultimately, it’s important to remember that your goal in evaluating and altering your compensation strategy is to acquire and retain the talent you need to achieve your strategic goals and ensure all employees are treated and paid fairly.