Table of Contents
Table of Contents
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What is Compa-Ratio?
A compa-ratio (also known as “comparison ratio” or “compensation ratio”) is a calculation that helps employers determine how their employees are paid relative to the midpoint of a defined salary range. At a glance, managers can see if internal and external employees are being paid equitably. The compa-ratio is a valuable metric for companies as they design their reward and retention strategies.
Why is the Compa-Ratio Important for HR?
Understanding compa-ratios and their purpose can help HR professionals identify trends and make data-informed decisions.
- Attract new talent. To be competitive in the market, employers need an enticing total rewards package. Compa-ratio analysis is one way to benchmark against other companies and make adjustments, either in salary or other rewards, when the analysis reveals an unfavorable disparity.
- Reduce turnover. Regularly auditing and benchmarking payroll data can help companies make adjustments and keep competitive pay practices before losing valuable employees.
- Highlight inequities in pay. Analyzing payroll data using a compa-ratio approach illuminates skewed payroll practices. Companies can make adjustments if inequities can’t be defended due to seniority, geography, experience, or another legitimate compensable factor.
- Control payroll budgets. Many companies use a compa-ratio matrix to determine merit increases. This helps curtail increases that would move an employee out of their current pay range. There are several excellent online resources to help establish such a matrix.
What To Do with the Compa-Ratio
HR and compensation professionals can use compa-ratio calculations in several different ways. Here are a few.
Comparing Internal Equity
As described above, the compa-ratio metric is helpful to see possible pay inequities within a company or team. If individual performance, experience or other legitimate compensable factors doesn’t justify some employees being paid less than others, proactive adjustments can be made to align pay.
Comparing External Market
Turnover is costly for companies and pay is a significant reason why employees go elsewhere. Compa-ratio calculations using market rates can help employers see which team members may be at risk of leaving due to lower-than-market rates and provide an opportunity to remedy any disparities before losing talent.
Making Pay Rate Decisions for New Hires
Pay rate decisions are important, both to attract new employees and to ensure equity with those already on board. Using a compa-ratio approach helps managers make employment offers that are both internally equitable and externally competitive.
Structuring Merit Increases
Compa-ratio calculations help ensure budget-friendly merit increase adjustments as well as motivate employees whose performance is above average. Typically, a merit increase matrix rewards strong employees who are paid below the midpoint while slowing the increase rate for those who are being paid above the midpoint.
Group Compa-Ratio Uses
Departments or entire company payroll practices can be analyzed using a group compa-ratio analysis. This analysis highlights which departments are being paid more than others. It can provide insight into which managers need more training to manage their budgets. Perhaps the whole company is paying higher or lower than the external market. The company compa-ratio provides important information. For example, an overall higher-than-average group compa-ratio may indicate a lower overall turnover rate or a higher overall competitive market requiring higher salaries to retain talent. An overall lower-than-average group compa-ratio may indicate high turnover. The compa-ratio metric itself won’t necessarily provide reasons for the calculations but can illuminate where employers can explore further.
How To Calculate the Compa-Ratio
Calculating compa-ratios can be done in several different ways both for individuals and groups. Companies can calculate the compa-ratio based on pay ranges or market pay rates. For purposes of this example, let’s assume an individual compa-ratio based on a pay range.
Step 1: Calculate the Individual’s Salary
If an employee is paid an hourly rate, multiply that rate by 2080, the number of hours they will work in a year if they work 40 hours per week.
Step 2: Determine the Midpoint of the Pay Range
The midpoint of a pay range is typically the target rate to determine competitive pay for an above-average employee relative to the larger market. New employees are typically paid below the midpoint while more senior employees are usually paid above the midpoint. Calculating the midpoint is done by adding the pay range’s minimum salary and the pay range’s maximum salary and then dividing that number in half.
Step 3: Divide the Employee’s Salary by the Range Midpoint
For example, if an employee is paid $40,000 per year and the midpoint is $50,000, the compa-ratio would be 80% or .8. If an employee is paid $40,000 per year and the midpoint is $40,000, the compa-ratio would be 100% or 1. Compa-ratios are expressed in either percentage or decimal format. A percentage is easier for employees and non-compensation professionals to understand, but most pros will use the decimal.
Step 4: Complete the Analysis for Everyone in the Pay Range or Group
Results can be sorted however you find it helpful to analyze and make decisions on the information. Keep in mind the compa-ratio is one way to view compensation but shouldn’t be the only quantifiable measure that companies use.
Step 5: Communicate Compensation Practices to Your Employees
Train managers to have conversations with their employees about the company pay strategy and how their pay aligns with the strategy. For example, if your company’s compensation strategy rewards skill development, help your employees understand what they can do to demonstrate mastery of new skills.
Step 6: Regularly Audit Pay Practices
Ensure that disparities in pay practices can be defended based on seniority, experience or other compensable factors.
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Carol Eliason Nibley, SPHR, GPHR and Principal Consultant at PeopleServe, has more than 25 years of experience in human resources, most recently serving as Vice President of Human Resources for a technology company in Utah County. Carol has taught HR certificate courses at Mountainland Technical College and in other settings for more than 12 years.