Compa Ratio: Formula & Best Practices [FREE Calculator]
Do you know if your employees are all paid fairly? Are the salaries your organization offers competitive? Although factors including industry, location, and size of the organization will play a role in determining salaries, figuring out the compa ratio can give you a good indication of how competitive your employee compensation is and serve as a guide for your payroll decisions.
In this article, we’ll explore what the compa ratio is, how to calculate it, and how to use compa ratio in your compensation strategy.
Contents
What is compa ratio?
Compa ratio formula
How to calculate compa ratio
Compa ratio calculator
Compa ratio analysis
Different types of compa ratios
Limitations of using compa ratio as a compensation metric
Using compa ratio in your compensation strategy
FAQ
What is compa ratio?
Compa ratio, or comparative ratio, is a metric that compares an individual’s or group’s salary to the midpoint of a defined salary range. It indicates whether an employee or a group of employees is paid below or above market rates and is one of the most widely used compensation metrics.
A compa ratio that is too low indicates a risk of losing your top performers to jobs and organizations that offer higher compensation and also a challenge to replace them. On the other hand, a compa ratio that is too high means that you might be paying your employees more than most other organizations, and this can eat into your bottom line.
You can compare the average ratios of groups, for example, departments or teams, to see differences between groups. Identifying those results can help ensure pay equity in and across groups in your organization and determine pay raises and promotion potential.
HR and compensation professionals have found a variety of ways to use the compa ratio metric. As a result, it has become one of the most helpful ratios in pay and compensation analysis.
Compa ratio formula
The general formula for compa ratio is:
Compa Ratio = Actual Salary / Salary Midpoint (for a decimal figure)
Compa Ratio = (Actual Salary / Salary Midpoint) x 100 (for a percentage figure)
When calculating compa ratio, you can use a decimal or a percent. Compensation professionals usually use a decimal, but it may be easier for non-analysts to understand a percentage figure.
The actual salary can be that of an individual, a group, or an entire workforce.
The salary midpoint can refer to:
- The midpoint of a defined salary range
- The average market rate or market midpoint
- An average of a group of actual pay rates
On the organization level, compa ratio is a measure of how well you are reaching your policy structure line.
How to calculate compa ratio
Here’s an example of how you would calculate the compa ratio at your organization.
Let’s say that the market midpoint salary for a Trainee Buyer role is $30,000. Trainee Buyer A at your organization is on a salary of $35,000. The compa ratio calculation would look like this:
$35,000 / $30,000 = 1.16
x 100 = 116.6%
This tells us that Trainee Buyer A’s salary is slightly above the market average. Perhaps this person already has some relevant experience, or they could simply be working for a company that offers better compensation rates than most of its competitors.
Compensation definitions
Here are some of the key compensation terms used when discussing and calculating compa ratio and what they mean.Salary
Salary refers to a regular fixed payment to an employee for services performed, usually expressed as an annual sum. However, most organizations pay salaries on a bi-weekly or monthly basis.The term “salary” is also used in formulas for hourly workers. In this context, it is the annual sum of hourly rate: Hourly pay × 2,080 hours.Salary, and therefore compa ratio, does not include bonuses, variable pay, benefits, or any other type of non-salary compensation.Range midpoint
Companies assign pay ranges to classes or groups of jobs to provide consistency and equity across jobs and the flexibility to plan in response to market conditions.The organization defines pay grades and ranges (or bands) for each job family and similar positions with:Target percentile
Companies define a pay policy relative to the current market rate. In that policy, they establish whether they will meet, lead, or lag the market.If the policy is to meet the market, the target percentile will be 50. Anything over the 50th percentile is leading the market. Targets below the 50th percentile are lagging the market.So, the target percentile is a certain percent above, at, or below the market rate.The formula is:Target Percentile = Market Rate × (1∓Policy Percent)Employers adjust the target percentile based on market conditions and the action of their rivals in competition for talent.To learn more about compensation terms, metrics, and formulas, read our article on Compensation Metrics HR and Managers Need to Know or download a free copy of the Compensation Metrics Cheat Sheet.
Compa ratio analysis
A compa ratio of 1 (or 100%) suggests that the salary (or group of salaries) is in line with the midpoint.
However, a ratio below 1 (or 100%) indicates that the salary may be too low or that the person in question is new to the role or still developing and, therefore, is on a slightly lower salary. New and inexperienced employees tend to earn salaries with a compa ratio of between 80% and 90%. But underpayment can contribute to a high turnover and must be monitored.
At the other end of the scale, a ratio over 1 (or 100%) indicates potential overpayment or that the employee is ready for a promotion. If the group compa ratio for a department or the entire company is above the midpoint, it can present potential budget constraints.
Different types of compa ratios
Individual compa ratio
Individual compa ratio is the ratio of an individual’s salary compared to the salary range midpoint.
Compa Ratio = Employee’s / Range Midpoint
For example, an employee’s salary is $47,200, and the midpoint of the salary range is $52,000. The compa ratio will be:
Compa Ratio = 47,200 / 52,000 = 0.908
x 100 = 90.8%
Compa ratio without pay ranges
You can use market rates or industry averages as the benchmark for comparison when you don’t have a defined pay range.
In this example, Employee A’s annual salary is $46,000, and your salary survey report average or midpoint is $50,000. The compa ratio is:
Compa Ratio = 46,000 / 50,000 = 0.92
x 100 = 92%
This also works with your pay policy. For example, if your policy is to pay employees at 15% above the market rate od $50,000, the formula will be:
Compa Ratio = Actual Salary / (Market Average x (1+0.15))
Here’s an example for the Employee A:
Compa Ratio = 46,000 / 50,000 × (1+0.15) = 46,000 / 57,500 = 0.8
x 100 = 80%
If you pay new hires at 10% below market, the compa ratio formula for the Employee A is:
Compa Ratio = Actual Salary / (Market Average x (1-0.10))
For our example, this formula is:
Compa Ratio = 46,000 / (50,000 × (1-0.9)) = 46,000 / 45,000 = 1.02
x 100 = 102%
How the individual compa ratio works
Most companies start new employees at the bottom of the range or a defined percentage above it. This allows them to increase pay as the employee gains experience. Increases tend to be higher at the beginning of the employee’s tenure and become smaller as the salary approaches the midpoint.
It’s common to keep employees’ pay to a range from 10-20% below the midpoint to 10-20% above it. However, top performers may reach higher ratios, and you may hire seasoned employees at a higher rate too.
Companies often use compa ratio to help decide how fast to move an employee to the midpoint of the range or the market benchmark.
This table from WorldatWork shows how to create a merit increase table using compa ratio.
Pay and seniority
In a civil service environment or other situations where seniority rules govern pay, differences in compa ratio compared to seniority can spark a compensation review of an entire employee class.
Group compa ratio
If you want to measure the difference between practice and policy for an entire organization or a group of employees, you can use group compa ratio.
Group Compa Ratio = Sum of Actual Salary / Sum of Job Reference Point Rates
In an Excel worksheet, the calculation might look like this:
You can use the group ratio to plan and control your pay budgets, and to spot any issues with the policy or the way managers implement it.
Differences could result from strategy, the characteristics of employees, and external factors including:
- Location pay for different regions, countries, or locations
- Differences in responsibilities within a job class
- Tenure in the job
- Experience in similar previous positions
For example, a lower than usual group compa ratio might be the result of shorter tenure in the job, which could be due to:
- Higher resignations caused by economic or financial decisions to forgo merit increases
- Faster promotions caused by rapid expansion
- More transfers prompted by internal mobility
A higher than usual group compa ratio might indicate longer tenure due to:
- Lack of promotion opportunity caused by transformation from a hierarchical structure to a flatter organization
- Progress in keeping but not promoting people who don’t have management skills but perform well
- Market forces that require higher pay rates.
High or low group compa ratio could also be because of problems with pay policy or the compensation structure, such as:
- Pay ranges that have fallen behind the market
- Anomalies after you implement a new pay structure
- A need to re-evaluate jobs that have changed
Group compa ratio can also alert you to differences among employee groups in gender, ethnic origin, age, or other instances of conscious or unconscious bias.
It’s critical to remember that compa ratio only indicates that there may be a problem. A thorough investigation will lead you to the root cause of the problem.
Average compa ratio
Average Compa Ratio = Sum of Individual Compa Ratio / Number of Individuals
In this sample worksheet, the sum of the compa ratios is 242.79, and the number of individuals is 232. That results in the average compa ratio of 1.05, or 105%.
Differences may be entirely justified. If not, they may need remedies such as:
- Speeding up salary increases until the group is within your guidelines,
- Decelerating increases and using one-time bonuses to retain affected employees
- Gaining firmer control over manager ratings and pay reviews
- Having HR business partners work with managers on their pay allocations
You can make your calculations easier with a compa ratio calculator.
Limitations of using compa ratio as a compensation metric
While compa ratio is a helpful metric for HR and compensation professionals, it does have some limitations:
- A narrow focus on base pay – Compa ratio only accounts for base pay and does not include total compensation and other non-monetary rewards that employees may receive.
- Oversimplifies the complex nature of compensation – There are many factors that influence compensation, and compa ratio is unable to offer this wider picture.
- Focuses primarily on internal pay equity – While compa ratio can shed light on imbalances with internal pay equity and help ensure all genders, ethnicities, and underrepresented groups are compensated fairly, it typically pays little attention to external market comparison.
Using compa ratio in your compensation strategy
How can HR professionals and business leaders use compa ratio in their compensation strategy to ensure employees are being compensated fairly and to boost satisfaction and retention rates? There are a couple of best practices you can apply.
- Conduct frequent reviews – Regularly review compa ratio results to align pay practices to your strategy and create a solid compensation plan to reward employees equitably. For example, if you consistently find that women have a lower compa ratio than men in the same roles, you need to tweak your compensation plan to address this issue.
- Compare ratios – When you do your reviews, compare compa ratios to tenure, experience, and job responsibilities. This will give you a clearer understanding of whether someone is actually being underpaid based on their experience and responsibilities or whether they are being paid fairly.
- Assign a “next review date” to every job or role classification – Track these dates and include a group compa ratio analysis in your review.
- Continue to build your people analytics capability – Automate compa ratio aggregation with other quantifiable factors that affect employee compensation.
- Don’t rely on compa ratio alone – Never let compa ratio stand alone as an equity measure because it only shows potential issues rather than the root cause of that problem. For example, you might find that you have a lower-than-average compa ratio for your managers compared to the industry midpoint. There may be an underlying cause for this, such as many managers have been newly promoted and are therefore less experienced.
- Use other compensation metrics – Compa ratio is just one of many compensation metrics that can help you determine the competitiveness and equity of your employee’s salaries. Other metrics like salary range penetration, market ratio, target percentile, and geographic differentials can help you get a more comprehensive read on the competitiveness of your compensation.
- Practice open and honest communication – Communicate with your workforce on how you use compa ratio and what it means. You can do this through a business-wide meeting or by sending an informative newsletter.
- Offer training – Train managers on how to discuss compa ratio with their team and give them the knowledge needed to answer common questions that may arise.
Over to you
As with all metrics, the compa ratio’s value lies not in the ratio itself but in how you use this information. Compa ratio is the beginning of an investigation, not the end.
There can be multiple reasons for an organization’s ratios to be under or over the midpoint. It’s important to continue researching and analyzing the data until you discover the underlying issue so you are able to offer fair, competitive compensation to all of your employees.
FAQ
Compa ratio is a metric that compares an employee’s or group of employees’ salaries to a salary midpoint and can tell you whether your employees are under or overpaid within their role, the organization, or compared to other organizations in your industry.
To calculate compa ratio, you divide the actual salary by the salary midpoint, which will give you a decimal figure. For a percentage figure, you can multiply this number by 100.
Compa Ratio = Actual Salary / Midpoint
A good compa ratio depends on many factors including industry, location, and experience. Generally, a good compa ratio will be somewhere between 0.8 and 1.2, or 80% and 120%.
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