A compa-ratio, also known as a comparison ratio, is an employee compensation metric that reveals how an employee’s salary compares to the overall market median. You can calculate both group and individual compa-ratios for your company to determine if your salaries are in line with industry standards or in need of adjustments.
Key takeaways about the compa-ratio metric
- Compa-ratios play an important role in compensation management strategies and employee retention
- It is relatively easy to learn how to calculate compa-ratios, whether manually or in an automated fashion. They are expressed as a percentage
- Compa-ratios can be used for salary benchmarking, pay adjustments, salary reviews, and more
- A compa-ratio range of 80-120 percent is generally deemed fair and competitive
- Compa-ratios can drive equity, retention, and job satisfaction in your organization
Compa-ratios can help employers to assess fair and competitive pay across job categories and teams. Since attracting and retaining top talent is one of the major HR challenges today, businesses that understand and use this calculation to their advantage can come out ahead. In this guide, we’ll cover what a compa-ratio is, why some employers use this metric, and how to calculate it.
What is a compa-ratio?
A compa-ratio is more than just a number. It also has significance for your company’s current and future success.
Definition and significance
A comparison of employee pay versus the market midpoint, a compa-ratio can help your business determine if it is paying employees fairly and competitively. If you find that your compa-ratios are low overall, you may want to adjust salary ranges to encourage the best of the best to join your company and to stay for the long run.
These ratios can support retention of top talent, accurate pay raises and reviews, and equity across your organization.
How compa-ratios promote pay equity
When you compute compa-ratios, you can quickly see if your salary ranges are competitive, both within the industry and within your organization. For instance, you can make pay adjustments accordingly, bringing the lowest-paid team members up to an equitable range. When employees who perform similar work are paid at similar levels, then you have taken steps toward pay equity in your company.
Now that we understand this metric, let’s discuss why some employers use it to enhance decision-making in the compensation management space.
Importance of compa-ratios in compensation management
When it comes to compensation management and strategy, compa-ratios can streamline decision-making and guide compensation decisions. In addition, compa-ratios can help your organization as follows:
- Evaluating salary competitiveness: A compa-ratio makes it easy to compare and contrast salaries and determine whether they are fair and competitive. The metric takes the guesswork and emotion out of salary decisions and ensures your company is adequately informed to offer competitive pay to workers.
- Identifying pay disparities: Likewise, these key ratios can help your HR team identify and address any internal pay disparities among teams or across departments. They can also help you create accurate and fair salary bands for future hiring and promotion decisions.
- Supporting budget decisions: Finally, compa-ratios can support better and faster budget decisions. If you have a group of employees well below the market median, for example, you can implement targeted raises, rather than flat, across-the-board raises.. Again, these calculations remove much of the guesswork and present the facts for smart decision-making.
Clearly, compa-ratios can be a powerful and effective financial tool for your entire HR team and organization. Moving on, let’s see what numbers should be considered when calculating this metric.
How to calculate a compa-ratio
Learning how to calculate and understand a compa-ratio is the next step for your organization. A three-step process to perform the calculation is described below.
Step 1: Define the employee’s annual salary
To start, compile an annual salary for listing for each employee in your company. Note: This calculation does incorporate additional incentives and perks, such as bonuses and benefits, into account. It focuses solely on salary. That said, fringe benefits can go a long way when it comes to attracting and retaining talent.
Step 2: Determine the midpoint of the pay range
You can turn to multiple industry salary sources, such as The Bureau of Labor Statistics (BLS), to determine the midpoint of the pay range for your industry. This reference point should be expressed as a single number, rather than a range.
Step 3: Calculate the compa-ratio
Once you have each employee’s annual salary and the midpoint of the range, you can calculate the compa-ratios. You can do so manually or automate the process for your organization.
- To calculate the compa-ratio for a given employee, you must divide his or her annual salary by the median market salary.
- Then, multiply the result by 100 to determine the compa-ratio percentage.
Compa-ratio calculation example
If your employee earns $50,000 per year, and the median average for that position is $60,000 per year, the compa-ratio is computed as follows:
- $50,000 ÷ $60,000 x 100 = 83.3%
This means the employee is slightly underpaid relative to the market, earning only 83.3% of the benchmark salary. You might be wondering whether this is an acceptable situation.
To get an inside perspective on compa-ratios, we asked Tom Brock, a licensed CPA and CFA charterholder with over a decade of experience helping small business owners, to offer some insights on this metric. Specifically, we asked Tom to opine on the ratio measures that business owners should keep on their radar.
What is a good compa-ratio?
As a general rule, compa-ratios between 80% and 120% are considered fair. Naturally, seasoned employees could be discouraged by compa-ratios that fall below 100% and will be drawn to positions that pay on the higher end of this scale.
Anything below 80% is typically considered a poor compa-ratio. However, it is not uncommon for new employees to fall into this category, largely due to a lack of experience, skills and abilities. Over time, assuming growth and development, they should advance along the scale and earn higher, more competitive salaries.
— Tom Brock, CPA, CFA
So how does a company know if its compa-ratio is clicking on all cylinders? “Employees who fall in the 90% to 100% category are usually solid, experienced performers, and those with compa-ratios above 100% are usually exceptional, highly skilled performers,” explains Tom. “Incidentally, many talent-focused companies will target compa-ratios as high as 120% or more to attract and retain exceptional performers.”
Now that we have covered the percentages employers typically aim for, it is a good idea to explore what an inadequate compa-ratio looks like. Once more, we asked Tom for his two cents.
What compa-ratio is too low?
As noted above, a compa-ratio below 80% is typically considered poor; however, a sub-80% ratio could be justified for new, relatively inexperienced employees. That said, when a company’s compa-ratios fall below 60%, a clear lack of competitiveness is present. Failure to rectify this issue could result in significant retention issues and an inability to attract strong talent.
— Tom Brock, CPA, CFA
With the numbers under our belts, let’s move onto how compa-ratios can be used in practice.
Applications of compa-ratios
There are various ways you can apply compa-ratios to make sound salary and budgeting decisions. A few of the most prominent applications are as follows:
- Performance-based pay adjustments: If you determine that you have several high-performing employees with compa-ratios of 80% or less, you will likely want to make performance-based pay adjustments to get them closer to 100% of the market median. You may need to adjust individual salaries or those of full teams.
- Market research for salary benchmarking: Salary benchmarking is another important HR strategy that can ensure your salaries are in line with industry standards. Compa-ratios are a key figure in market research for salary benchmarking, enabling you to quickly see which categories are below or above those of similar companies in your industry. If you note that several of your key roles are relatively underpaid, you might want to take swift action to increase the annual compensation.
- Regular salary reviews and updates: When it’s time for salary reviews and updates, compa-ratios make it easy to determine which employees are being paid generously and which ones need to catch up to the industry median salary point(s). A compa-ratio can make this process more fair and equitable.
When assessing salaries and performance, it’s also a good idea to review other HR offerings, priorities, and tasks, including annual benefits, payroll, workers’ compensation insurance, and workers’ compensation by state.
Bottom line: Understanding compa-ratio for compensation planning is a plus
If your company is using compa-ratios for the first time or you need some support with strategic compensation planning, OnPay’s HR software can simplify everything — from compensation to payroll to benefits — for your entire company. Visit OnPay today to learn more about how your company can free up valuable employee time by automating administrative tasks and streamlining your HR services and programs.
You can also learn more about HR services for small businesses, including the latest information on onboarding, compliance, retention, and more. OnPay is here to help you grow your HR programs and increase the effectiveness of your efforts.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.