An HR Glossary for HR Terms
Glossary of Human Resources Management and Employee Benefit Terms
What Is Compa-Ratio?
Compa-ratio, or comparison-ratio, eliminates many of the extra considerations to make it easier to compare employee salaries.
In a competitive talent market, paying a fair salary is crucial to attracting and retaining the best talent. Similarly, ensuring all employees across the company are paid fairly for their positions is vital to establishing a culture of fairness and transparency. A wide variety of factors impact an employee’s salary, making it difficult to compare apples to apples. That’s where compa-ratio comes in handy.
Compa-ratio measures current pay rates as a percentage of market pay midpoints. This indicates whether an employee is paid below, at, or above market rates compared to similar positions at other companies. The midpoint of a pay range represents full market pay, and the ratio shows where the employee falls in relation.
Compa-ratio can be calculated individually to show where each employee falls on the scale or for a group to measure how your company’s compensation strategy compares to others.
What Does Compa-Ratio Tell You?
Compa-ratio tells you the competitiveness of an employee’s pay level. It highlights how an employee’s salary relates to the current market rate and the salaries of comparable positions at other companies, so you know how far an employee’s pay is from the market midpoint or fair market rate (whether it’s at, above or below).
Compa-ratios help companies know if they are compensating their employees properly and fairly. A compa-ratio that is too low means the company risks losing top talent to higher-paying jobs and struggling to find a quality replacement, while a compa-ratio that is too high means the company is paying more than other companies, which can potentially cut into the bottom line.
Calculating compa-ratio can help you adjust compensation as needed to retain employees or be competitive in attracting new employees. Compa-ratio also helps companies calculate realistic and competitive salary budgets.
Group compa-ratio measures where salaries fall for the entire company or individual departments. For example, you could calculate a group compa-ratio to see how your company’s salaries compare to the competition or how a department compares to similar departments at other companies. A group compa-ratio also showcases if the pay policy is equal across the company or if there are discrepancies. If one group of the company is paid much closer to market value than another, that could create tension within the organization or highlight hidden bias.
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How Do You Calculate Compa-Ratio?
Compa-ratio is expressed as a number deviating from 1.0, which represents a salary that matches the midpoint of the market range for that role. The simplest way to calculate individual compa-ratio is to divide an employee’s salary by the market compensation midpoint. To find the market pay midpoint, look at competitors’ salary data or labor statistics to determine the market average for a similar position.
For example, if an employee’s salary is 68,000 dollars and the salary range midpoint is 80,000 dollars, the compa-ratio is calculated with the equation 68,000/80,000 for a result of .85, or 85 percent of the midpoint.
To calculate group compa-ratio, divide the total salary of the group by the sum of their respective job midpoint rates. For example, employees in the finance department may have the following salaries:
With these corresponding market midpoints:
In this case, 183,000 (the total salary of the group) divided by 185,000 (the sum of each employee’s salary midpoint) results in a group compa-ratio of .98 or 98 percent. That means that the department is paid almost exactly at market value. The group compa-ratio can also be compared to the ratio for other departments to see how salaries compare across the company.
What Does a Compa-Ratio of .75 mean?
A compa-ratio of .75 means an employee’s pay is 75 percent of the industry midpoint. For example, an employee with a salary of 50,000 dollars with an industry midpoint of 75,000 dollars has a compa-ratio of .75.
A compa-ratio of 1.0 or 100 percent means the employee is paid right at the median market salary or full market value compared to people in similar positions. The optimal compa-ratio is between 80 and 120 percent to balance staying competitive and not wasting resources. Therefore, a compa-ratio of .75 is slightly below the optimal rate, meaning there’s a greater chance the employee will leave for a higher-paying job, and a pay adjustment may be necessary.
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