When evaluating how competitive and equitable pay is within your organization, a very familiar pay metric can be used to identify potential trouble spots: compa ratios. A compa ratio compares an individual employee’s salary to the midpoint of a given salary range. This simple metric can be utilized in many ways to guide compensation decisions when used thoughtfully and consistently.
Using Compa Ratios to Help Calculate Salaries and Make Business Decisions
As discussed in Merit Matrices: What Are the Compa Ratio and Market Index?, “compa ratio is the relationship of base pay to the salary grade midpoint and is expressed as a percentage.” It is calculated by dividing the actual salary by the midpoint of the corresponding salary range.
For example: If an Accountant earns an annual salary of $80,000, and the salary midpoint for the position is $80,000, then the compa ratio is 1.0 or 100% expressed as a percentage ($80,000/$80,000). This reveals that the employee is paid at the range midpoint; values higher or lower indicate how salaries compare relative to midpoint.
The compa ratio can reveal many things about how the employee is paid. If the salary range midpoint aligns with market data at the 50th percentile, then it means that the employee is paid at the same rate as others in the relative market. This assumes that an individual with the same level (years) of experience, skills, knowledge, and education can expect a salary at the same rate. Someone with less can expect to be paid lower in the range (with a lower compa ratio that is less than 100%) and a seasoned professional would most likely be paid at the higher end of the range (with a higher compa ratio that exceeds 100%).
Establishing Pay Rates
This is useful information when determining candidate job offers. A compa ratio of 100% indicates that the salary in question is paid at the market rate that one can expect to pay for fully competent, experienced incumbents. A compa ratio less than market is appropriate for incumbents still learning, with relatively few years of experience (perhaps a new college grad), or those new in the role. A compa ratio greater than 100% is usually reserved for those who are highly experienced, have been in the role for several years, or perhaps have some niche skillset. Salary adjustments can be made to the salaries of existing incumbents as information is gathered about the salary needs of current candidates.
Annual Compensation Review
Compa ratio formulas and calculations can be used to get a bird’s-eye view of where positions fall in relation to the external market. This will show where salaries align to the market, to internal salary structure, and to others in the position. This data may reveal a need to adjust the ranges. Once the pay inequities and salary adjustments have been identified, pay adjustments can be calculated.
Performance-Based Merit Increases
Many companies use a compa ratio performance matrix, or a merit matrix, to determine increases based on performance and market comparisons. An employee’s progression through the pay range may be directly related to performance. A merit matrix provides guidance on how to match performance ratings to compa ratios when determining merit pay increases. A merit matrix is a two-factored table that considers performance rating and some measure of relative salary placement, typically compa ratio. It is designed to provide a framework to help managers equitably navigate the allocation of merit increases across their employee population and should be structured to fairly reward high-performing employees similarly across the company to reduce the risk of salary-increase inequality. Since pay increases are most frequently made as a percent of salary, that would mean that high-performing employees receive the same percent increases across the organization, independent of the position.
Compa ratio is a common statistical compensation tool, though it is not meant to be taken at face value in every situation. ERI’s Salary Assessor utilizes compa ratios to help calculate and benchmark salaries. An investment of time to know the company’s pay structure, its jobs and niche talent market, as well as the compensation strategy allow the use of this tool to begin a conversation about the meaning of the results. A low compa ratio in a company that pays higher than most for a group of jobs is not necessarily a bad thing to be remedied immediately. Many companies with union-represented positions have pay ranges that reflect the negotiated pay ranges, which may be higher than the broader market. It is important to use the tools consistently that work best for supporting the overall company strategy.
