Are your company’s salaries competitive? Is pay equitable among the workforce? To discover possible areas of concern, you might want to consider comparison ratios, or compa ratios.
Compa-ratio is one of the most common metrics for measuring salary and evaluating how competitively an employee is paid. This quick yet reliable statistic can be immensely helpful in making decisions surrounding compensation and an employee’s pay.
The ratio is a measure of the difference between an employee’s salary and the midpoint of salaries for comparable positions in other companies. Compensation ratios are an important tool used to attract and retain top talent in today’s competitive workforce.
This allows businesses to make sure their compensation levels are fair, competitive, and that their employees are being compensated for their individual contributions.
A compa-ratio will help you set your internal pay range
Compa ratio is a useful tool for employers to assess the value of an employee’s salary and how an employee is paid in comparison to what other similar employees are paid. This type of ratio takes into account the external market forces, as well as internal qualifications and experience.
The outcome gives employers insight into the right salary level and employee’s pay range for their staff members, allowing them to remain competitive and retain top talent.
Compa-ratio is also a great way to evaluate the effectiveness of internal salary structures. It can help you determine if your current salary levels are appropriate for your industry or market, as well as identify areas where adjustments may be necessary.
Obtain salary range market data to use when you calculate compa-ratio
The first step to calculate compa ratio is to get good salary benchmarking data to determine the current market value for each internal job and job family. This basis allows you to compare salaries based on similar companies in your industry or location.
At SalaryCube, we provide you with the employee compensation data you need to begin to calculate your compa-ratio.
Salary benchmarking data
By utilizing our salary benchmark data, you will have current market data on base pay, variable pay and total pay. These pay types are displayed by average pay, median salary, salary range min, salary range midpoint, and salary range maximum. All of this can be used to calculate compa-ratios and set an appropriate employee salary.
Related: Radford Compensation Alternatives
Fair market rate
The median salary is a great place to start if you want to price your jobs at the current market rate and compare against market value. Using SalaryCube as the basis for your compensation strategy and when calculating compa-ratio, you can feel confident when you compare employee salaries at your company to the current market data.
Get the best real-time salary data for your compa-ratio calculations.
Choose which type of compa-ratio you want to use
A compa-ratio calculation can come in a variety of forms, depending on the needs of the employer and their employee compensation strategy. Two types of compa ratios are individual compa-ratio and group compa-ratio.
Individual compa-ratio
Individual compa-ratios compare an employee’s salary to that of other similar employees within the organization. This type of ratio helps to ensure that all employees are being compensated fairly, according to their qualifications and experience.
Group compa-ratio
A group compa-ratio measures the average salary of a group of employees in comparison to the salaries of similar groups in other organizations. The group compa-ratio can help businesses assess how competitive they need to be when it comes to compensation, as well as how their salaries compare to those of other organizations in the same industry.
Free compa-ratio calculator
To calculate a compa-ratio, employers need to divide an employee’s salary between the market rates at the midpoint of compensation and the employee’s wages.
For example, if an employee is earning $50,000 and the midpoint of salaries for similar employees in other companies is $60,000, then their compa-ratio would be 0.833 (50,000/60,000).
High compa-ratio
A high compa-ratio is a ratio that is above 1.0 and indicates that the employee’s salary is higher than the midpoint of salaries for comparable positions in other companies. This suggests that the employer has competitive compensation levels and is likely to be able to attract and retain talent.
A high individual compa-ratio can also indicate that the employer is spending more money than necessary on compensation. As such, companies might reevaluate how much they pay employees in order to match the market average.
Low compa-ratio
A low compa-ratio, which is a ratio that is below 1.0, indicates that the employee’s salary is lower than the midpoint of salaries for similar positions in other companies.
This suggests that the company may need to adjust its compensation framework to remain competitive and ensure it can attract and retain talent.
What is a compa-ratio of .75?
When a ratio of 0.75 is observed, it means the employee earns 25% below the industry average and may consider searching for better-paying opportunities from competing companies that offer compensation perceived as equitable. On the contrary, if a 1.15 compa-ratio is seen instead, this denotes that the worker gets paid above market standard.
How to calculate a group compa-ratio
Group compa-ratios are used to compare the average salaries of a group of employees to those of similar groups in other organizations.
To calculate a group compa-ratio, employers need to add up the salaries of all the members in a group and divide the total by the number of employees in that group. The resulting ratio will then be compared to other similar groups in different organizations.
For example, if a group of 10 employees has an average salary of $60,000 and a similar group in another organization has an average salary of $55,000, the company’s group compa-ratio would be 1.09 (60,000/55,000). This insight can be used by the employer to adjust its compensation framework.
How does a compa-ratio help establish a pay policy?
Many companies aim to hire employees at the low end of the predetermined salary range. This policy provides employees with some flexibility in pay increases to an employee’s annual salary.
In general, salary rates should range from 12% – 12% below their midpoint to 12% or higher. Utilizing a compensation ratio can help organizations plan a compensation strategy and develop an effective pay policy.
Compa-ratio, employee’s salary, and pay equity
The compa-ratio is a key component in helping to ensure pay equity within an organization. Pay equity is the concept of fair and equitable compensation for employees based on their qualifications and experience, not other factors such as gender, race, or age.
The compa-ratio statistic will provide employers with an objective way to measure how fairly their employees are being compensated.
Compa-ratios are also beneficial for measuring the effectiveness of compensation strategies and helping employers to remain competitive by adjusting their pay scales accordingly.
By comparing the wages of their employees to those in other organizations, employers can ensure they are staying ahead of the competition when it comes to offering competitive salaries.
Determine target percentile
Companies design a compensation policy in accordance with the existing market rate. With their policies, they establish if they will keep up with or outpace the marketplace, or stay behind it.
If aiming to meet the current market level is set as a goal by companies, then 50th percentile becomes their target; anything beyond that point would mean leading and targets lower than this benchmark signify lagging of the sector.
To reach your target percentile, simply calculate the market rate multiplied by one minus or plus the policy percent. The formula is straightforward: Target Percentile = Market Rate × (1∓Policy Percent).
Companies tailor the target percentile according to market circumstances and in response to their opponents as they vie for top talent.
Compa-ratio use in merit increases
Compa ratio and job performance rating are both utilized when deciding on merit increases. Employees with a lower compa-ratios coupled with higher performance scores should receive the highest end of the recommended pay increase, while those possessing greater compa-ratios or lesser performance scores should be offered the lowest part of that range.
Common compa-ratio use in pay structure practices
Throughout the employee’s lifecycle, it’s expected that employees learn new skills or improve performance. It’s important to use a compa-ratio to make sure the pay structure and pay grades of the employee is in line with the market rate for those with similar skillsets.
Conclusion
Compa-ratios are a powerful tool for employers to ensure fair and equitable compensation. By measuring the value of an employee’s salary compared to similar positions in other companies, employers can make sure they are offering competitive salaries that remain up-to-date with current market trends.
Compa-ratios should also be used when deciding on merit increases, as employees with higher performance scores or lower compa-ratios should receive the highest end of recommended pay increase ranges.
Ultimately, compa-ratio use is essential for any employer wanting to stay ahead of their competitors while providing fair wages and job promotions.
By using a comp ratio to measure employee salaries, employers can ensure their pay structure is in line with the market rate and that they are providing fair compensation for every position within their organization. This helps create an environment of trust and respect between employers and employees, as everyone knows they will be paid fairly based on experience and qualifications.
