Decoding Compa-Ratio: A Comprehensive Guide for HR Professionals

November 28, 2023
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Decoding Compa-Ratio: A Comprehensive Guide for HR Professionals

Sometimes, setting employee salaries can feel a lot like a guessing game. How do you know when you’ve set a salary too high or too low — versus when it’s just right?

The answer lies in data. As a crucial component of an equitable compensation strategy, HR teams rely on a range of data and calculations to inform any salary decisions.   

The comparison ratio is one part of the puzzle. Also known as compa-ratio, this calculation helps companies set salaries that both attract top talent and maximise your budget. 

Used alongside salary benchmarking and salary bands, knowing how to decode the compa-ratio calculation is a key way to ensure your compensation strategy is fair, transparent, and objective. Here’s everything you need to know.  

What is Compa Ratio? 

Compa ratio is a formula used to calculate how an employee’s salary compares to the mid-point or market median of their pay range.

This ratio is a critical part of any company’s compensation planning because it helps determine if your employees are being paid competitively — or not. 

It also helps highlight any internal inequity if employees with the same role, responsibilities, and skills have significantly different ratios.   

How to calculate Compa Ratio 

The formula for calculating an individual employee’s compa-ratio is pretty straightforward:

Employee’s salary/median market rate salary x 100 = compa-ratio percentage

Let’s take a look at an example:

€50,000/ €60,000 x 100 =  83.3%

The employee in the example above is being paid slightly below the average market-rate for their role. Being able to calculate an employee’s compa-ratio relies on accurate market data — but a benchmarking tool like Figures can help you track this down. 

This calculation is usually based on an employee’s base salary, without any bonuses or benefits added. 

We’ve covered the individual compa-ratio calculation here — but there are also two other types which we’ll cover a little later on. 

The importance of Compa Ratio 

From driving internal pay equity to boosting talent retention, the compa-ratio calculation can help HR teams ensure that their company’s pay practices are helping drive the business forward. Here’s how.  

Ensuring pay equity

A compa-ratio metric is a useful tool when working toward internal pay equity. It allows you to identify any discrepancies, for example, if one employee is being paid above market rates while another in the same role is paid below market rates. 

By proactively monitoring individual compa-ratios and then comparing the values for employees in the same roles, you can work towards identifying and resolving any disparities.

Boosting talent retention

Employees want to know they’re being paid a fair wage — and the compa-ratio result makes that easy to demonstrate. If an employee’s value is around 100%, they know they’re being compensated at market rates. 

This knowledge can help boost employee retention. That’s because pay is a primary factor for many employees when they’re deciding whether or not to stay in their current roles. Proving that you value your employees and offer competitive compensation can also increase job satisfaction and performance over time. 

Using the compa-ratio calculation also makes it easy to identify employees who are being paid below market rates, which can mean they’re at high risk of leaving your company. 

You may then choose to implement a range of targeted retention strategies designed to reduce employee turnover. This could include salary adjustments, additional benefits, and bonuses. 

Being open about how your company uses compa-ratios to inform pay strategies can help cultivate a company culture of transparency and fairness.  

Allowing for effective compensation planning 

When setting compensation levels, there’s always a balance between setting competitive salaries while also maximising your available budget. 

The compa-ratio calculation helps to remove the guesswork. By comparing your salaries to the average market rate, it’s easy to set competitive salaries that attract top talent. 

This calculation also makes it much more straightforward to allocate your compensation budget. Being able to quickly identify which employees are being paid significantly below the average market rate means you can prioritise adjusting these, rather than spend more money on a flat percentage increase for all employees across the board (which may not be necessary). 

Supporting data-driven compensation decisions 

Compensation decisions should be unbiased and transparent. By relying on data from compa-ratio calculations, HR teams can make objective, informed decisions in line with a robust compensation philosophy. 

Using data to drive the decision-making process also makes it much easier to justify decisions when discussing these results with employees.

Creating a compensation communication plan that outlines how and why these calculations are used can also help reassure employees that decisions are made without bias. 

If you choose to integrate the compa-ratio calculation into performance review conversations, it’s easier to define pay increases that align with both market benchmarks and employee performance. 

Interpreting compa ratio data

The compa-ratio calculation is relatively simple to interpret but has a wide range of applications. Here are some of the most popular options. 

Identifying overpaid or underpaid employees 

A compa-ratio of 100% means an employee is paid exactly the average market value for their role. In reality, this doesn’t happen very often! 

Typically, most employee’s compa-ratio should fall within the 80-120% bracket. This can be further broken down into three categories:

  • 80 - 90%: New hires who are developing their skills and have yet to work their way up their salary range usually fall into this bracket.
  • 90 - 100%: Employees who perform well and have all the skills required to complete their responsibilities will generally fall into this bracket.
  • 110 - 120%: This bracket is usually reserved for employees with exceptional performance, very specific skills, or those who have been with a company for a very long time. 

Once all employee’s compa-ratio calculations have been completed, they can be sorted into these three categories. Employees within the 80 - 90% (or below) range, are generally considered underpaid. 

For each of these employees, complete an assessment to determine whether their skills, responsibilities, experience, and performance warrant a pay increase. 

These employees may also be at risk of leaving the company for a better-paid role with equivalent responsibilities elsewhere. 

Employees within the 110 - 120% bracket can be considered overpaid compared to market rates. Again, an assessment is needed to determine if their performance and skills warrant these rates. For highly skilled employees performing an in-demand role, this might be the case, especially if they would be hard to replace. 

For other scenarios, HR may need to consider salary adjustments to bring their compensation in line with market rates. 

Addressing disparities 

Creating fair and transparent compensation practices requires regular reviews and open employee dialogue. 

Often, the compa-ratio calculation will identify some disparities. Perhaps some employees ask for (and receive) a pay increase every year, while others haven’t requested a pay increase so are essentially performing the same role for less money. 

Your compensation philosophy should assess each employee’s compa-ratio, and then ensure that they’re consistently adjusted using the same processes. 

To avoid any disparities moving forward, ensure that your company’s compensation philosophy clearly outlines the methods used to determine employee salaries. 

Typically, this would include collecting salary benchmarking data, developing salary bands, and then using the compa-ratio calculation to evaluate each employee’s salary. 

If employee salaries are going to be adjusted as a result of their compa-ratio falling above or below market rates, set a consistent policy for how this will be implemented. 

Questions to consider include:

  • At what percentage below or above market rates will a pay review be triggered? (As a reminder, most employee salaries tend to fall within the 80 - 120% range, but you may decide to define a different range).
  • How will you ensure salary adjustments are fair and consistent? 
  • How often will employee salaries be reviewed?
  • How will you communicate changes to employees? 

Types of compa-ratio

Compa-ratios can be split into three main categories:

1. Individual compa-ratio

Calculates how a single employee’s salary compares to the median market salary.

Employee’s salary/median market rate salary x 100 = compa-ratio percentage

The individual compa-ratio can be used to determine if an employee’s salary is below, at, or above the market rate. 

This can then help inform salary adjustments, if necessary. 

2. Group compa-ratio

Used to calculate how a group of employees’ salaries compare to the median market salary.

Total of employee salaries for the group / Total of median market rate salaries for the group x 100 = group compa-ratio percentage

This is a useful calculation when assessing if the salaries for a specific group of employees (typically those with the same job description or working within the same department) are aligned with market rates. 

Using the group compa-ratio can help highlight any disparities between teams. For example, if one manager consistently approves pay increases while another rarely does, the compa-ratio percentage for the first group may be above market rates, and the percentage for the second group may be below market rates. 

Once disparities like this are identified, you can address any pay inequities using a consistent and fair assessment process (hint: we gave you some ideas for how to structure this process, up above). 

3. Average compa-ratio

This calculates the average of all employee's compa-ratio salaries. 

Sum of individual compa-ratios / number of employees = Average compa-ratio 

This calculation can give an overview of a company’s pay structure and how this compares to market rates. 

It’s useful as part of your overall benchmarking processes as you work to determine if your position within the market needs to be adjusted. 

It can help identify if your compensation structure is broadly in line with market rates. If your average falls below your pre-determined range, this can signal that work needs to be done. 

First, you’ll need to complete further calculations using the group and individual compa-ratio calculations to determine which employees need salary adjustments. 

Using compa-ratio in compensation planning 

Companies and HR teams are under pressure to do more with less.

Setting salaries that are competitive yet sustainable is a crucial part of achieving this — and the compa-ratio can help inform a range of compensation planning strategies, including:

  • Salary reviews: Once any employees being paid below market rates have been identified, their salaries can be reviewed and adjusted if necessary. Salaries of employees in similar roles should also be reviewed to ensure there aren’t any disparities. 
  • Merit increases: Several strategies can be used here. One option is to identify employees with a below-market average compa-ratio and offer them larger merit increases or sales commissions. This can work well for sales-based roles with an OTE salary structure. Individual compa-ratios can also help inform the fair distribution of merit increases, designed to even out inequities and ensure everyone is paid a fair salary. 
  • Incentive programs: Additional incentives and benefits can sometimes help ‘bump up’ the total compensation of employees with below-average compa-ratios. Top talent with above-average ratios may also be interested in incentives that increase their total compensation. 

All of the above can help boost employee satisfaction and retention — because everyone knows they’re being paid an equitable wage that’s been objectively determined. 

Using a fair and transparent compensation policy also helps boost trust which in turn, tends to positively impact performance. 

Addressing compensation challenges 

Successfully integrating compa-ratio calculations into your compensation policy and strategies isn’t without its challenges. We’ve rounded up some of the common issues we see — and suggested some solutions.

Challenge 1: Ensuring data accuracy

Solution 1: The value of the compa-ratio calculation relies on high-quality data. Using real-time benchmarking data to inform the average market rates you’re using is crucial. For best results, choose a reliable data source (like Figures!) that’s filterable by location, industry, company size, and more. 

Challenge 2: Promoting employee understanding. 

Solution 2: Employees may initially be hesitant about any strategies with the potential to impact their pay. Creating a clear compensation communication plan can help reassure them of how these strategies may impact them and at the same time tell them more about the objective, data-backed decision process. 

Challenge 3: Simplifying complex compensation structures

Solution 2: Companies with complex, legacy compensation structures may find it challenging to simplify and standardise these — but it’s an important part of the process when working towards equitable compensation practices. 

Using a comprehensive compensation management tool that’s backed by the highest-quality data makes this streamlining process as simple and stress-free as possible. Plus when it comes time for the next review, all the data you need is at your fingertips.   

Ready to start calculating compa-ratios at your company? Then you need access to real-time benchmarking data. Get in touch to find out how Figures can help.  

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