Compa-Ratio
Compa-Ratio is one of the most common metrics used by compensation professionals. As pay transparency proliferates and employees have more visibility to their salary ranges, several questions about compa-ratio and range penetration may appear. This article addresses the most common questions:
- What is Compa-Ratio?
- How Do you Calculate Compa-Ratio?
- When Does Compa-Ratio Matter
- When Does Compa-Ratio Not Matter?
- What is a Good Compa Ratio?
- What Does a High Compa-Ratio Mean?
- What Does a 1.0 Compa-Ratio Mean?
- What Does a .75 Compa-Ratio Mean?
- How is compa-ratio different than range penetration?
What is Compa-Ratio
Compa-ratio is a compensation metric that compares an employee’s salary to the midpoint of their salary range. It is often used by companies to determine whether their employees’ salaries are aligned with the midpoint and therefore aligned with the market rate. A compa-ratio of 1.0 means an employee is paid exactly at the midpoint of the salary range, below 1.0 indicates they are paid less than the midpoint, and above 1.0 means they are paid more than the midpoint.
The image below provides an overview of different compa-ratios within a pay band. If your salary falls within the green section, your compa-ratio would be between 0.95 and 1.05 because it is 5% above or below the midpoint.
How to Calculate Compa-Ratio
Compa-ratio is calculated by dividing the employee’s current salary by the midpoint of the salary range for their position. It’s typically expressed as a percentage. For example, if an employee’s current salary is $50,000 and the midpoint for their salary range is $45,000, the Compa-ratio would be $50,000 / $45,000 = 1.11, or 111%. The formula to calculate compa-ratio is below:
Compa-Ratio = Salary / Midpoint
When Compa-Ratio Matters
Compa-ratio is particularly useful when organizations want to assess how closely employees are being paid to midpoints. Identifying jobs or job families where a large percent of employees have compa-ratios that deviate from 1.0 helps in identifying any discrepancies or imbalances in salary distribution among employees performing similar roles.
When Compa-Ratio Doesn’t Matter
Although compa-ratio is one of the key metrics used by compensation professionals, it is important to consider the compensation philosophy. Compa-ratio may be less relevant in situations where the compensation is largely influenced by factors other than the midpoint. Companies that have significant STI or LTI incentives may influence the value of Compa-Ratio.
While many organizations benchmark their midpoint effectiveness based on overall compa-ratios, average compa-ratio, may oversimplify and overshadow individual compa-ratios, which must be considered.
FAQs about Compa Ratio
What is a good compa-ratio?
Although the compa-ratio is objectively calculated, what makes a compa-ratio good is rather subjective. A comp-ratio that is high means that the employee is paid highly, compared to the midpoint. This also usually means that (depending on the merit matrix) they may not receive merit increases as large as others with similar performance in the same job. High compa-ratios may also mean that the job’s midpoint is too low, compared to the market — this is especially true if most employees have a high compa-ratio.
How do I calculate compa-ratio?
Compa-ratio is a simple formula and is represented as Compa-Ratio = Salary / Midpoint
What does a high compa-ratio mean?
A high compa-ratio means that the employee is paid well above the midpoint. If a compa-ratio is 1.2, this generally means the employee is paid 20% above the compa-ratio
What does a 1.0 compa-ratio mean?
A compa-ratio of 1.0 means that the employee is paid exactly at the midpoint of the salary range.
What does a .75 compa-ratio mean?
A .75 compa-ratio means that the employee is paid 25% below the midpoint of the range. For example, if the midpoint was $40,000, an employee with a compa-ratio of .75 would be paid $30,000.
How is compa-ratio different than range penetration?
Compa-ratio is a function of the salary’s relationship to the midpoint, and position in range is a function of where the salary sits within the entire pay range.
One response
There is one more variable. Not all companies set their midpoint at the 50th percentile. So a high compa-ratio in a company that sets its midpoint at the 40th percentile is not as good as the CR suggests in relationship to the actual market median. ETC.