A Comprehensive Guide to the Compa Ratio
In its original use, compa ratio (or comp ratio, or compensation ratio) is a simple formula designed to compare an individual’s actual salary to the midpoint of a defined salary range.
Over the past few decades, HR and compensation professionals have found many more ways to use it. As a result, it has probably become the most helpful ratio in pay and compensation analysis.
Analysts can compare the average ratio of any subgroup to the group average to see differences between groups. Identifying those results can help ensure equity in and across groups in your organization.
For example, you could use group compa ratio and other data to compare salaries in job groups to other organizations to evaluate external competitiveness.
Don’t base decisions on compa-ratio alone. Instead, consider it with industry, location, size of the organization, and other factors.
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What is compa ratio?
The general formula for compa ratio is
Compa Ratio = Actual Rate of Pay / Reference Point of Pay
where the actual rate of pay can be an individual, a group, or an entire workforce, and the reference point of pay is:
- the midpoint of a defined salary range,
- the average market rate or market midpoint, or
- an average of a group of actual pay rates.
On the organization level, compa ratio is a measure of how well you are reaching your policy structure line.
Before we start the discussion, let’s review the compensation terms that are required to understanding compa ratio.
A salary in this context is a regular fixed payment to an employee, as payment for services performed, usually expressed as an annual sum. However, most organizations pay salaries on a bi-weekly or monthly basis.
We also use the term “salary” in formulas for hourly workers. In this context, it is the annual sum of hourly pay, hourly wage × 2080 hours.
Salary, and therefore compa ratio, does not include bonuses, variable pay, benefits, or any other type of non-salary compensation.
Companies define a pay policy relative to the current market rate. In that policy, they establish whether they will meet, lead, or lag the market.
If the policy is to meet the market, the target percentile will be 50. Anything over the 50th percentile is leading the market. Targets below the 50th percentile are lagging the market.
So, the target percentile is a certain percent above, at, or below the market rate. The formula is:
Target Percentile = Market Rate × (1∓Policy Percent)
Organizations adjust the target percentile based on market conditions and the action of their rivals in competition for talent.
Companies assign pay ranges to classes or groups of jobs to provide consistency and equity across jobs and the flexibility to plan in response to market conditions.
The organization defines pay grades and ranges (or bands) for each job family with
- a midpoint at the target percentile,
- a minimum at a certain percentage below the midpoint of the compensation range,
- and a maximum above it (usually the same percentage).
The range minimum is typically the starting point for a new employee.
To learn more about compensation terms, metrics, and formulas, read our article on Compensation Metrics HR and Managers Need to Know or download a free copy of the Compensation Metrics Cheat Sheet.
Individual compa ratio
The individual ratio is an elementary but infinitely valuable ratio of salary to the midpoint of a pay range:
Compa Ratio = Actual Pay Rate / Range Midpoint
In this example, an employee’s salary is $47,200, and the midpoint of the salary range is $52,000. The compa ratio will be:
Compa Ratio = 47,200 / 52,000 = 0.908 = 90.8%
You can use a decimal or a percent. Compensation pros use a decimal, but it may be easier for those outside the professional to grasp a percent.
On the other hand, your engineers might prefer 0.907692.
For example, a percent might be most helpful when a manager needs to explain an employee’s pay level.
However, a decimal is better when an analyst uses a compa ratio with other metrics.
Compa-ratio without pay ranges
You can use market rates or industry averages as the benchmark for comparison when you don’t have a defined pay range.
In this example, the employee’s pay rate is $46,000, and your salary survey report average or midpoint is $50,000. The compa ratio is:
Compa Ratio = 46,000 / 50,000 = 0.92 = 92%
It also works with your pay policy. So, for example, if your policy is to pay employees at 15% above the market, the formula will be:
Compa Ratio = Actual Pay Rate / (Market Average×(1+0.15))
For our example, the formula is:
Compa Ratio = 46,000 / 50,000 × (1+0.15) = 46,000 / 57,500 = 0.8 = 80%
If you pay new hires at 10% below market, the formula is:
Compa Ratio = Actual Pay Rate / (Market Average × (1-0.10))
For our example, this formula is:
Compa Ratio = 46,000 / (50,000 × (1-0.9)) = 46,000 / 45,000 = 1.02 = 102%
How the individual compa-ratio works
Most companies start new employees at the bottom of the range or a defined percentage above it. That policy gives them a way to increase pay as the employee gains experience.
Increases are usually higher at the beginning of the employee’s tenure and become smaller as the salary approaches the midpoint.
A typical practice is to keep salary rates to a range from 10-20% below the midpoint to 10-20% above it.
However, top performers may reach higher ratios, and you may hire seasoned employees at a higher rate.
Companies often use compa-ratio to help decide how fast to move an employee to the midpoint of the range or the market benchmark.
This table from WorldatWork shows how to construct a merit increase table using compa ratio.
Pay and seniority
In a civil service environment or other situations where seniority rules govern pay, differences in compa ratio compared to seniority can spark a compensation review of an entire employee class.
Group compa ratio
To measure the difference between practice and policy for the entire company or a group, we use group compa ratio.
Group Compa Ratio = Sum of Actual Pay / Sum of Job Reference Point Rates
In an Excel worksheet, the calculation might look like this:
You can use the group ratio to plan and control your pay budgets. Then, you can use it to spot problems with the policy or the way managers implement it.
Differences could result from strategy or the characteristics of jobholders, such as:
- location pay for different regions, countries, or locations;
- differences in responsibilities within a job class;
- tenure in the job; or
- experience in previous like positions.
For example, a lower than usual group compa ratio might show shorter tenure in the job, which could be due to:
- higher resignations caused by economic or financial decisions to forgo merit increases,
- faster promotions caused by rapid expansion, or
- more transfers prompted by an internal gig economy.
A higher than usual group compa ratio might indicate longer tenure due to:
- lack of promotion opportunity caused by transformation from a hierarchical structure to a flatter organization,
- progress in keeping but not promoting people who don’t have management skills but perform well, or
- market forces that require higher pay rates.
High or low group compa ratio could also be because of problems with pay policy or the compensation structure, such as:
- pay ranges that have fallen behind the market,
- anomalies after you implement a new pay structure, or
- a need to re-evaluate jobs that have changed.
Group compa ratio can also alert you to differences among employee groups in gender, ethnic origin, age, or other instances of conscious or unconscious bias.
It’s critical to remember that compa ratio only tells you there may be a problem. Only a thorough investigation will lead you to the cause.
Average compa ratio
Average Compa Ratio = Sum of Individual Compa Ratio / Number of Individuals
In this sample worksheet, the sum of the compa ratios is 242.79, and the number of individuals is 232.
Differences may be entirely justified. If not, they may need remedies such as:
- speeding up salary increases until the group is within your guidelines,
- decelerating increases and using onetime bonuses to retain affected employees,
- getting better control over manager ratings and pay reviews, or
- having HR business partners work with managers on their pay allocations.
Using compa ratio in your compensation strategy
- Conduct frequent reviews to align practices to your strategy and create a solid compensation plan to reward employees equitably.
- When you do your reviews, compare compa ratios to tenure, experience, and job responsibilities.
- Assign a “next review date” to every job or role classification, track the compliance dates, and then include a group compa ratio analysis in your review.
- Continue to build your people analytics capability to automate compa ratio aggregation with other quantifiable factors that affect employee compensation.
- Never let compa ratio stand alone as an equity measure. It only shows you a potential issue.
- Communicate with your workforce on how you use compa ratio and what it means.
- Train managers on how to discuss compa ratio with their people.
Over to you
Like any tool, compa ratio’s value lies not in the ratio itself but in how you use it.
There is no substitute for knowledge. Compa ratio is the beginning of an investigation, not the end.
There can be multiple reasons the ratios are out of line, so keep on asking why until you find the root cause.
Compa ratio can help you in the entire range of discussions on pay equity, from high-level strategy to the single individual who has a question or concern.
It’s worth your time to ensure that every person in your organization has access to pay policies, their application, and how you use metrics to build understanding.