How to Calculate Compa-Ratio and Why It Matters
Every company wants to retain their best employees, not lose them to a competing company. But the easiest way to lose those employees is by not paying them enough compared to other companies in your industry. But how do you know if you’re offering competitive pay?
The comparison ratio (compa-ratio) is a mathematical equation to determine how an employee’s salary measures up against people in the same position at other companies. In simple terms, it shows how competitive your pay is for that job title.
It’s a valuable tool to make sure your best employees are continuously satisfied with their compensation. It can also help your company achieve pay equity for all employees, by assessing where everyone falls within the salary range for that position. For HR professionals looking to improve their workplace, the compa-ratio is an essential metric for employee engagement.
Let’s look at why compa-ratio is so important and how to use it to improve your organization.
What Is Compa-Ratio?
In a nutshell, “compa-ratio” is short for “comparative ratio.” It’s an equation used to calculate how an employee’s pay compares to other people’s pay in the same position at different companies.
The exact formula for the compa-ratio goes as follows:
Compa-ratio = (Employee’s salary/Median Salary) * 100
This will give you a single score. If it lands at or near 100, that salary is close to the market rate for your employee. If it is lower than 100, you’re paying lower than the market rate. Anything over 100 means you’re paying above the market rate. This doesn’t indicate overpay — it just means you’re paying more than what that employee may see posted in job listings at that time (more on that later).
For example, the median salary for a full-time personal assistant in the US is $36,000. If you wanted to pay your new assistant $30,000, this is how you would determine the compa-ratio:
(30,000/36,000) = 0.83
8.3 * 100 = 83.3
In this case, you would be paying your assistant somewhat below market value. However, it’s still within the “pay band” for that position.
What Is a Pay Band?
Ideally, your company should strive to pay employees within the “pay band” for their position. That means it should fall within the range of numbers 20% higher and 20% lower than the median salary for that position.
You can learn the pay band of a position by multiplying the median salary by 0.8 and 1.20. This will give you the numbers representing the range between 80% and 120% of the median salary. If the salary for your employee falls between those two numbers, then you are technically paying that person a competitive salary for that position.
To continue our example, the median salary for a full-time personal assistant in the US is $36,000. The pay band for this position is between $28,800 and $43,200.
Let’s say you do decide to pay your personal assistant $30,000 annually. Using the first half of the compa-ratio, we came up with 0.83. This means that assistant’s compa-ratio score is 83. That’s right in line with competitive pay, because it’s well within that 80% to 120% range.
Why the Compa-Ratio Matters
So now you know how this equation works. How can you use it to your advantage?
Ensure Employee Engagement
Money isn’t a perfect motivational tool. If it were, only volunteers and interns would ever be bored at work. But offering competitive pay is essential to attracting and retaining top talent. Employees will want to stay long-term with a company they know will adequately compensate them for their work and skills. If you’re able to land within the compa-ratio’s pay band for each position, you may help reduce turnover rate.
Evidence-Based Hiring Practices
Knowing the average local salary for the position you need to fill already gives you a leg up when hiring out. But knowing the range (and where your offering falls within it) provides insight into what people may think when comparing your listing to those of other companies. If very few people are applying for a certain position, you may be offering a number on the lower end of the pay band.
Discoveries with Existing Hiring Trends
Having exact data about how everyone at the same level is paid can open up interesting discussions about qualifications within the company. Is the junior programmer in one department paid more only because they have one additional certification? Why is it that an office manager with a long tenure at the company isn’t being compensated at the higher end of the pay band? Is it because they don’t have a college degree?
Using a mathematical, non-subjective formula to measure the fairness of your salary for each position may reveal ways in which your company can improve its payment distribution.
Informed Discussions on Equity
It’s never comfortable to talk about inequity in the workplace. But if you’re able to raise concerns with exact numbers on disparities between employees, it’s more likely you’ll be able to convince skeptics that a problem does indeed exist. Add data about where your company compares pay-wise against competitors, and you’ll have a more solid case about changes that need to be made. You can go even further with using the compa-ratio to demonstrate the exact sources of inequality.
How to Use a Compa-Ratio to Reveal Inequity in Your Company
In short, inequity refers to unfairness and injustice in dealings between people. In a company, this is often used in reference to unequal pay or distribution of benefits/perks solely based on the employee’s racial or other permanent characteristics.
The compa-ratio is a very helpful tool for finding inequity because it’s entirely numbers-based. The compa-ratio doesn’t have human subjectivity or bias. The numbers won’t lie — in fact, they may help you find the exact nexus of inequity at your company.
Re-Assess Compensation to Detect Inequity (and Improve Talent Engagement)
Stop inequality before it starts by running the compa-ratio of current employees against the salaries of advertised positions at other companies. Are you keeping pace with the market with the people you’ve already hired? If you want to be really thorough, try running compa-ratio comparisons between different teams within a department.
All of these results will help you catch discrepancies in salary, both due to inequity and otherwise. You’ll also be able to tell which managers are sticking to the company’s official compensation plan and/or where the high performers are within the company. This is extremely helpful for detecting where employees aren’t engaged with work. You might even be able to use this to anticipate employee churn.
Use Compa-Ratio to Determine Pay Differences Over Time
Is your most experienced talent leaving? The positions they held may no longer pay enough to keep pace with your market.
Determine the pay band for their position, and compare their current salary and the salary they negotiated for at the last evaluation, the one before that, and so on. You may notice a pattern of “drift,” where inadequate raises over time caused them to gradually fall out of their appropriate pay band. This can be corrected by compensating people up to the range of their pay band, and completely avoided by performing these comparisons frequently and correcting the course of trends. Don’t let the urge to woo talented newcomers with higher pay cause you to neglect your most tenured employees.
Assess Compa-Ratio Scores Across Groups
Let’s say you suspect inequity between two groups of people at your company. The compa-ratio is perfect for direct comparisons between individuals within and outside of a group. You can also do compa-ratios for members of smaller groups, like between people of the same department, same seniority, etc. That might actually be more helpful for locating bias, because you’re more able to see trends or tendencies. Are the older, female workers of the company all paid within a healthy compa-ratio? How about the young Black men?
Limits of the Compa-Ratio
The compa-ratio is very helpful for verifying that employees are being paid fairly. But there are definite limits to the equation and the story it can portray about equal pay in the workplace. It’s important to take these into consideration when using the compa-ratio to dictate policies about compensation in general.
No Accounting for Perks
The compa-ratio does not take into account paid vacation, 401k matching, free meals, and several other perks that may incentivize a person to work at a certain company. Depending on the industry, an employee may be also willing to work for a company that offers lower pay in exchange for a meaningful non-monetary perk (such as a generous maternity leave plan).
It’s possible to assign monetary values to certain perks and run the compa-ratio to better gauge how your company compares to competitors. But make sure to do it for the same perks across companies (e.g. make sure that paid vacation time is accounted for in the figures assembled for each company). This may take time and you run the risk of being imprecise, and therefore performing incorrect math.
No Accounting for Extra Qualifications
The compa-ratio is great for determining pay discrepancies or deviations from the average for that position. But it’s important to note that discrepancies can sometimes reflect a difference of qualifications. It makes sense to give more compensation to an employee that’s been at the company for a decade longer than another in the same position. That also applies to employees who pursued additional certifications or took on more complicated tasks in the same role.
No Accounting for Inflation (or Other Economic Factors)
Inflation is an important factor to consider when writing out paychecks in 2023, but it isn’t accounted for when comparing them using the compa-ratio. It’s important to take into account that the numbers you end up with may not reflect the same quality of life across locations. Your employees may have additional pay differences between them because of tax bracket changes, low wage growth, and increasing cost of living. This also doesn’t take into account that employees may have different tax needs (and deductions) depending on their location.
No Accounting for Location
Cost of living influences and adds context to an employee’s salary. However, compa-ratio doesn’t take into account where an employee lives and the various costs associated with living in that area. The same salary for an employee living in a small town may feel very different to an employee living in a city. Expenses aside, fulfilling their duties may also come with heavy commuting, planning for adverse weather, or other location-specific factors that others may not have to account for. None of these factors go into the compa-ratio.
As an example, the personal assistant making $30,000 would be able to live very comfortably in Topeka, Kansas. The median pay for this position is $39,446, so they would be well within the pay band if they were able to negotiate for a $1,600 raise. But things are different in San Francisco, where the median salary for a personal assistant is $48,589 (this pay band ranges from $38,872 to $58,396). This is partly due to the 54% difference between the cost of living between the two areas. For our assistant to live at the same standard of living in San Francisco, they would need to earn $65,018.
The compa-ratio is an equation used for comparing salaries within a group. It’s an incredibly valuable tool for determining if inequity is present within a company pay structure — without making room for human error. Knowing where your company stands with regard to paying people fairly can help determine if you’re at risk for employees leaving for better paychecks elsewhere.
It’s also important to remember that employees can choose to leave a company for a non-quantifiable reason, such as a toxic manager or the chance to work in an industry they’re passionate about. Take advantage of what the compa-ratio can indicate, and use it to gain better insight into your employees and their life at the company.
Keeping a company running and the employees happy is a difficult job for any HR department. There are several responsibilities in regards to payroll, employee-management relations, and ensuring equitable treatment and pay. Criterion can help, offering custom solutions and seamless integration with many of your existing programs. Specialty modules centered around talent engagement will help you keep track of employee progress and satisfaction — before they decide to leave. With Criterion, data-driven decisions that benefit the entire company are more possible than ever.
Don’t wait to start making your company a better place to work. Book a demo of Criterion HCM today.