This article is part of a larger series on How to Do Payroll.
Compa ratio, also called compa-ratio, is short for compensation ratio and is a formula (Current salary/market average * 100) used to assess the competitiveness of an employee’s pay. A compa ratio of 100 indicates you’re paying an employee their full market value.
You’re paying above market rate
You’re paying market rate
You’re paying below market rate
Determining the compa ratio for all of your employees allows you to know whether you are paying them competitive salaries. If you pay too little, you risk losing top performers to competitors. If you pay too much, you risk hurting your bottom line. A happy medium requires analysis and adjustment based on several factors.
How to Calculate a Compa Ratio
Here’s the formula to keep handy:
Current Salary / Market Average * 100 = Compa Ratio
Let’s look at a real-life example. Say you have an office manager position that you’re calculating the compa ratio on. Your business operates in Jacksonville, Florida, and you’re in the landscaping industry. Your office manager has been with your company for three years and has 17 years of experience. Their main job duties include overseeing all staff, handling payroll, managing business certifications, and acting as in-house HR. Some of these duties go beyond a typical office manager role, so you’ll need to pay close attention to job descriptions when doing your market research (we will cover research a bit more later).
After you’ve completed your research, you determine the market average for an office manager with extensive experience doing those job duties in the Jacksonville area is $68,700. You’re currently paying your office manager $59,500. So, let’s plug this data into our formula.
Current Salary ($59,500) / Market Average ($68,700) * 100 = Compa Ratio
$59,500 / $68,700 * 100 = 86.61
If you were to increase your employee’s salary to the median market rate, that would be about a 15% increase (the nationwide average annual increase is around 3%). That’s a substantial raise which would impact your payroll budget. But if you find you’re paying under market value, you may need to consider a sizable raise to keep your valued and experienced office manager.
The right compa ratio will vary from business to business, even in the same industry. You may value on-the-job experience more than a competitor, for example, which may mean that you need to pay slightly higher salaries for more experienced employees. This could result in your company’s compa ratio being at or above 100.
To begin calculation of your compa ratio, you need to collect data. There are many places you can look to find market data online. If you simply Google the job title plus “salary” you will probably see a dollar amount in the search results. I recommend not taking that as absolute truth as it will not take into account all of the details necessary to give you an accurate salary.
Specific criteria to consider when researching market data include:
- Your physical location
- Each position job title
- Specific job duties
- Companies in your industry
- Education requirements
I do recommend using market comparison salary tools to help guide your analysis. These resources compile vast amounts of data and break it down to minute levels of detail, giving you accurate pay information for similar positions. You may find that some roles are not exact matches, so you will need to make some adjustments to your analysis. For example, the same job title in Chicago may command a lower salary in Tulsa, so you will need to review specific jobs in your market to make sure you’re getting an accurate average.
Do not use a single website as your source, but instead use several. This may seem time-consuming, but it will help ensure that you get the most comprehensive data that includes not only the job title but also your specific location and qualifications for the position you are analyzing.
Tip: You don’t want to base your compa ratio on an unrelated industry or on similar job titles without considering the specific job duties. Many times, companies will simply look at job title comparisons without considering that other companies may use job titles very differently.
A pay band is a range of compensation each job should fit within. Along with the compa ratio, you should also calculate pay bands for each role. This will help you determine how much of an increase you may be able to pay employees who need a bump to stay competitive.
Let’s consider the Jacksonville office manager’s pay band. In general, you can safely assume a 20% swing in either direction of the market rate, making this employee’s pay within their pay band, albeit on the low end at 86.61. That’s a good compa ratio to shoot for, too: 80 to 120 tells you you’re being competitive and not at risk of losing employees over paying salaries well below the market rate.
Is it necessary to know a pay band when discussing compa ratios? Yes, because a pay band gives you the full range of what you should be paying an employee. The compa ratio helps you determine a specific target point and the pay band gives you room to move around that point.
Why Businesses Use Compa Ratio
Regardless of your industry, you need to offer competitive salaries to attract high performing employees. Whether you pay your employees a salary or an hourly rate, competitive pay helps to set your business apart from other companies.
Knowing your company’s compa ratio will help you:
- Understand where your pay falls in your market. Do you have trouble attracting the top talent in your area or industry? Do you lose employees to competitors? Your compa ratio may explain why.
- Combat turnover. One of the most often cited reasons for employees leaving a company is a salary that doesn’t keep up with market demand. Adjusting salaries based on your compa ratio can help with employee retention.
While employees tend to overestimate what they think they should be paid, they do have a general idea of the market value for their role. So should you.
What to Do With a Compa Ratio
As with most pay-related business decisions, salary should not be considered in a vacuum, but rather as a part of your company’s entire compensation package. So if you have found an employee has a compa ratio of 86.61, as we did above, what do you do with that information?
You could do nothing, which is not recommended. The longer an employee stays on the low end of their pay band or drops below a compa ratio of 80, the more likely they are to leave for a higher salary.
I recommend looking at the data from a holistic perspective. This means looking at the compa ratio analysis but also looking at your company’s entire compensation package. Do you offer benefits above the industry average? Do you provide more paid time off (PTO) than competitors? Do you pay 100% of an employee’s healthcare premiums? All of these can contribute to the attractiveness of your company’s compensation package, which can offset a compa ratio under 100.
Above all, conducting a comprehensive compa ratio analysis gives you information you didn’t previously know. Making your company competitive and retaining top talent can be achieved with this information.
There are many sources of information that can help you calculate compa ratio. Pay close attention to job duties and not just job titles, as those vary from company to company and industry to industry. Once you’ve determined the compa ratio for each position at your company, you can use the data to make strategic business decisions which may ultimately help you retain your top performers.