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 Compa Ratio: Best Practices
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 $78,200. You’re currently paying your Office Manager $59,500. So, let’s plug this data into our formula.
Current Salary ($59,500) / Market Average ($78,200) * 100 = Compa Ratio
$59,500 / $78,200 * 100 = 76.09
If you were to increase your employee’s salary to the median market rate, that would be about a 30% increase (the nationwide average annual increase is around 3%). That’s a substantial raise that would impact your payroll budget.
However, 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. Otherwise, you could lose them to another company—changing jobs results in an average salary increase of 14.8%.
Do Market Research
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 calculating the compa ratio, you need to collect data. There are many places 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 the details necessary to give you an accurate salary.
Specific criteria to consider when researching market data include:
- Your physical location and where your employee works
- Each position’s job title
- Specific job duties
- Companies in your industry
- Education requirements
Expert Tip: I 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. Check out our guide to the best salary comparison tools for some options.
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.
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.
Calculate Pay Bands
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 just under that standard at 76.09. A ratio of 80 to 120 is a good target as it shows that you’re being competitive and not at risk of losing employees for 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.
Establish a Compensation Philosophy
Establishing a compensation philosophy for your company is crucial, as it serves as the foundation for creating a fair, competitive, and transparent pay structure. This ideally aligns with your company’s values, goals, and overall HR strategy.
A well-defined compensation philosophy will include:
- Goals and objectives: Clearly outline the purpose of your compensation strategy, such as attracting and retaining top talent, fostering employee engagement, and promoting diversity and inclusion.
- Market positioning: Define your organization’s target market position, whether you aim to lead, match, or lag the market in terms of compensation.
- Pay components: Specify the various elements of your pay structure, such as base salary, bonuses, commissions, and benefits.
- Pay bands: As discussed above, establish salary bands for each position, considering factors like experience, education, and skills required.
- Performance management: Describe the process for evaluating and rewarding employee performance, including merit based increases and promotions.
- Review and adjustment: Explain how and when compensation policies will be reviewed and adjusted, taking into account market trends, inflation, and company performance.
Having a well-written compensation plan and clearly defined pay bands is essential for:
- Internal pay equity
- External competitiveness
Your compensation philosophy and policy must be transparent. A transparent compensation policy fosters trust among your employees. By openly communicating your compensation strategy, you demonstrate your commitment to fairness and inclusivity, which can improve employee morale and retention. It also helps new hires understand their earning potential, while existing employees can see how their performance, experience, and skills contribute to their salary adjustments.
Why Businesses Use Compa Ratio
Regardless of your industry, you need to offer competitive salaries to attract and retain 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 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 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 retention—in fact, it is one of our top strategies in our guide to employee retention.
- Budget management. Compa ratios provide valuable insights into how employee salaries compare to the established salary ranges. This information helps businesses manage their payroll expenses effectively and allocate resources for salary adjustments when needed.
- Performance management. By monitoring compa ratios, your business can identify high-performing employees who may be underpaid. Taking swift action can ensure they receive fair compensation and help to keep these high performers on staff.
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 76.09, 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.
Consider the following:
- 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?
- Do you have pay discrepancies between employees in similar positions?
- Are you under-paying high-performing employees?
- What is your new hire budget vs your retention budget?
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.
Compa Ratio Frequently Asked Questions (FAQs)
How do you account for different levels of experience, education, and skills within the same role?
When calculating compa ratios, consider developing subranges within each salary range to account for varying levels of experience, education, and skills. This approach ensures employees with similar qualifications are compensated equitably.
How do you handle employees with compa ratios significantly above or below the ideal range?
If an employee’s compa ratio is significantly above or below your desired range, review their salary, job responsibilities, and performance. Develop a plan to address these disparities, like giving them a raise (for lower compa ratios) or adding responsibilities (for above-average ratios). Ensure to discuss this plan with them as soon as possible to cover your bases.
How often should you update compa ratios?
It’s best to review and update your compa ratios at least annually. This allows you to adjust for market trends and performance evaluations.
How can you ensure your compa ratio analysis stays unbiased and accurate?
To maintain accuracy and objectivity in your compa ratios, use reliable market data, establish clear criteria for salary ranges, and involve multiple stakeholders in the decision-making process. Regularly review and adjust your methodology to address any potential biases or inconsistencies.
What are the potential challenges and limitations of using compa ratios?
Compa ratios are a useful tool for assessing pay equity and competitiveness, but these have limitations. For example, these may not fully capture differences in job responsibilities, performance, or individual circumstances. Consider these alongside compa ratios for a full picture.
There are also legal considerations to consider. Multiple federal laws, like the Equal Pay Act, the Fair Labor Standards Act, the Age Discrimination in Employment Act, and Title VII of the Civil Rights Act, all protect workers from different types of discrimination. Compa ratios can help prevent some of this discrimination by ensuring fair pay. However, it’s important that your business be aware of these federal laws, plus any applicable state laws, to ensure your compa ratio analysis and policy does not inadvertently discriminate against any employee.
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 that may ultimately help you retain your top performers.