Compa Ratio, short for comparison ratio, is a comparison of the salary you are paying your employees versus the market midpoint for similar positions at other companies. Compa ratio is a useful metric to have when setting salary levels or negotiating raises, and it helps you avoid losing talent to other companies.
How To Calculate Compa Ratio
You can calculate compa ratio using this formula:
Compa Ratio = Salary You Are Paying ÷ Market Range Midpoint x 100
What Does Your Compa Ratio Mean?
|Compa Ratio||What It Means|
|<100%||You’re paying below market rate|
|100%||You’re at the market rate|
|>100%||You’re paying above market rate|
The right compa ratio depends on a combination of the position, your budget, and other employee benefits that you are offering. For instance, you may be able to pay below 100% if you counterbalance that with good health insurance benefits or equity options. For certain positions, like commissioned sales positions, you may be able to provide a base salary whose compa ratio is below 100%. On the other hand, you may want to pay above 100% if you’re in a very competitive environment for talent and want the very best candidates. More on this below.
Compa Ratio Example
Let’s take an example. Let’s suppose our market comparison salaries for a retail manager are those in the table below. The midpoint of the salaries is half the amount between the lowest salary and the highest.
|Comparison Salary 1||$80,500|
|Comparison Salary 2||$82,500|
|Comparison Salary 3||$85,400|
|Comparison Salary 4||$95,700|
|Comparison Salary 5||$120,300|
The Market Midpoint would be calculated as:
($120,300 – $80,500) / 2 + $80,500 = $100,400.
If you were paying $110,000 your Compa Ratio would be:
$110,000 ÷ $100,400 X 100 = approximately 110%.
That means you are paying slightly more than the market rate.
How to Get Market Comparison Salaries for Your Compa Ratio
Your selection of market data points obviously can have a huge impact on your compa ratio analysis. There are several public sources of salary data that you can use to calculate compa ratios. When using this data, you’ll need to match the data collected to the specific roles that you are hiring for. This means going beyond job title, industry, region, job responsibilities, and several other factors that impact the appropriate salary for a position. For instance, the salary of a CFO for a San Francisco-based tech company may not be equivalent to the salary of a CFO at a suburban chain of thrift stores.
Check out our top recommended salary comparison tools to find out where you should begin your research.
How To Use Compa Ratios
In general, compa ratios are used for the following purposes:
- Setting base pay levels for roles
- Salary negotiations
- Negotiations in performance reviews and pay raises
- Salary guidelines around seniority, experience levels, etc.
- Adjustments for inflation year-over-year.
In general, most companies will set an overall competitiveness target. They aim for compa ratios in the 80% to 120% range for all positions.
Factors That Affect Compa Ratio
In calculating and using compa ratios, there can a number of complications that you should keep in mind.
Job Titles Vary
The same position can have different titles. For example, “secretary”, “executive assistant”, and “office manager” can all refer to the same position.
Indeed’s Job Trends tool is a great way to find similar job titles so you’re capturing a full data set when gathering comparison salary data. It allows you to do keyword searches of job titles in their database and compare supply and demand for different job titles on their platform over time.
Responsibilities vs Titles
Not all companies have the same level of responsibility and pay for a given title. A vice president at a large bank does not necessarily play the same role as a vice president at a small bank; the latter perhaps has more responsibility.
Tenure / Experience
Often individuals may have the same title but bring different experience levels or time at the company. This could have an impact on the individual’s value to the company and what kind of Compa Ratio you want to target.
Regional Salary Differences
Urban versus suburban or expensive regions like the Northeast or Northern California can have a huge impact on comparison salary levels.
Company Growth vs Stability
Fast growing companies versus slow, steady growth companies are going to affect expected salaries. Some people prefer growth opportunities versus job security.
The reputation and employer brand of your company versus peers can also impact relevant comparison salaries. A highly regarded company might not need to have the same Compa Ratio as those with lesser brands.
Even if a person has the same title with the same responsibilities, not everyone executes their job equally. Star performers are going to expect a different Compa Ratio than average performers.
For some positions other companies might use a different mix of bonuses, stock options, benefits, and other forms of compensation to reward employees in addition to salary.
Alternatives to Compa Ratio: Other Salary Measures
The Compa Ratio is a great benchmark, but it’s not the only one. There are two main alternatives that you can use to determine appropriate salary levels:
1. Range Penetration
Range penetration is a measure of how far along an individual’s pay is along the range between lowest and highest comparison salaries. This is useful in gauging promotion opportunities and raises. The formula is (Salary – Range Minimum) ÷ (Range Maximum-Range Minimum) * 100 %.
For instance, if the range of office manager salaries in your region is $30,000 to $60,000 per year and you pay your office manager Sally $41,000, her range penetration is (41,000 – 30,000) ÷ (60,000 – 30,000) * 100 % = 37 %. This means Sally has significant room to grow in her position and salary level.
2. Compensation / Revenue Percent
Another salary measure is compensation as a percent of total revenue for a company or division. This measure is less about individual salary competitiveness and more about the company as a whole and profitability targets.
For instance, if your employees’ total compensation adds up to $1 million and your revenue is $5 million, your Compensation / Revenue Percent would be $1 million / $5 million = 20%.
Bottom Line: Compa Ratio
There are a wide variety of salary data sources that can help you calculate compa ratio depending on your need for segmentation and specificity. Remember, job titles and descriptions are not consistent across companies. Make sure you’re gathering the right salary data for all your open positions with Indeed’s salary comparison tool.
Are you integrating new staff into your company? Read our guide on how to onboard an employee so that you don’t miss out on any steps.