Compa-Ratio: Definition, Formula, Uses, and Benefits

Fair and enticing compensation is one of the most important drivers of employee retention and satisfaction. It is, after all, that’s the most basic foundation of any employment agreement.

But it can also be a constant thorn in your HR department’s side: compensation was the top reason employers blamed for higher voluntary turnover, according to Payscale’s 2023 Compensation Best Practices Report.

So, how can you ensure that you’re paying employees a competitive wage to retain high performers, while also managing overall workforce costs? You can find the answer in a simple calculation: the compa-ratio.

Compa-ratio gives you a look into how your compensation measures up to industry standards and median pay grades. This can help you advance pay equity, attract top talent, and keep your best employees within your organization. Here’s a closer look at the formula and how to use it.

What is Compa-Ratio?

Compa-ratio, or “comparison ratio,” is an employee compensation metric that's used to determine how an individual employee’s salary compares to the rest of their organization and industry standards. This number allows you to determine fair, competitive pay for each position that is in line with market rates.

The measurement is usually expressed as a percentage and, while the word "compensation" can mean many things, compa-ratio includes base salary only. The ratio compares an individual's salary to a given midpoint — whether that's the midpoint of the salary range for the role, or the median market range for the industry. From there, compa-ratios help you determine how much more or less your employees are being paid compared to the midpoint.

You can calculate compa-ratio one of two ways:

• Group compa-ratio: For a group of employees, used to see how their pay compares to a wider group, company, or industry standard.
• Individual compa-ratio: For a single employee, used to see how an individual’s pay compares to the rest of the team, company, or the industry average.

What is a Compa-Ratio of .75?

A compa-ratio of .75 means that an employee’s pay is 25% less than the median market rate for similar positions. Their salary only falls within the 75th percentile of the comparative group, which is where the ".75" comes from.

If you have one or two individual employees with a compa-ratio of .75, then it could be a sign that you need to adjust their salary up to market rate. But if you have a whole group of employees with a .75 compa-ratio, then it might be time to revisit your organization's pay grades and adjust accordingly in order to remain competitive.

What is the Compa-Ratio Formula?

Compa-ratio is calculated by dividing an employee’s actual salary by the median or midpoint salary for their position, then multiplying by 100.

Here's what the formula looks like:

Compa-Ratio = (Individual Salary / Midpoint of Comparative Group) x 100

For example, if an individual earns $75,000 and the industry median salary is $80,000, then their compa-ratio would be 93.75%. A compa-ratio of 100% would put them right at the median. Based on this calculation, we can see that they're just below the median salary for the industry.

You can also use the formula to compare pay rates within your own organization. Let's say the pay range for a Senior Sales Manager at your company is between $100,000 and $120,000. The midpoint is $110,000, and one of your Senior Sales Managers named Lisa makes $117,000. Here's how that compa- ratio calculation would look:

Compa-Ratio = ($117,000 / $110,000) x 100

Compa-Ratio = 106.36%

In this case, Lisa is making around 6% more than the midpoint for her role within your organization.

Where to find median salary benchmark info:

• Industry salary reports and surveys
• Bureau of Labor and Statistics reports
• Glassdoor salary data for similar organizations or roles in your industry
• Your own internal salary data

How to Use Compa-Ratio at Your Organization

Compa-ratio gives you a strong sense of your salary competitiveness, and tracking it over time allows you to see how it impacts employee retention. Here are some ways to apply this calculation regularly at your company:

• Track compa-ratios for high-performing individuals and adjust pay as needed to retain top talent.
• Monitor compa-ratios for an entire team or department and look for outliers. Large gaps could indicate it’s time to revisit pay grades or conduct a market analysis.
• Use compa-ratios in conjunction with performance reviews to determine fair merit increases or bonuses.
• Review compa-ratios annually or biannually and make adjustments to pay grades as needed to stay competitive.

A good rule of thumb is to aim for a compa-ratio that's between 80% and 120% of the range. If you're in the process of setting or raising salary bands, you can use compa-ratio to set those parameters for each position. You can aim for new hires or inexperienced team members to earn at least 80%, while top performers or more tenured employees should earn at least 100% — if not the top of the range.

Why Use Compa-Ratio?

Compa-ratio is an invaluable tool for employers looking to ensure fair and competitive pay, attract top talent, and manage costs. With these insights at your fingertips, you can make more informed decisions about compensation that will benefit both your organization and its employees.

• Work toward pay equity: Compa-ratio allows you to create an equitable salary structure so you can act on your organization’s commitment to diversity, equity, and inclusion. It enables the reduction of pay disparities within individual roles or departments, and helps prevent discrimination or bias from creeping into the compensation process.
• Attract top talent: A competitive salary is essential for winning over candidates in any job market, and having a strong grip on compa-ratio can help you stay ahead of the curve. Plus, when you have a clear sense of the compa-ratio for each role, you can negotiate salaries with confidence.
• Structure your salary bands and ranges: Compa-ratio gives you a clear starting point for your organization's compensation strategy. You can use the insights to ensure your compensation is in line with the market rate, while accounting for different levels of experience or seniority within each role. It reduces the complexity of the process and creates a fair structure across the board.

Don’t Stop at Salary — Show Your Employees You Care About Wellbeing

While compensation is clearly important to employees, it’s not the only thing that matters when it comes to working — or staying — at a company. For instance, almost half of employees said they’d take a whopping 20% pay cut in order to experience more trust in the workplace, according to a report from security provider Cerby.

Our own State of Work-Life Wellness report shows that for 93% of employees, wellbeing is just as valuable as their salary at work. If you want to retain the majority of your workers, including your best and brightest performers, it’s important to invest in their wellness and happiness — inside and outside of work.

You can show employees you care about their wellbeing by crafting a robust wellness program that offers resources for physical, mental, and financial wellness. These services are often flexible, allowing team members to tailor the program to their unique health and wellness needs. Wellness programs help support employees and also lead to higher productivity, retention, and engagement rates — a win all around for your organization.

Speak to one of our Wellbeing Specialists today to learn more about the great benefits your team can see by adding Wellhub to your own wellness offering!

References

• 2023 Compensation Best Practices Report. (2022.) Payscale. Retrieved May 8, 2023 from https://www.payscale.com/research-and-insights/cbpr 
• Christ, Ginger. (January 17, 2023.) Nearly half of employees, managers would take a 20% pay cut to be trusted more. HR Dive. Retrieved May 8, 2023 from https://www.hrdive.com/news/nearly-half-of-employees-managers-would-take-a-20-pay-cut-to-be-trusted/640501/ 
• “Compa-Ratio.” Glossary of Terms. The University of New Mexico. Retrieved May 8, 2023 from https://hr.unm.edu/compensation-glossary-terms 
• Kwong, Amanda. (July 3, 2019.) Closing the Gender Pay Gap in the Nonprofit Workforce. Ad Council. Retrieved May 8, 2023 from https://www.adcouncil.org/closing-the-gender-pay-gap-in-the-nonprofit-workforce 
• May 2022 National Occupational Employment and Wage Estimates. U.S. Bureau of Labor and Statistics. Retrieved May 8, 2023 from https://www.bls.gov/oes/current/oes_nat.htm#00-0000 
• Mucheki, Nyasha. (August 16, 2021.) Compa ratios - Everything you need to know. The Human Capital Hub. Retrieved May 8, 2023 from https://www.thehumancapitalhub.com/articles/What-You-Need-To-Know-About-Compa-Ratios