What is the compa-ratio, and how do you calculate it?

How do you know if your compensation strategy is competitive? One way to find out is to compare your salaries to industry standards. 

Underpaying a good team member is a quick way to lose them. A compa-ratio helps you maintain a competitive compensation plan, which is essential for garnering loyalty from high-performing employees. 

But it’s not just about offering good salaries and managing labor costs. The compa-ratio also ensures that compensation is fair and equitable. Here’s how to use a compa-ratio to determine competitive pay ranges. 

What is a compa-ratio?

Compa-ratio is short for “comparative ratio.” It’s a mathematical calculation that determines how an employee’s salary compares to the remuneration for other workers in similar roles. It can help employers set a competitive salary range for base compensation.

The compa-ratio compares the individual’s pay to the median in a salary range, using this number as a benchmark figure. 

3 steps to calculate compa-ratio

The compa-ratio formula is simple and intuitive. Once you’ve selected an employee to analyze, follow these three steps:

1. Identify the salary midpoint

Look at salaries from the industry or other companies and determine the median amount (the midpoint in the range). If you list 11 salaries from low to high, the midpoint would be the sixth salary.

2. Apply the formula

From here, the compa-ratio formula is straightforward. Take the employee’s salary (without benefits or bonuses), divide it by the median, and multiply the result by 100. This gives you a percentage that tells you how close your team member’s salary is to the midpoint.

Here’s how to calculate the compa-ratio: 

(Employee salary ÷ median salary) x 100 = compa-ratio

3. Interpret the result

Examine how your employee’s salary fares when compared with the benchmark. If the result is below 100%, you’re paying less than the median. If it’s above 100%, you’re paying them relatively well.

Types of compa-ratios

This metric can be used in several scenarios to determine how competitive your workforce’s salaries are.

• Individual compa-ratio: This determines how an employee’s salary stacks up, using the median salary as a benchmark for pay range. For example, if an employee earns $35,000, but the median is $37,000, they might need a raise to stick around.
• Group compa-ratio: Evaluates how a group’s compensation compares to a salary benchmark by comparing the group’s total pay to similar teams. It can help you compare departments to each other or to departments in other organizations.
• Average compa-ratio: Divides the sum of each individual’s compa-ratio within a group by the number of people in the set. This is used less often than a group compa-ratio.

Common uses of the compa-ratio in HR

Once you’ve calculated an employee’s (or group of employees’) compa-ratio, you can use this result to inform decision-making. Here are some typical use cases:

• Setting starting salaries for new hires: Your organization needs top talent to thrive. If you want to hire someone with expertise and several years of experience, consider paying above the midpoint. If you’re filling a more junior role, you may pay below the median to save money. What is considered a good salary varies according to the individual and the role, so don’t rely on your compa-ratio analysis alone.
• Comparing employee compensation to market standards: Paying your employees at least the market rate is essential to remain a competitive company and be a fair-paying employer. 
• Adjusting compensation packages for performance reviews: Employers often increase salaries after positive performance reviews, meaning high-performing individuals may have annual compensation expectations. If you decide an employee deserves a pay raise, a compa-ratio can help you determine how much that should be.
• Eliminating departmental, racial, and gender pay gaps: An ethical employer should seek to reduce discriminatory pay gaps. The compa-ratio can give you insights into pay disparities, helping you reduce inequities by comparing compensation across gender, race, and department groups.
• Aligning payroll budgets with long-term financial planning: Understanding median pay rates can help you set annual and long-term budgets. Calculating your employee’s compa-ratios enables you to account for potential pay raises and the costs of new hires.

Limitations of the compa-ratio

A compa-ratio is a helpful tool, but it isn’t always relevant. Here are some limitations to keep in mind:

• Doesn’t account for bonuses or benefits: In addition to a salary, employees often receive other perks (e.g., bonuses, lunches, 401k matching, and paid leave). None of these are considered when calculating a compa-ratio, skewing the results.
• Doesn’t consider varied cost of living: Employees who live and work in expensive areas may need a salary above 100% to account for the cost of living. The same salary will go further for an individual who works in a small town than someone living in a big city.
• May overlook employee qualifications, tenure, or performance history: A compa-ratio doesn’t consider qualifications, years of experience, or past performance. Using it on its own to determine a salary or merit increase can lead to pay inequities. A fresh college grad won’t have the same experience (and likely skills) as someone who’s worked in the industry for 10 years. 
• Must be supplemented with other metrics: Due to all these considerations, the compa-ratio alone can’t dictate an employee’s salary or justify a specific pay range.

Ensure fair compensation with Oyster

Managing employee pay across diverse markets can be complex, but compa-ratios help you stay competitive. 

With Oyster’s Global Payroll solution, you can easily track and manage compensation across borders, ensuring every employee is paid fairly and in line with local market standards. Make payroll simpler and keep your team motivated with Oyster’s trusted tools.

Frequently asked questions

What is a bad compa-ratio?

What defines a fair compensation rate depends on many factors. Generally speaking, anything below 80% is considered well below market value. Conversely, anything above 120% is significantly over the market rate.

Paying below or above these percentages can lead to pay inequalities, eroding trust in your compensation strategy. Aim for a reasonable but competitive salary range.

How do compa-ratios inform company-wide compensation strategy?

The compa-ratio can help with payroll and compensation strategies in numerous ways, including: 

• Salary benchmarking: Calculate salary benchmarks across roles and departments by comparing salaries.
• Budgeting: Determine who’s due for a salary increase to streamline payroll budgeting.
• Competitiveness: The compa-ratio can ensure you attract top talent.
• Pay equity: Acknowledge pay inequities in your company so you can start to rectify them.

Does the compa-ratio always accurately reflect fair compensation?

The compa-ratio should never be used alone. Instead, think of it as one tool among many to determine fair compensation. Consider employees’ locations, costs of living, additional benefits, experience, and skills when deciding on a fair compensation strategy.