Compa Ratio Definition
Compa-ratio, in simpler words, is the method to measure pay by comparing an employee’s salary to the median compensation for the same roles in an organization or a target market.
It is the responsibility of HR managers to ensure that every employee in the organization should be paid fairly. This is when the compa ratio comes into the picture!
Let’s dive in and understand the role of the compa ratio in increasing transparency in the workplace!
Here, we will discover:
- Understanding Compa Ratio Meaning
- What is the Compa-Ratio Formula?
- How to Calculate Compa Ratio?
- How do Organizations Use the Compa-Ratio?
- Alternatives to Compa Ratio to Gauge Pay Competitiveness
Understanding Compa Ratio Meaning
A compa-ratio takes an employee’s yearly base pay and compares it to the middle of the price range for their job; in other words, how well their pay matches the going rate. The salary number doesn’t include bonuses, variable pay, perks packages etc.
The ratio gives you a percentage to check a worker’s pay. If the number is 100%, the worker is getting what the job is worth on the market. If it’s above, the worker is getting more. If it’s less, they’re getting less.
What is the Compa-Ratio Formula?
Finding compa-ratio is super easy. All you need to do is divide the base salary for the position by the median pay of the same position, then multiply it by 100.
How to Calculate Compa Ratio?
Just follow these steps to compute the compa ratio:
Step 1:
The first thing you’ll need to do is figure out how much an employee makes a year, and the middle of a pay range.
Step 2:
Next, take the employee’s yearly pay and divide it by the middle number. The comp-ratio is 90% if the middle number is $100,000 a year and the worker is paid $90,000.
Step 3:
Then, figure out compa-ratio for a single employee or an entire group of employees. Whichever you choose, sort the results to get a better handle on what you’re paid.
How do Organizations Use the Compa-Ratio?
Here are some ways organizations use the compa-ratio:
- Getting New Workers:
When companies decide to pay a job they often use the compa-ratio. Businesses can determine what the perfect pay range for a job is by the compa-ratio of comparable jobs of existing employees Businesses can also offer competitive pay to help bring in the best employees by looking at the average of middle pay of a market.
- Review of Pay:
During salary reviews, companies use the compa-ratio to see if an employee’s pay is in line with the market rate. If an employee’s pay ratio is less than 100%, it means they are getting paid less than the average person in the market. Because of this, the company may change salaries to keep good workers.
- Ensure Equal Pay:
Compa-ratio is another key tool that many companies use during the salary review process. It’s a way of showing how an employee’s pay is aligning with the market rate. We talked about this earlier. If the pay ratio is less than 100% it means the employee is being paid below the market average.
- Compare:
It’s also crucial for businesses that want to make sure their pay slabs are as low as those of their main competitors. They could find the job salary in a competitor company and then compare it with their own company. It will help them to follow the right pay practice, thereby staying ahead of their top competitors.
Alternatives to Compa Ratio to Gauge Pay Competitiveness
Here are some more methods to measure the pay effectiveness of your organization:
The market ratio is found by dividing the current salary by the market equivalent. Resources that are useful for this are Payscale’s What Am I Worth? tool and Glassdoor’s Know Your Worth tool. If your web designer gets $75,000 and the market rate is $85,000 then your market ratio is 88%. While you aren’t looking for a 100% market ratio at all times, this will give you a picture of what someone is making for this position.
- Find the Target percentile
The target percentile tells you how much money you’ll spend to hire people in a certain business or field. You should give a salary in the 75th percentile range if you want to hire the best person for the job. In the same way, companies that are tight on cash or want to hire people for entry-level jobs can offer pay in the 25th percentile area.
This simply means when you compare a person’s salary to the total pay sale for that position or similar role in the organization. It helps organizations find out how the salary of an employee progresses in a particular position.
There you go! We hope you got a clear picture of the compa ratio.