As a small business owner, your company needs to compete with others to win over talent. Naturally, the more competitive a role, the quicker and easier it is to fill it—which can keep the cost of hiring low while ensuring you have the workforce necessary to meet your productivity and revenue goals.
And one of the ways to do this? A competitive pay policy and compensation strategy. By making sure wages and salaries meet or exceed the market rate, you can attract—and retain—top talent. But how do you measure how an employee’s pay compares? By calculating the compa-ratio.
Let’s look at how to calculate the compa-ratio—and ways you can use it to determine if your employee wages and salaries are fair, equitable, and competitive.
What Is the Compa-Ratio?
A compa-ratio compares a role’s salary to its median value in the industry.
It’s important to note that a comparison ratio only considers salary; it doesn’t account for bonuses, variable pay, and other types of compensation (like benefits and other perks).
Typically, the compa-ratio calculation is expressed as a percent, though it can also be presented as a decimal, which is generally preferred by analysts vs. small business owners or human resources professionals.
This metric is also known as a comparison ratio, comparative ratio, or CR.
Why Should You Use Compa-Ratio?
Comparative ratios should be calculated and used to:
- Determine if a role is competitive: A compa-ratio that is significantly lower than the market value can indicate that your compensation isn’t competitive, leading to issues with attracting and retaining talent. On the flip side, a compa-ratio that’s much higher than the market rate can demonstrate that you’re overpaying for a position.
- Improve your budget and how you allocate funds: As mentioned, compa-ratios can demonstrate where you’re over- or underpaying your employees, impacting your total labor costs. Identifying how much or how little you’re paying for a role compared to the market value can help you adjust your budget, employee compensation plan, and pay policy, potentially lowering labor costs—or, at least, investing funds into the right positions.
- Set salaries for open positions: Unfilled job openings can impact your business in terms of productivity, labor costs, and hiring costs—and the longer the role is open, the more costs you incur. Calculating compa-ratios for an open role can give you insight into its competitiveness, allowing you to determine if you should increase the salary to attract new employees.
- Retain tenured employees: Employees with years of experience and/or specialized skills should, generally, earn more than the median compensation for a given role. Calculating the compa-ratio can help you determine if these tenured and experienced employees are properly compensated, giving you the chance to make adjustments to maintain or improve employee retention.
- Evaluate and pursue pay equity: Compa-ratio can be used to measure and compare the pay rates of employees in similar positions and with similar experience to determine if there are any gaps in pay. This can be useful for identifying pay inequity and closing gender pay gaps or ensuring employees with different ethnicities are paid the same for fulfilling the same responsibilities.
What Is an Ideal Compa-Ratio?
An ideal compa-ratio should fall somewhere between 80% to 120%, depending on the employee and role.
Generally, pay grades should target:
- Entry-level roles, new hires, and poor performers: a CR of 80% to 90%.
- Steady employees and employees who perform well: a CR between 90% and 110%.
- Skilled, tenured, and top performers: a CR between 110% and 120%.
An ideal compa-ratio for a position at any business should factor in the team member's background, expertise, location, skills, and tenure.
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What Does 95% Compa-Ratio Mean?
A 95% compa-ratio means an employee earns 5% less than the market average.
For example, if the median market value of a role is $50,000, an employee with a 95% CR would earn $47,500.
What Does Compa-Ratio 0.75 Mean?
A compa-ratio of 0.75, or 75%, means an employee’s salary is 25% less than the market average.
For example, if the median market value of a role is $50,000 and an employee has a 0.75 CR, their current salary would equal $37,500.
Because of this large discrepancy, this employee might be more likely to quit or perform poorly, contributing to high turnover.
How Is Compa-Ratio Calculated?
Employers and HR professionals can use different types of compa-ratios to offer competitive salaries, adjust the employee pay structure, and evaluate pay benchmarks. Here are the top 3 and how to calculate them.
1. Individual Compa-Ratio
This compares an individual employee’s pay to the median salary of an industry or market. An individual CR is useful during performance reviews to determine if an employee is due for a pay increase.
An individual compa-ratio is calculated by dividing an individual’s salary by the salary median of their job role:
(Actual Salary / Salary Median) x 100 = CR (%)
An apprentice plumber working at ABC Plumbing earns $40,000. The national salary median for apprentice plumbers is $43,100. The plumber’s individual compa-ratio is 92.8%:
($40,000 / $43,100) x 100 = 92.8%
That means they are paid roughly 8% below average. Take a look at local median pay, too, to see where they stand. Then, adjust accordingly! Maybe you want to make sure they stay on board—in which case you may need to raise their salary.
2. Group Compa-Ratio
Group compa-ratios are used to compare a group or department’s pay to other groups within the company and to competitors. This measure is primarily useful for adjusting and planning your budget and compensation strategy.
A group compa-ratio is calculated by dividing the sum of the group’s actual salaries by the sum of salary medians:
(Sum of Actual Salary / Sum of Salary Medians) x 100 = CR (%)
A construction supply company employs four junior account managers (who earn $63,000 per year) and an account management manager (who earns $135,000). Together, the team earns a combined salary of $387,000. The sum of salary medians for these positions is $383,844. The compa-ratio for the account management department at this company is 100.8%:
($387,000 / $383,844) x 100 = 100.8%
This means the team earns slightly more than the average, which should help you stay competitive.
3. Average Compa-Ratio
Average compa-ratios are used to measure how a group’s compa-ratios compare to another group’s (like another department in your organization, a different subset of employees, or a specific group within your industry) or companies (like your competitors).
This can help you determine if you’re meeting your goals for areas such as pay equity, in addition to measuring the competitiveness of your pay scale.
An average compa-ratio is calculated by adding up the sum of compa-ratios for a group of employees, then dividing by the number of individuals in that group:
(Sum of Compa-Ratios / Number of Individuals) = Average CR (%)
The total compa-ratio for a bakery's morning shift is 498%. The bakery employs 6 people in the morning to do various tasks, from baking to working with customers. Their average compa-ratio is 83%:
(498% / 6) x 100 = 83%
Meanwhile, the total compa-ratios for the bakery's afternoon and evening shift is 600%. The bakery employs 8 people in the afternoon. Their average compa-ratio is 75%.
(600% / 8) = 75%
This means that, on average, those working in the morning have higher wages. That may be okay, especially if a morning shift requires an early wake-up. Or this bakery may want to do something about it if they have difficulty retaining afternoon and evening shift team members.
Before you calculate the compa-ratio for an individual or group, you can figure out the actual salary and salary median with these two formulas:
Actual salary is the annual salary of an individual, group, or entire workforce. To calculate the annual pay for a position or employee who’s paid an hourly wage, you can multiply the hourly pay rate by 2,080 hours:
Hourly pay x 2080 = Annual salary
Salary median (or salary midpoint) is the middle of a pay range for a given position or group based on market data about the salary range of a role or company:
(Salary Range Minimum + Salary Range Maximum) / 2 = Salary Median
Use Compa-Ratios to Keep Your Team Strong
Designing an effective compensation plan requires a multi-pronged approach that balances pay, benefits, and budget.
And a key to making sure your plan works for you—and your employees? Compa-ratio calculations. These formulas can help you attract top talent, pay your staff fairly and equitably, and compete with other companies in the market searching for the same stellar employees.