What is Compa-ratio?

Compa-ratio, also known as compensation or comparative ratio, is a measure used to compare current pay rates with midpoints of a salary range. The midpoint of a pay range represents the average pay for that range in other organizations. An employee’s actual salary to midpoint ratio indicates whether she is paid below or above market rates.

Compa-ratio formula

Calculating the compensation ratio is fairly straightforward. You divide the employee’s annual salary by the median salary for similar positions.

Compa-Ratio = Actual salary rates / Midpoint of the pay range X 100

For example, if the employee earns INR 800000 per year and the median salary range is 10,00,000, then the compa ratio will be

800000/1000000 X 100 = 80%

Different types of Compa-ratios

Employers can use different compa-ratios to compare employees’ salaries and ensure they meet the industry standards. We have mentioned different kinds of compa-ratios below:

Individual Compa-Ratio: The individual compa-ratio is a metric that compares a person’s position within a pay range to the midpoint of that range. If an individual’s salary is excessively high or low, it can be adjusted using this calculation.

Individual Compa-ratio = Actual pay range / Midpoint range.

Group compa-ratio: The group compa-ratio measures the difference between privacy and policy for the whole organization.

Group Compa-ratio = Sum of actual pay / Sum of job reference point rate.

Average Compa-Ratio: The average compa-ratio is computed by summing the individual’s compa-ratio and dividing by the number of individuals.

Average compa-ratio = Sum of Individual Compa Ratio / Total Number of Individuals.

How can employers use compa-ratio?

Compa-ratios can best be used by employers as a strategic pay equity solution to ensure competitive compensation within organizations. Why is that?

1. When using pay equity comparisons through compa-ratios, employers get to compare an employee’s pay with the midpoint or market rate for the job. Through such an analysis, employers will be in a position to tell whether there is any pay difference, perhaps on gender grounds, especially in somewhat similar jobs and skills and experiences. An employee would be deemed to be quite far above or below the market rate by a much greater margin and possibly merit more investigation.

2. Though compensation ratios indicate meaningful information, they should not be the deciding factors in making an employment decision. The decision should be based on business size, location, industry standards, and employee performance. These approaches ensure no marginal justification or varying compensation rates.

3. If the majority of employees fall below a compensation ratio of 100 percent, then salaries may need to be adjusted to market level. In contrast, if most frequently above the midpoint, then perhaps a review of compensation strategy and a limit on payroll costs are needed.

Common Payroll Compa-Ratio Structure

Compa-ratios are essential to determining just and effective pay practices in organizations. They provide guidelines on how employee remuneration differs from what is paid in the market. Here is the common structure for the compa-ratio in payroll practice:

• 80% -90 %: This range usually fits the book of inexperienced new hires or employees who are not exactly doing what is expected for performance. It is where people begin to build their skills and become familiar with what they do.
• The 90% to 110% group of employees are mostly experienced employees who consistently represent good workplace performance. The percentage range of this group constitutes the main body of workers, where compensation is widely comparable to market-based levels; thus, the pay is fair and satisfactory.
• 110%—120%: These include employees with rare skills or long tenure. Very often, the value these employees bring to the organization’s success renders such pay above the midpoint of the market justified.

FAQs

What does compa-ratio .75 mean?

Compa ratio .75 or 75% means the employee earns 25% less than the market average, which means they are not fairly paid.

What is a 100% compa-ratio?

A 100% compa-ratio means the employee receives just the right salary amount according to the market rate.

How often should companies update their compa-ratio?

Companies should review their compensation ratio annually to adjust and make changes according to market trends. Regular reviews ensure that the pay structure remains competitive and employees stay satisfied.