How Is Compa-Ratio Used in Employee Compensation?

Do you use compa-ratios to check to see if your employee pay is meeting your organization’s compensation goals?

What is a Compa-Ratio?

For those of us just getting started with compensation metrics, the term “compa-ratio” may sound foreign. What is it? What does it do?

“It’s basically taking a salary and dividing it by the midpoint of the range in which that job sits.” Terry Pasteris explained in a recent BLR webinar. “So, you take an incumbent salary and divide it by the midpoint.” This measurement assumes that you have salary ranges and midpoints defined, and the midpoint is the target pay for those in that range.

“If you have a compa-ratio of 1 or 100, that would say that your salary is the same as the midpoint.” Pasteris told us. In fact, “your compa ratio should be 1 or 100 (depending on how you do the calculation) for a fully implemented compensation program.” The midpoints are geared toward the position in the market you want to pay: they’re your target to be competitive.

If you are paying according to your strategy, and you have an even distribution of employees throughout the range, and you’re paying across the range (depending on the level of performance), then all other things being equal, a fully-implemented compensation strategy would have a compa-ratio of 100.

To do that calculation for your whole organization, you would take the sum of your salaries, divided by the sum of your salary range midpoints to determine what your organizational compa-ratio is.

If you wanted to know whether your highest performer is being paid appropriately, on the other hand, then calculate their compa-ratio and check to be sure it’s greater than 100.

You can also do department or business unit compa-ratios. You can even look at the ratios across different parts of the organization to see where it varies. This is useful information to see if there is a relationship between the compa-ratio of a group and the performance of that group.

The compa-ratio is a very useful tool to know how well you’re paying and if you’re paying appropriately.

For more information on compa-ratios and other compensation metrics, order the webinar recording of “Compensation Metrics: How to Gather and Calculate Key Data so You Can Pay Appropriately.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Terry Pasteris is president of TLMP Consulting Group. She is both a Global Remuneration Professional (GRP) and a Certified Compensation Professional (CCP). Ms. Pasteris’ compensation work includes developing cash, benefit and equity programs and she has also developed performance management, staffing and communication solutions.