Compensation specialists apply statistical analysis to develop information about salary policies within organizations. One of the statistics that the compensation specialist uses to compare actual salaries with salary midpoints is the compa-ratio.
Compa-ratio is a salary index that is expressed in either decimals or percentage. Compensation specialists apply compa-ratio to describe the relationship between an individual salary and group salaries to the organization's midpoints. Because midpoints express the organization's target pay, use of a compa-ratio indicates how close actual salaries are to target values. The standard compa-ratio range is 80% to 120%. Less than 80% indicates the organization is not paying a competitive wage. Higher than 120% indicates the organization is paying above what is necessary to be competitive.
To calculate compa-ratio, the compensation specialist places the salary as the nominator and midpoint as the denominator. The answer is a decimal. The specialist usually converts the decimal to a percentage by multiplying by 100.
Salary = $42,000 Midpoint = $50,000
Compa-ratio for this example is .84 or 84%
There are three common uses for compa-ratio calculations: when extending a salary offer to a new hire, when budgeting the total amount of a merit pay program, and when determining an appropriate pay raise for an individual.
When the organization extends an offer to a fully competent applicant, the target compa-ratio may be 90%. If the midpoint for the new hire's position is $50,000, the compensation specialist may recommend a salary offer of 90% times $50,000 or $45,000. Standard compensation practice does not support extending a new hire offer at a compa-ratio above 100%.
To calculate compa-ratio for annual merit pay budgeting, the compensation specialist will add all salaries within the organization and divide it by the sum of all midpoints.
Total Salaries = $5,704,000 Sum of Midpoints = $6,200,000
The organization's compa-ratio is 92%. Because the competitive target compa-ratio is 100%, the organization has room for salary growth and can justify a salary increase program.
The amount of increase awarded to an employee is usually dependent on the employee's performance and compa-ratio.
Salary Midpoint Compa-Ratio Performance
Employee 1 $42,500 $50,000 85% Excellent
Employee 2 $56,000 $50,000 112% Excellent
An employee who is an excellent performer with a compa-ratio of 85% should receive a larger raise than an excellent performer with a compa-ratio of 112%. Of course, the ability of an organization to fund a salary increase program trumps other considerations.
Calculating compa-ratios is a simple process that provides complex information to compensation specialists.