Compensation (Compa) Ratio – Definition, Formula & How to Calculate

What is Compensation - Compa Ratio


Taking care of your employees is something every employer aims to achieve. One of the first ways of instilling a sense of belongingness and job satisfaction among employees is by compensating them fairly. Speaking about compensation, let us touch upon the concept of compa or compensation ratio.

What is the compa ratio?

The compa ratio is a compensation metric, the role of which is to compare the salary you are paying your employee to the midpoint of the salary range that is being paid for similar positions in the market. A compa ratio in the bracket of 80% to 120% is considered ideal. This ratio is viewed as an easy to calculate statistic that guides an employer’s decision regarding compensating his employees.

How Compa-Ratio is Calculated?

Compa-ratio is calculated as the employee’s current salary divided by the current market rate as defined by the company’s competitive pay policy. It’s a very simple formula, and a powerful one when it comes to deciding how large of a raise in pay an employee needs at a given time. Compa-Ratios are position specific. Each position has a salary range that includes a minimum, a midpoint, and a maximum.

How to calculate the compa ratio?

A specific formula helps employers in calculating the compa ratio. Compa Ratio = Actual Rate of Pay/Reference Point of Pay

  • Actual Rate of Pay: In the above formula, the actual rate of pay can be the pay of an individual employee, a certain group, or the entire workforce.
  • Reference Point of Pay: The reference point of pay can be anything from the midpoint of a defined salary range, average market rate or the market midpoint or even an average of a group of actual pay rates.

What is Compensation - Compa Ratio

 

Why should an employer have a compa ratio in place?

  • Suitable Compensation: For an employer to fairly compensate his employees, having the compa ratio handy would prove beneficial.
  • Lower Turnover: Organizations are at a risk of high-quality employees putting in their papers due to poor pay scales. This can be avoided by taking assistance from the compa ratio.
  • Recognition: Employees, who are appropriately compensated for the work they put in feel recognized and appreciated for their efforts. This leads to improved employee productivity and performance.

When employees become aware that an organization is using the compa ratio to make evaluations, every time an employee exceeds expectations, such employees are likely to work towards up skilling and performing consistently. Compensation professionals have gone on record to claim that with the compa ratio in play, employees become more competitive and work unfailingly towards organizational goals. The formula commonly used by compensation professionals to assess the competitiveness of an employee’s pay level involves calculating a compa-ratio also sometimes referred to as “compensation” or “comparison” ratios. Compa-ratio is the short form for Comparative ratio.

These three values represent industry averages for the position. A Compa-Ratio of 1.00 or 100% means that the employee is paid exactly what the industry average pays and is at the midpoint for the salary range, A ratio of 0.75 means that the employee is paid 25% below the industry average and is at the risk of seeking employment with competitors at a higher pay that is perceived equitable. A ratio of 1.15 compa-ratio would mean the employee is paid above the industry average.

Individual compa-ratio

The individual compa-ratio, which describes the individual’s position in the pay range against the pay policy reference point for the range and can be used to reposition an individual’s pay in the range if it is too high or low.

Group Compa-ratio

The group compa-ratio, which quantifies the relationship between practice and policy for the whole organization or a defined population group (function, department, occupation or job family). It is a calculation of the sum of actual pay as a percentage of the sum of job reference point rates. This ratio has an important part to play in the overall pay management process. It can be used to establish how pay policy has been implemented overall and identify differences between parts of the organization which may indicate problems in the policy itself or in the way it has been implemented by managers. It can also be used to plan and control pay budgets.

Average Compa-ratio

The average compa-ratio, which is the sum of each individual’s compa-ratio divided by the number of individuals. It is therefore not the same as a group compa-ratio which is based on the relationship between the sums of actual rates of pay and the sums of job reference points of pay. The average compa-ratio can therefore differ from the group compa-ratio according to the spread of individual compa-ratios at different job sizes. The group ratio is more frequently used.

What is a good Compa-ratio?

Compa-Ratio is a relative measure of your current ability to reach your policy structure line.  These are organizationally-unique variables involved to calculate Compa-ratio

  • Grade width
  • Job progression protocols
  • Population maturity
  • Market ratio policy
  • Accuracy of your grade assignments
  • Precision of your grade midpoints
  • Performance of your employees
  • Timing and frequency of increases
  • Desired competitive posture
  • The statistical distribution of individual C/Rs
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Compensation (Compa) Ratio – Definition, Formula & How to Calculate
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Compensation (Compa) Ratio – Definition, Formula & How to Calculate
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The formula commonly used by compensation professionals to assess the competitiveness of an employee’s pay level involves calculating a compa-ratio also sometimes referred to as “compensation” or “comparison” ratios. Compa-ratio is the short form for Comparative ratio.
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Techitalents
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