Compa-ratio sounds like a fancy term, but it’s actually pretty simple. Even better, calculating compa-ratio is easy and the results aren’t hard to interpret.
But what is compa-ratio, exactly?
Hang tight. We promise we’ll explain everything you should know about compa-ratio in this post.
What is Compa-Ratio?
Short for compensation or comparative ratio, compa-ratio is a way to compare a person’s annual salary to the median salary in the same field.
You can use compa-ratio in two ways:
- To evaluate how individuals are paid within your company
- To evaluate how your salary stacks up against the market average
Both of these uses are valuable because you always want to make sure that your employees and your leadership team are receiving fair pay, Goldilocks style. Not too high, not too low, but just right.
If you’re wondering why compa-ratio uses the median and not the mean, or average, of a set of numbers to do a compa-ratio, here’s the thing.
A median, for those of us who need a math refresher, refers to the midpoint in a sorted range of numbers. The numbers can be arranged from highest to lowest or lowest to highest.
Even though the median doesn’t define what most of us think of as the average number of something, it is a type of average. And it’s the best measurement to use when there are wildly high or low numbers.
Let’s say you employ two software developers and want to figure out if their salary is competitive.
You decide to analyze the salaries of seven software developers in your town. We’ll say that since you’re friends with them, they’ve agreed to share this sensitive information.
All seven software developers hold similar positions and have been with their company for two to five years.
Here are the seven salaries, in order from lowest to highest:
$81,000, $90,500, $95,900, $103,000, $193,000, $270,000, $700,000
If you add up these seven numbers, you get $1,533,400. Divide this number by 7 to get the average and you end up with an average salary of $219,057.143.
But only two people receive a salary above $200,000, so how can that be a true picture of the average salary?
It can’t, because that giant $700,000 salary skewed the average higher.
Instead, you can look at the median—$103,000—for a much more accurate picture of the average salary for software developers in your area.
Now you can compare the salary you pay your two software developers to this number to figure out the compa-ratio.
What is the Typical Compa-Ratio?
Employers generally try to pay their employees a salary with a compa-ratio of 0.8, or 80% of the median market value to 1.2, or 120%.
The number that represents a compa-ratio of 1.0, or 100%, matches the median market value of the job. So in the software-developer example, the median market value—and therefore the compa-ratio of 1.0— is $103,000.
New hires tend to receive pay on the lower end of the ideal compa-ratio range, especially if they don’t have much experience. Poor performers might end up receiving a compa-ratio of 0.8 or 0.9, too.
Rising stars within a company might move up to a mid-range compa-ratio of 1.0. As the employee continues to log years of productive work within a company, the compa-ratio might rise to 1.2.
Our pretend software developer who makes $700,000 a year—a compa-ratio of 6.8, or 679.6%—is way above the market rate.
And frankly, we don’t think the employer can truly afford it. A salary that high means there’s probably another employee (or 10) in a different department earning a below-average salary.
How to Use Compa-Ratio in 3 Steps
Ready to learn how to use compa-ratio? Here’s how it works.
1. Divide the Annual Salary by the Median Salary
We showed you an example of this in the first part of the guide, but we used a hypothetical situation. To apply it to your company, you’ll need to figure out the median salary for a particular role.
National data is fine and it’s the easiest data to find. But if you can determine the median salary for your city, state, or region, the data will be more relevant.
Let’s go back to the software developer example, but this time, we’ll use actual data. According to the U.S. News & World Report, software developers made a median salary of $120,730 in 2021.
Now let’s find out how much your three software developers make.
Employee #1 has been with you for 10 years and makes an annual salary of $125,000.
Employee #2 is a new hire with two prior years of software dev experience, and she gets paid $85,000.
Employee #3 struggles at work, so even though he’s been with you for five years, he earns a salary of $87,000.
To figure out the compa-ratio, apply this formula to the salaries in question:
Annual Salary / Median Salary = Compa-Ratio
So let’s calculate each employee’s compa-ratio:
- Employee #1: $125,000 / $120,730 = 1.03, rounded down to a compa-ratio of 1.0
- Employee #2: $85,000 / $120,730 = 0.70 for a compa-ratio of 0.7
- Employee #3: $87,000 / $120,730 = 0.72, rounded down to a compa-ratio of 0.7
Note that some people like to see these ratios in percentage form, so they multiply them by 100. For example, Employee #1 would have a compa-ratio of 100%.
Either way is fine.
2. Interpret the Compa-Ratio
Let’s take a look at the results we got in Step 1. Remember that the ideal compa-ratio range is 0.8 to 1.2.
For each employee, ask yourself these three key questions:
- What percentage more or less is each employee paid than the salary midpoint?
- Does this figure make sense for the employee?
- Could this figure pose a problem for the company?
Employee #1, who’s been with you for 10 years, has a compa-ratio of 1.0. Along with longevity, this employee brings value and loyalty to the company. Their compa-ratio is on par with the national median.
Do they deserve to be closer to a compa-ratio of 1.1 or 1.2? Could they start feeling underpaid as they enter a second decade of working for you?
These are key questions for you to consider.
Employee #2 is new. Her compa-ratio is 0.7, which is a bit low—even for a new hire. It’s 30% lower than the median She might prove to be an incredibly valuable worker and start to resent being paid lower than the market average.
Employee #3 also has a compa-ratio of 0.7, but you’re starting to think it might be time for him to find a new position elsewhere. He’s frequently late to work, and when he’s there, he hardly gets anything done. Your managers have had many feedback sessions with him and he’s just not getting it.
The lower pay sort of makes sense, but wouldn’t it make more sense to let him go and bump your two other software developers up to a more favorable compa-ratio?
3. Make Necessary Adjustments
What should you do if the compa-ratios show that your employees are either undercompensated or overcompensated? Here are a few strategies for each situation.
If Employees are Undercompensated
If you find that an employee is being undercompensated and you want to keep that employee on, it’s time to make cuts elsewhere to raise their pay.
You may discover that letting go of an under-compensated and underperforming employee (looking at you, Employee #3!) gives you the space to raise that salary.
Once you make sure you can responsibly make this adjustment, communicate your reasons to the employee. Let them know that you realized you were paying them below the market rate and that you are adjusting their pay accordingly.
If Employees are Overcompensated
No one likes a pay cut, especially if there’s no disciplinary reason to back it up. For that reason, transparency is your friend here.
Invite the overpaid employee to look at the market data and compa-ratio calculations with you. Let them know that you made the mistake of paying them above the market rate and that you need to make cuts.
You might choose to lower the amount of an upcoming bonus or lower the person’s salary. It all depends on your budget.
But the conversation doesn’t have to be all doom and gloom. You can end the meeting with your employee on a high note by:
- Showing them the roles within your company that pay a higher salary and asking if they’d like to be considered for those roles
- Offering new, non-monetary forms of compensation, such as a weekly paid wellness hour, dedicated time to work on personal projects, or late-start Mondays
Above all, be ready to answer tough questions and find ways to help your employee feel valued throughout this tricky process.
What is a Group Compa-Ratio?
A group compa-ratio compares the combined salaries of a group of people to the combined median salary for each person in the group.
The formula looks like this:
Group Compa-Ratio = Salary #1 + Salary #2 + Salary #3 / Median #1 + Median #2 + Median #3
Let’s say you want to determine the group compa-ratio for a small marketing agency with three people in it: you, the owner and project manager; a graphic designer; and a copywriter.
To do this, you would:
- Figure out each person’s yearly salary or wages
- Combine each salary or total yearly wage into one big sum
- Look up the median salary for each role represented within the group
- Combine these median salaries into one big sum
- Divide the combined wages by the combined median salaries
Here’s what the steps look like in action.
- Figure out each person’s yearly salary or wages
- Owner/Project Manager
- Actual Salary: $70,000
- Graphic Designer
- Actual Salary: $60,000
- Copywriter
- Actual Salary: $62,000
- Combine each salary or total yearly wage into one big sum
- $70,000 + $60,000 + $62,000 = $192,000
- Look up the median salary for each role represented within the group
- Owner/Project Manager
- National Median Salary: $80,000
- Graphic Designer
- National Median Salary: $50,000
- Copywriter
- National Median Salary: $65,000
- Combine these median salaries into one big sum
- $80,000 + $50,000 + $65,000 = $195,000
- Divide the combined wages by the combined median salaries
- $192,000 / $195,000 = 0.98
That’s your group compa-ratio. And it’s pretty close to the middle of the ideal range, which means you’re probably on track with what you’re paying your employees—and yourself.
Since we’re on this topic, it’s important to keep the wage gap between leadership and employees from getting too big. No one likes an overpaid CEO.
How Compa-Ratio Relates to Pay Equity
Compa-ratio can highlight glaring differences in pay. If individuals within your company have wildly different compa-ratios, you need to take a hard look at your compensation practices.
Group compa-ratio also brings pay inequity to the surface, and it’s especially helpful for larger companies.
For instance, you could figure out the group compa-ratio for all of your departments and compare them with each other. If some departments have a compa-ratio of 1.4 while others have a compa-ratio of 0.6, you’ve got some pay inequity to deal with.
The good news is that you can easily create a payroll budget to help you rethink your compensation practices.
