What is a Compa Ratio? Why It Matters, and How to Calculate It
Pay inequity matters to today’s workforce, as it rightly should. Inequitable pay not only reduces an employee’s sense of value, it is also a driving contributor to voluntary attrition. Around 50% of employees who plan on quitting their job are doing so to get better pay and benefits (Resume Builder).
At Praisidio, we exist to help solve employee attrition, and we use two primary metrics to quantify pay inequity within any organization: Comparative Ratio (compa ratio) and Position in Range (PIR). In combination, these give the information you need to take a proactive approach to correcting pay inequity and retaining more employees.
If you’d like us to do the hard work for you and monitor your existing talent risk in real-time, schedule a demo.
What is compa ratio?
An employee’s compa ratio quantifies whether or not they are being fairly compensated. Comparative ratio measures an employee’s pay against salaries from the other companies within the industry.
In most cases, compa ratios are calculated at a more granular level to give employers an idea of how fairly their employees are compensated, when compared to similar jobs in the city or region. Then there are a couple of variations of compa ratio, which offer more precise insights.
Comparative ratio definition
Compa ratio is a mathematical comparison between an employee’s salary and the midpoint of the salary range for the employee’s position at other companies. Comparative ratio calculation expresses an employee’s salary as a percentage of the midpoint of the market salary range for that role.
This might sound a bit complex. However, the compa ratio calculation is fairly straightforward.
How to calculate compa ratio?
This is the formula for calculating compa ratio:
When you calculate compa ratios, you’ll get a number such as 1.0, .75, or maybe 1.2.
…But what do these numbers mean? Is it good or bad if your compa ratio is .75? What should you do about your comparative ratios?
Compa ratio examples
The number is basically a percentage. A compa ratio of 1.0 means your employee is being paid 100% of the midpoint of the salary range for that position. Stated another way, the employee’s pay is exactly the same as the salary range midpoint for that position.
On the other end, a comparative ratio of 1.2 shows that an employee is actually being paid 20% more than the pay range midpoint or 120% of the midpoint salary.
Bottom line: if an employee’s calculated compa ratio is less than 1.0, they likely should be paid more than they’re getting. If an employee’s comparative ratio is 1.0 or better, they’re being at least fairly compensated.
What is a compa ratio of .75 (and why is it important)?
As you may have guessed from the previous examples, a compa ratio of .75 indicates an employee gets paid 75% of the pay range midpoint for that position.
A .75 comparative ratio is a common HR industry benchmark that indicates the company should take quick action to improve an employee's pay to increase pay equity within the company and minimize the chances that the employee will leave for a better pay job.
That’s not to say that compa ratios between .76 and .99 are good. Those should be corrected, too. A compa ratio of .75 is just an established benchmark that indicates high probabilities of voluntary attrition and helps companies identify immediate talent retention risks.
External vs Internal comparative ratios
As we mentioned earlier, there are a couple variations of comparative ratios. External compa ratio is one of them.
An external comparative ratio compares an employee's pay to the midpoint of the salary range for the entire market for that job position, or the market within your company’s city or region. This is a measure of how fairly your employees are being compensated, compared to other employers in the industry.
An external compa ratio of less than 1.0 indicates that an employee is being underpaid, relative to the market salary.
Internal comparative ratio compares an employee’s pay to the midpoint of the salary range for all the employees in that job position within your organization. This shows you how well each employee is being paid in comparison to their peers.
An internal compa ratio of less than 1.0 shows that an employee is being underpaid, relative to the other employees with the same job position within your organization, even if they might be getting paid well compared to the market rate.
Both external and internal comparative ratios are important. Nobody likes feeling that they’re being paid unfairly, regardless of whether that’s being paid unfairly within the market or within the organization.
Position in range
Position in range is similar to a comparative ratio. However, it helps you get more actionable insights than compa ratios alone.
Similar to comparative ratio, position in range enables you to identify employees and groups of employees who are being underpaid relative to their peers.
However, position in range also shows you how much more an employee can be paid before reaching the maximum market salary for their position.
With minimum and maximum salary values of the salary band for an employee’s job position, we calculate position in range with this formula:
For example, with a salary range of $100,000 to $200,000 and an employee salary of $120,000, this formula generates a position in range of 20%. This means the employee is being paid 20% of the maximum salary for that position.
The benefit of calculating position in range (in addition to tracking comparative ratios) is that position in range gives you a more actionable number for how much more an employee could or should be paid in absolute dollars.
Like compa ratios, position in range can be calculated internally and externally.
Also, the 25th and 75th percentiles are used as lower and upper range bounds, respectively, rather than the absolute minimum and maximum salaries for the position. This prevents outliers from throwing off your position in range calculations.
The combination of compa ratio and position in range shows you which employees and groups of employees are being underpaid and a range for how much more you’d need to pay them to correct pay disparities within your organization.
Monitor your employees’ compa ratios in real time
To perform a true audit of pay inequity within an organization, you also need to combine these pay metrics with demographic data.
Praisidio compares the compensation ratio and pay in range averages for demographic cohorts in your organization to identify groups of employees who are underpaid. Praisido gives you a comparison interface that combines multiple employee signals to uncover any biases in your company’s compensation structures.
This is an example of Praisidio’s analysis of pay for finance managers in an organization:
The Praisidio comparisons user interface highlights in red who are being underpaid relative to the industry and your company’s compensation midpoint, and gives you actionable data on how much pay increase is needed to correct compensation disparities.
Pay inequity audits (without Praisidio) are typically quite costly and slow. They often require multi-disciplinary teams, third-party consultants, and take months to complete.
Praisidio uses internal data you’re already collecting to deliver comparisons immediately. This automates data collection and analysis, so you can monitor compa ratios and pay in range metrics in real-time, and uncover hidden biases within each job role by gender, ethnicity, location, and other factors.