How to Achieve Pay Equity through Compensation Ratio

When was the last time you checked if your employees are being paid fairly by your organization? Are you confident that you are compensating them competitively? Do you have employees who are unmotivated to work? If yes, the problem might be rooted in their wages. A quick way to confirm this is by the use of compensation ratios.

A compensation ratio, or compa-ratio, is a measurement of pay used to compare an employee’s salary to a median salary for similar job titles within a company or an industry. This is an essential tool to assess how well your employee’s pay is aligned to a desired salary range.

This article will help you know if you are paying your employees fairly with the use of compensation ratios.

Defining the Compa-ratio

The compa-ratio is used to assess the competitiveness of an employee’s pay; to calculate it, the compensation we will look at is the employee’s base, annual salary. We generally discount the bonuses, variable incentives, and the value of non-monetary benefits when comparing it to the market average.

There are two types of compa-ratio:

• Individual compa-ratio: this evaluates the pay of an individual employee against the median pay of a target market or to the midpoint of a company’s pay grades.

• Group compa-ratio: this compares the compensation of a group of individuals, such as a department in a company, to another predetermined group within the organization.

Putting it to Use

Here is how you use the compa-ratio to measure the competitiveness of your employee’s pay:

1. Step 1: Determine the salary structure of your company

   Know your minimum and maximum salary for a job title. The compa-ratio percentages usually fall between 80% and 120%, with 100% being the market average. In common practice, new hires and inexperienced employees are generally paid closer to 80% to allow room for improvement while the long-tenured employees and those who perform exceptionally at their jobs may receive salaries closer to the 120% end.

2. Step 2: Obtain an employee’s salary and calculate compa-ratio

   To calculate the compa-ratio of your employee, you divide his pay rate by the median salary of all the employees in your company with the same job title or the median salary you attain from market standards, and you multiply it by 100. For example, if your employee earns $53,000 and the median of all employees in your company with a similar job title is $55,000, then the formula would be:

   Compa-ratio: $53,000/$55,000x100 = 96.36%

3. Step 3: Analyze Compa-ratio

   The percentage from the compa-ratio formula above will tell you how far the individual employee’s salary is from the midpoint of salaries of all employees with a similar job title. The midpoint here is always at 100% and you will see that the particular employee is paid slightly below the median wage. If you are using the market average as the midpoint, then this illustrates that your employee is paid below industry standards for that specific job title.

Compensation Ratio is your Compass

The compensation ratio can serve as an indicator of various positions in your employee’s salary. An employee’s progression based on pay range can be directly related to his or her performance. As an employer, the compensation ratio can help you decide on what actions to take in rewarding employees who exceed work expectations. However, not all employees will receive the same merit pay increase, even though they all perform excellently. Managers still need to look at how far an individual’s pay is relative to the midpoint. Top performers who fall below the median might receive larger raises compared to their colleagues who are already paid above the market value. Knowing the compensation ratio of your employee can also help you achieve pay equity. When you factor in the demographic of your workforce, such as gender, and you happen to see that a female employee is paid less than her male counterpart who has a similar job title and level of experience in their field, this may warrant investigation for you to resolve the pay gap.

To know if there are high disparities in compensation across departments in your company, you can use the group compa-ratio formula. The calculation used here is to add the total salaries of all employees of a particular group and divide it by the total median salary of your company. This is useful to see if your actual pay practices are aligned with your compensation philosophy. Additionally, the group compa-ratio works to highlight the differences among employee groups for gender, location, role responsibilities, and job experience. This can help you see if there might be an unconscious bias in pay for a specific department or employee group.

CompAnalyst provides insights sourced from reliable HR-submitted data so you can view updated market midpoints you can use to calculate the compensation ratio of the employees in your organization. With the comprehensive data you get from this tool, you can analyze your position in the market when it comes to compensating your employees and make pay decisions with confidence.

Where should my Compa-ratio lie?

Your employees’ compa-ratio should ideally fall within the 80% to 120% range. When a consistent top performer has a compa-ratio below 80%, this poses a risk that he may leave your company and you should dig deeper to address any pay equity issues. Similarly, when a long-tenured employee receives pay above 120%, this might serve as an indication to qualify him for promotion and management should review other factors such as work performance and skill level to justify this position.

Knowing your company’s compensation ratio provides valuable insights into managing your payroll budget. Seeing employees getting paid outside the competitive range will tell you that you might need to allocate your business’s resources for salary adjustments. Alternatively, you can stay competitive in your pay market and still follow your payroll budget by balancing the right combination of monetary pay and non-monetary benefits. This can help to keep your employees engaged with your organization and combat turnover.