It’s that time of year again. Your organization is conducting performance reviews. There’s general mayhem as both your highest- and lowest-performing employees scramble to finish the most work possible in order to attain the highest rating and to get that elusive increase in pay.
OK, while this may not be a realistic depiction of your organization, at the very least it is safe to assume that most of your employees want to do well enough to qualify for some kind of financial promotion. However, taking into consideration an employee’s performance rating alone often does not reveal the true market value of that performer. The performance rating taken in tandem with an employee’s compa-ratio reveal a fuller picture.
For those perhaps a bit unfamiliar with the terminology, while they are sometimes referred to as “compensation” or “comparison” ratios, the “compa-ratio” is defined as the percentage obtained by dividing the actual salary paid to an employee by the midpoint of the salary range for that position. Simply put,
CR (Compa-ratio) = AS (actual salary) X 100
MP (midpoint of pay range)
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. It allows an organization to understand how an individual’s pay relates to the organization’s pay ranges and the market. If the individual’s compa-ratio is 100%, then the individual is already being paid what a competent performer would be. Following is an example which demonstrates how to calculate an individual employee’s compa-ratio.
Let’s say the market pay range for the average receptionist position is between $20,000 and $28,000 per year, with the midpoint of those two at $24,000 per year. If there are five actual receptionists who earn (respectively) $21K, $23K, $24K, $26K, and $28K/per year, then the compa-ratios would be as follows:
Receptionist A – 21/24 = .875 x 100 = 87.5%
Receptionist B – 23/24 = .958 x 100 = 95.8%
Receptionist C – 24/24 = 1 x 100 = 100%
Receptionist D – 26/24 = 1.083 x 100 = 108.3%
Receptionist E – 28/24 = 1.167 x 100 = 116.7%
Here are five clear percentages. The former two are below what a fully competent solid performer should be paid, the middle figure is exactly at midpoint, and the latter two are above the midpoint for the given position.
But how does one use compa-ratios? Well, while pay scales always have a defined range, so too do compa-ratios. As outlined on the website of Australia’s National Remuneration Centre there are ordinarily five zones, each associated with a pre-defined level of performance:
“A commonly accepted range for compa-ratios is 80% to 120%, which in turn can be divided into five zones, ie:
80-87%
88-95%
96-103%
104-111%
112-120%
Each one of these zones is associated with a pre-defined level of performance, with 100% representing fully competent performance in the job.
The five compa-ratio zones range from the lowest level for new, inexperienced incumbents, or unsatisfactorily performing incumbents, through to the highest level reserved for those universally recognized as outstanding performers.
A broad definition of each zone is therefore:
- 80-87% – new, inexperienced, or unsatisfactorily-performing incumbents.
- 88-95% – those gaining experience but not yet fully competent in the job.
- 96-103% – fully competent performers performing the job as defined.
- 104-111% – those consistently performing the job at a lever higher than what the job definition requires.
- 112-120% – those universally recognized as outstanding performers, both inside and outside the organization.”
If we use these zones to compare the salaries of the aforementioned five receptionists, Receptionist A would be making a salary comparable to that of an unsatisfactorily-performing employee; B and C, that of a fully-competent performer; D, a higher-level performer; and E, an excellent performer. Comparing these five percentages with the actual performance of each receptionist will indicate necessary changes to the individual’s pay. Ideally, an employee’s performance should of course match the compa-ratio range into which their salary falls.
“Compa-ratios are a valuable tool for obtaining a benchmark of employees’ salaries against pre-determined standards,” explains National Director Michael Maciekowich. “While using compa ratios lock-step with pay raises may hinder an organization’s flexibility, the figure can be helpful in ensuring that top performers receive the compensation commensurate with their contribution.”
When the time rolls around for your organization to conduct performance reviews, the compa-ratio coupled with the employee’s rating will provide much-needed insight into whether or not a substantial or below average raise in pay is appropriate.
Great piece of information.
It is a very simple, easy to understand way of presenting a very important concept in compensation.
I believe the whole point of Compa ratio is to understand where you stand. And in case your compa ration is low, you can either look for different & fair employer or negotiate with your current employer. For later, without the knowledge of true/official MP for your organization & location one can not estimate his/her status. My question is: Is HR obligated to provide you with the Compa ratio data or how to obtain true MP?
Hello!
Compa Ratio is a tool to be used by human resources to better identify potential compression issues within the pay ranges as well as to help determine the competitiveness of employees in relation to a market driven range midpoint. It is not common to share with employees unless it is part of a communication regarding a plan to correct any issues discovered.
This is very helpful! Thank you. I’m wondering what you would have to say about this situation:
My band increased from a 4-6 suddenly last year due to an HR error. My band width is 47-72k and my most recent compa-ratio is 93%. I have never had any performance issues and am consistently achieving my goals and taking on new work. My salary is only $55k. Does the 93% tell me that I am ‘not compentent for the job?’ If so, that doesn’t match up with the rest of my performance evaluation and I’m wondering if I should ask for it to be reviewed.
Hello!
Thank you for posting this question!
No, not at all! A compa ratio of 93% does not mean that you are “not competent for the job.” Rather, it’s simply stating that you are paid below the midpoint of your pay range.
With that in mind, since your position moved from a grade 4 to a grade 6, I would connect with your manager or HR to see what steps you can take to further move your salary into the range, as well as what your manager or HR already may have planned for a salary adjustment for you.
Please let us know what happens!
I just received my annual pay raise and performance review. I was rated as a “strong performer”. The top is “exceeding”. I tend to bounce between the two ratings since the management team has been rotating.
We do get an annual pay increases based on performance. We do have a “top wage” that each position within the company can hit. I am getting closer to that wage. My compa ratio is 87.3% on my review, however. According to the scale above, that would put me as “under performing”, yet my review is “strong”. Does this compa ratio simply reflect at what percentage pay rate I am at compared to the top wage, perhaps? Just seeing the percentage hit my pride a little.
Hi Angela!
Thank you for your post!
No, don’t be upset or insulted by your compa ratio! Compa ratio simply compares where your salary falls in comparison to the midpoint of your pay range. It’s a tool to determine employee position in range.
I haven’t seen your organization’s full comp program, but based on your strong performance scores in the past, I would think that being a high performer with a relatively lower compa ratio would mean that your salary increases should be larger than those of lower performers or employees with higher compa ratios.
– Jennifer
Hi Jennifer, do we ever have reducing compa ratio overtime for an employee and how will that situation happen?
Hi there!
Thanks for your question!
Yes, an employee’s compa ratio could decrease over time, but it’s not a frequently occurring situation.
If an employee’s salary doesn’t change, but his / her pay range increases, the compa ratio will decrease. This occurs when employers increase their pay ranges due to market movement, and don’t award salary increases at the same time.
– Jennifer
What will be the consequences of increasing the band range. So for example moving from a 80%-120% band to a 70% – 130% band
Hi Mona!
Thank you for your question!
When considering increasing the range spread of a pay range, there are a few things an employer must explore before making the change:
1. Does the new, lower range minimum fall below state or federal minimum wage guidelines?
2. Would the new, lower range minimums allow the employer to successfully attract new talent?
3. Why does the employer want to widen the pay ranges? Is it in response to / in support of a larger HR program such as career pathing or another employee development approach? Or it is simply to avoid updating the pay ranges in response to market changes?
4. For not-for-profit employers, are the wider pay ranges fiscally feasible, in light of grant funding, any state legislation around compensation maximums, or other financial considerations?
I hope this is helpful for you. Please let us know if you have additional questions!
– Jennifer