Compa-Ratio

How to calculate compa-ratio

Divide base pay by the band midpoint. Use the same unit on both sides: annual salary against an annual midpoint, or hourly rate against an hourly midpoint. Many reports multiply by 100 and show it as a percentage (97.5% instead of 0.975). Both are fine as long as everyone reads the same version.

Use base pay only. Overtime, commissions and shift premiums swing month to month and would make the ratio noisy. If a part-time employee is in the analysis, use their hourly rate or annualize to full-time equivalent; do not compare their actual earnings to a full-time midpoint.

For a team, department or demographic group, calculate the group compa-ratio: total base pay divided by total midpoints. This weights the result by pay level, which is what you want when checking whether a whole job family is underpaid.

A worked example across a team

A payroll team of four sits in grade 7, midpoint $64,000:

• Luis, 6 months in role: $55,000, compa-ratio 0.86
• Angela, 3 years: $63,000, compa-ratio 0.98
• Priya, 7 years, top performer: $71,500, compa-ratio 1.12
• Kevin, 4 years, solid performer: $56,500, compa-ratio 0.88

Group compa-ratio = 246,000 ÷ 256,000 = 0.96. The group looks fine. The individual view does not: Kevin has four years of tenure and solid ratings but is paid like a new hire, probably because he joined during a hiring freeze at a low offer and never caught up. He is the person a recruiter at another company will call next. This is why you always look at individual ratios next to tenure and performance, not just the average.

What is a good compa-ratio?

There is no single good number, but a common benchmark is:

• 0.80 to 0.90: new to the role or still learning. Expected for recent hires and recent promotions.
• 0.90 to 1.05: fully proficient. Most of a stable workforce should sit here.
• 1.05 to 1.20: highly experienced, top performers or people with skills that are hard to replace.
• Below 0.80 or above 1.20: usually outside the band. Investigate each one.

An organization-wide compa-ratio near 1.00 means you are paying about what your compensation philosophy says you should. If your policy is to lead the market and your average is 0.93, either the bands are out of date or managers are under-offering.

Using compa-ratio in merit cycles

The most common use is a merit matrix: a grid that sets the merit increase based on performance rating and compa-ratio. Someone rated 'exceeds' at 0.88 might get 5%, while someone rated 'exceeds' at 1.12 gets 3%. Both are rewarded, but the lower-paid person moves toward midpoint faster.

Simple example matrix for a 3.5% merit budget:

• Exceeds expectations: 5.5% (below 0.95), 4.5% (0.95 to 1.05), 3.0% (above 1.05)
• Meets expectations: 4.0%, 3.0%, 2.0%
• Below expectations: 0% across the board

Run the matrix against your actual population before you publish it, to check the total cost fits the budget.

Compa-ratio vs range penetration

Both describe where someone sits in their band, but they answer different questions. Compa-ratio compares pay to the midpoint, so it tells you how pay relates to the market rate. Range penetration measures how far between minimum and maximum the pay sits: (Pay − Minimum) ÷ (Maximum − Minimum).

In the Angela example, range penetration in a $52,000 to $76,000 band is (63,000 − 52,000) ÷ 24,000 = 46%. Range penetration is more useful when bands have different spreads, because a 1.10 compa-ratio is near the top of a narrow hourly band but only in the middle of a wide executive band. Comp analysts usually report both; see how bands are built on our salary band page.

Common mistakes

• Stale midpoints. A compa-ratio is only as good as the midpoint. If bands have not moved in two years, everyone looks better paid than they are.
• Using it as a cap. Telling a top performer they cannot get a raise because they are at 1.08 is how you lose top performers. Use lump sums or promotion paths.
• Ignoring it in offers. Recruiters should know the compa-ratio of the current team before making an offer. Hiring a new agent at 1.02 when the tenured team averages 0.95 creates a compression problem on day one.
• Only reporting averages. Group ratios hide individual gaps, and individual gaps by gender or race are what a pay equity analysis will find.