Compa-ratios. Some people love them, other people hate them. Before we get into why that is, let’s start off with a quick refresher on what they are. Compa-ratios show an employee’s salary relative to the midpoint of the salary range for their position.
Let’s say a marketing manager earns $95,000. The salary range for their position is $90,000-110,000, so the midpoint is $100,000. You would divide the salary ($95,000) by the salary range midpoint ($100,000), to get a compa-ratio of 0.95.
As a data-savvy HR professional, you already knew that—but we’re going to carry this example through as we look at different ways to use compa-ratios.
Unemployment is low and competition for talent is high. Candidates have many opportunities available to them, and your talent acquisition team needs to make offers near the top of your salary bands, if not above them, in order to close in-demand talent. Compensation-savvy organizations know this means their salary bands are falling behind, but may find it challenging to continually update them in today’s increasingly competitive talent market.
If salary bands are outdated, some would argue that compa-ratios are unreliable. In the past, compa-ratios might be 0.85 for inexperienced hires, 1.0 for adequate hires, and 1.15 for top performers. When salary bands have fallen behind market pricing, the compa-ratio scale will shift upward. An inexperienced hire might be 0.95, an adequate hire might be 1.1, and a top performer might be 1.25.
Take our $90,000-110,000 salary range for marketing managers. As you build out your team, you find you must offer your second marketing manager $115,000 to close them. Their compa-ratio is 1.15, versus 0.95 for your first hire. This once would have been an indication that your second marketing manager was a top performer, but both employees have the same job grade, impact, and experience level. Instead, this becomes an indication of a pay inequity. Salary data alone would tell the same story in this example, but we’re not often dealing with two very similar employees in practice.
Compa-ratios get a lot more interesting and useful when you use them to indicate consistency across your organization. Here are some ways to look at the data:
The competitive talent market makes it challenging to maintain up-to-date salary bands, which can throw off compa-ratios as we know them. A 1.15 compa ratio for a new marketing manager may mean that employee is perfectly capable—but not necessarily a top performer as we’d normally assume. That’s ok. The scale is merely shifting as market data moves faster than our salary bands.
The important thing is that all of your employee compa-ratios are shifting consistently across your organization. Employees with similar roles, experience, and impact should obviously be compensated similarly. But you also want to ensure that tenured employees across your organization are keeping pace with the higher salary demands of newer employees. You want to make sure that people from underrepresented groups are being compensated fairly. And you want to make sure your top performers are compensated based on their value to your organization, so you can retain them. Compa-ratios are one of the tools that can help you do that.