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.
Where compa-ratios can go wrong
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If salary bands are outdated, some would argue that compa-ratios are unreliable.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.
Better ways to use compa-ratios
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:
Median compa by function: Understand if your average compa-ratios are consistent between functions. A function with a high compa-ratio should have more high impact, experienced people on the team. A function with a low compa-ratio and high turnover may need some adjustments to improve retention.
Compa-ratio distribution: Look at how compa is distributed across your organization and within each function. Most people will be around the midpoint, which may not necessarily be 1.0 if your salary bands don’t reflect market pricing. Your top performers across the organization and within each function should be on the high end of the scale, and less experienced employees on the low end.
Compa distribution by tenure: As in our example above, newer employees may be joining the company with higher salaries than your more tenured employees. Look at your distribution by tenure to understand if your most loyal employees need some attention to ensure they stay.
Compa by gender and ethnicity: Spot potential pay inequities by looking at compa distribution by gender and ethnicity. Look at the company level, then drill down by function and organizational department. This may help you spot unconscious bias in your offers and annual compensation cycles so you can correct them.
Low employee compa: As market forces drive compa-ratio up, it’s important to take a look at employees below 0.85. These people are compensated at the low end of their salary range, or may be below band. Investigate each case individually to determine if an increase is in order.
High employee compa: High compa-ratios are going to be more common as the market drives salaries up. This may be an indication that it’s time to update your salary bands. However, it could also be a signal that you need to begin thinking about a promotion for employees with high compa so you can move them into a higher salary band.
Managers with unusually high or low compa distribution: Keep tabs on which managers have a significant percentage of their team either above or below band, and look into why. This can help ensure that individual managers are adhering to your compensation strategy, so their team’s compa is consistent with the rest of the organization.
Final thoughts on compa-ratios
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.
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