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 may need to make offers near the top of your salary bands, if not above them, in order to close in-demand talent. You may also need to increase salaries for your current team members to ensure fair pay within your team and boost your retention efforts.
This can affect your compa-ratios in two major ways:
1. Compa-ratios may begin to inflate with rising wages
Salary bands are falling behind at many organizations, but it can be difficult to keep them up-to-date 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If salary bands are outdated, some would argue that compa-ratios are unreliable.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 higher performing, more tenured, or more experienced than your first, but both employees have the same job grade, impact, experience level, and location.
Instead, this becomes an indication of a pay inequity and the right thing to do is adjust your first marketing manager’s salary as well. Now both have a higher compa-ratio than their experience level and impact would normally dictate.
2. Compa-ratios may decrease if you update salary bands
Some companies are beginning to think ahead by bumping the maximum of their salary ranges so employees have room to grow. This will decrease compa-ratios and can cause issues if this metric is shared internally.
For example, the marketing manager’s maximum salary might increase $20,000 for a $90,000-130,000 salary range. The marketing managers currently earning $115,000 would have their compa-ratio drop from 1.15 to 1.05. Even if you give raises when you update salary bands, your employees might not remain at the same compa-ratio.
This can be problematic if you’ve socialized that compa-ratios determine what someone earns. Your employees (and their managers) will want to hold their same compa-ratio and may feel slighted if you don’t. Without proper communication, your plan to increase salary bands could backfire.
Better ways to use compa-ratios
Compa-ratios aren’t dead, but they can lead you the wrong way if you use them as an absolute measure of a team member’s worth. They get a lot more interesting and useful when you use them for analysis 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 a salary 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.
Using these metrics can be particularly helpful if you have multiple office locations or use a location-based approach to remote compensation. Compa-ratios help you normalize your salary data across geographic regions so you can ensure fair pay for employees in different areas.
For example, you might have a top performing marketing manager in Peoria with a lower salary than a colleague in San Francisco with less experience. Utilizing compa-ratios can help you determine if each of them is paid fairly based on your compensation strategy.
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.
Conversely, dropping an employee’s compa-ratio as you update salary bands doesn’t mean that employee is less valuable or impactful than before. It just means you’re making room to account for inflation and rising wages so you can continue to attract and retain talent.
The important thing is that all of your employee compa-ratios are shifting consistently across your organization. Employees with similar roles, experience, impact, and locations 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 impact 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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