The compa ratio: What is it and how should you use it in your business?

A “compa ratio” – have you heard of it? Also known as a compensation ratio, it’s a measurement that allows managers and leaders to assess how their salaries compare across market averages. It might also be your new secret weapon for ensuring that your employee compensation is competitive, helping you attract and retain talent.

Don’t worry, there are no fancy technical tools required to work it out, just a basic calculator and a good understanding of average market salaries. We’ll take you through exactly how to measure the compa ratio in your business, and how you can use it to assess where you stand in the wider market.

How to calculate compa ratio

The main type of compa ratio is the individual compa ratio, which is used to determine how an individual’s salary stacks up against the industry average. A compa ratio comes in the form of a percentage – we’ll explain what you can do with that percentage a little later.

First, to calculate the compa ratio for an individual, you need the individual’s annual salary for a specific role, and the market average for that same role.

To get the market average, first use our salary benchmarking tool. It can give you the industry average for a role in seconds, using over 2 million data points.

Next, use the following compa ratio formula:

(Current salary / Market average) x 100 = Individual compa ratio

As an example, say you have an engineer whose yearly salary is $110,000. The market average salary for engineers in your industry and location is $125,000. If you use this equation ((110,000 / 125,000) x 100), then this individual engineer’s compa ratio would be 88%.

Likewise, an individual in the same role whose yearly salary was $135,000 would have a compa ratio of 108%, derived from ((135,000 / 125,000) x 100).

What does the compa ratio mean?

A compa ratio that is 100% would mean that an individual is being paid exactly the same as the market average. A ratio below 100% shows they’re being paid under that market average, and a ratio above 100% shows they’re paid above market average.

Uses for the compa ratio

So you’ve got the percentage – now what? Knowing the compa ratio of your employees can actually come in really useful when assessing compensation in your business.

Internal salary range settings

There isn’t a rule that every company should aim for 100% compa ratios for all individuals – in fact, that wouldn't make a lot of sense for many businesses, since employees in the same role might have varying levels of skills and experience.

Instead, compa ratios can be used to assess whether you’re paying your team in a way that is accurate for them. For example, you may have one team member who is freshly graduated from university and is learning on the job. That employee's salary, and as a result, their compa ratio, is unlikely to be the same as their colleague who has been with the company for a few years, despite them both doing the same role.

Using a compa ratio can be an effective way to set a salary range in a company for specific roles – for instance, you could pay employees on a sliding scale, from a compa ratio of 90% to 110%. It can also enable you to set specific measures of performance and experience that can be accurately compensated.

Effective salary benchmarking

To retain and engage employees, it’s important to offer a competitive compensation package. By calculating the compa ratio for each employee, you can get a clear idea of how you compare in the market, and if you’re under or over paying your employees against industry averages.

For example, if you’re on your third compa ratio calculation and your compa ratios are consistently coming out as well below 100%, you might want to consider whether your salaries could be more competitive. Otherwise you risk losing your team members to better-paying competitors.

Compa ratios can also reassure you when your compensation is already competitive, helping you avoid unnecessary salary increases and maintain a balanced budget.

Determining rates for new hires

Ah, the dreaded salary discussion, debate, negotiation – whatever you call it, it’s rarely a fun experience for either hiring managers or candidates during a job interview. If you’re an employer, you want to offer a salary range that is competitive enough to get a great candidate on board, but not more than you necessarily need to pay either. It’s a big mental guessing game.

Adding a compa ratio into the mix can be a useful way of coming to a figure that makes sense for the candidate you’re courting. Use the market average and compa ratio to find a figure that accurately represents the skills and experience they're bringing to the role, while benchmarking against the wider industry. You’re much more likely to find a figure that both you and the candidate is happy with, compared to guessing a figure on the fly.

The importance of contemporary market data

Remember that the compa ratio is not a one-and-done figure. It relies on market averages, which fluctuate and change often. Our latest Employment Report shows the latest wage changes in Australia, and they can vary widely year-on-year.

With that in mind, make time to regularly stay across the market averages that apply to your team members, with use of a salary benchmarking tool. That way you can ensure that the compa ratios in your team are accurate as well.

Additional types of compa ratios

The individual compa ratio is a great way to assess whether you’re paying individuals in your team in a way that makes sense for you, and for them. However, there are two other types of compa ratio that can be used to gain a wider perspective of your compensation packages in comparison to the wider market rate.

Average compa ratio

Average compa ratio supports you in assessing your compensation across pay bands, a whole team, your entire business or a certain group of individuals.

To calculate the average compa ratio, you need to know all the individual compa ratios of the individuals you’re looking to measure. For ease, use the compa ratio in decimal point form rather than percentage (eg. 88% becomes 0.88, 108% becomes 1.08). Then, do the following compa ratio calculation:

The sum of all individual compa ratios / The number of individuals = Average compa ratio

So say you wanted to check the compa ratio of a team of five employees, where the individual compa ratios were 90%, 96%, 102%, 106% and 112%. The average compa ratio would be approximately 101%, or 1.012 from ((0.9+0.96+1.02+1.06+1.12) / 5).

The use of this kind of compa ratio is a little different from individual compa ratio, and it’s usually used in cases whether you're analysing pay equity internally across your business. For example, if one group’s compa ratio is much lower than another group, you may be able to identify a specific disparity.

Group compa ratio

Group compa ratio can be useful in assessing both groups of employees within an organisation, as well as comparing your compensation to competitors.

To calculate compa ratio for a group, you need to know all the individual salaries of those in the group, and the respective market average salaries for all the different roles in the group. It's back to the salary benchmarking tool for that one.

Then, complete the following compa ratio calculation:

(The sum of all individual salaries / The sum of market average salaries for all individuals) x 100 = Group compa ratio

For example, you’re assessing a small team of designers and copywriters. The designers are paid $90,000, $92,000 and $95,000 respectively, while the market rate for a designer for that location is $90,000. The copywriters are paid $82,000 and $86,000, against a market average of $85,000.

The final group compa ratio would come to approximately 101% from the formula ((445,000 / 440,000) x 100).

You can use group compa ratios to evaluate potential issues with your pay policies and practices, and to check whether you’re generally paying alongside market averages.

Additionally, lower group compa ratios can signal that you have many new employees in a particular group, which may alert you to high turnover rates or higher rates of internal mobility. Higher group compa ratios may indicate a shift in market trends toward higher pay rates.

The limits of compa ratios

With the market averages regularly changing and the complex alchemy of individual skills and experience, it’s fair to say that compa ratios aren’t an exact science.

They also don't take in other elements of compensation packages beyond an employee’s salary, such as benefits and incentive programs. The wider compensation strategy, and any additional benefits that come with it, can make a huge difference to employee retention and performance rates in a company.

However, compa ratios can help employers understand how their salary range compares, both internally and in the wider market. It can also make assessing pay ranges and salaries in a company a little easier too.

Our benchmarking tool helps you review salaries with confidence

Get the data-driven insights you need to optimise your compensation strategy and stay competitive with the SmartMatch salary benchmarking tool. It offers real-time wage insights across industries and locations, driven by over 2 million data points, and is available online without the need for logins and subscriptions.

Ready to dive into the data? Try the salary benchmarking tool today.