There is nothing more pressing for companies in today’s competitive marketplace than retaining and attracting talent. Business leaders can use government tools such as data provided by the Bureau of Labor Statistics, combined with a simple formula to develop a compensation strategy to elevate themselves within their industries to attract talent and reduce turnover.
Compa-ratio, or comparison ratio, is a metric that compensation professionals use to measure the salary an employee is paid against the salary range midpoint for their position or similar positions at other companies. A compa-ratio reveals how far an employee’s pay is from the market midpoint (think “fair-market rate”). If an employee has a compa-ratio of 100%, they would be considered right “at market.” But if the compa-ratio is in the 50th percentile, you would be more at risk of losing key players or not being competitive within your industry.
Compa-ratios help businesses decide if they are properly compensating their employees. When employee compensation is too low, a company risks losing high-quality, long-term employees and attracting low-quality job candidates. At the opposite end of the spectrum, if a company’s pay is too high, they could be potentially mismanaging resources and negatively affecting the bottom line.
First things first, though. In order to determine compa-ratios you must have pay grades or pay bands in place for all of your job descriptions and roles.
How to Design Your Compensation Strategy
Determining salary ranges plays a big part in compensation planning, and taking your time to get it right will pay off long-term. Properly defined pay ranges not only help ensure you’re paying employees fairly, but also help with budget forecasting. To get started, review all of your job descriptions, rank or classify them by the value and complexity in your company, and then research prevailing salaries for those roles on websites such as Glassdoor. You’ll need to determine the low end of the salary, the midpoint, and the top for each job. You can read a more in-depth article about establishing salary ranges here. Once you have salary bands in place, you can now establish your compa-ratios.
How Does a Compa-ratio Help Compensation Planning?
When it comes to salaries, most businesses try to start a new employee off at the bottom of a salary range or a pre-determined percent above it. Having a policy like this gives them a bit of wiggle room when it comes to pay increases as the employee gains experience and tenure.
Generally, it’s recommended that you keep salary rates at a range from 10-20% less than the midpoint to 10-20% above. You will likely find that a tenured top performer sits at a higher ratio, and in this battle for talent you also might hire more experienced candidates at a higher point on the scale.
How to Calculate Individual Compa-Ratios
Here is a very simple formula to determine a compa-ratio calculation:
Divide the employee’s salary by the market rate compensation midpoint (ex: employee salary ÷ pay-range midpoint).
How to Calculate a Group Compa-Ratio
To measure the difference among salaries for the whole company or for each department, you can use a group compa-ratio. The calculation to use here is Total Salaries ÷ Total of Job Midpoint Rates. This calculation can be useful in determining how the pay policy has been implemented across the company and highlight disparities across departments.
Differences could be due to the structure of your overall compensation strategy or the demographics of certain employees or job roles, such as:
- Location pay for different parts of the country
- Disparities in role responsibilities
- Job tenure
- Previous experience
Unusually high or low compa-ratios could be a result of pay policy problems or issues with the compensation structure, such as pay ranges that lag behind the market or a need to update jobs that have morphed over the years.
More importantly, a group compa-ratio can also highlight differences among employee groups for gender, ethnicity, age, and other instances where conscious or unconscious bias might be present.
It’s important to remember that compa-ratios only tell you there might be a problem; digging into the details will determine the cause.
Balancing Compa-Ratio with a Complete Benefits Package
In this newer work environment, many factors affect employees’ job satisfaction and attract new hires. Salary, of course, is one that should be measured to ensure a business can meets its strategic goals with proper staffing. Measuring the importance of flex-time, hybrid work, and a complete benefits package go hand-in-hand, while also considering compa-ratio metrics.
Finding an acceptable compa-ratio depends on a combination of the position, budget, and other employee benefits offered. A compa-ratio below 100% can be counterbalanced with benefits such as top-notch health insurance or equity options.
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One Minute Takeaway
- Companies can get up to $9,600 in Work Opportunity Tax Credits (WOTC) per employee
- WOTC was designed to help employees from certain groups move from economic dependency to self-support
- Credit amounts will be based on the number of hours an employee works