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Understanding the compa-ratio
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Keeping compensation fair, competitive and aligned with performance is essential for Canadian business owners. That’s where the compa-ratio, also known as the “comp ratio,” “comparative ratio” or “compensation ratio” comes in. This metric allows employers to measure employee pay compared to established salary ranges. Understanding the comp-ratio can help you manage compensation budgets, support pay equity and prepare for performance reviews.
Table of Contents
- What is a compa-ratio?
- Compensation defined
- How to calculate the compa-ratio
- How to interpret the compa-ratio results
- Types of compa-ratios
- Practical use of the compa-ratio in compensation planning
- Common compa-ratio use in pay structure practices
- Compa-ratio use in merit increases
- Understanding the limits of the compa-ratio
- FAQs
What is a compa-ratio?
A compa-ratio is a compensation benchmark that compares an employee’s salary or hourly rate to the midpoint of the internal pay range or the target market for the position in the external market. Values are expressed as a percentage.
Compensation defined
Compensation encompasses all forms of pay provided to employees, including fixed pay (salary or hourly wage), variable pay (bonuses, equity and long-term incentives) and supplementary pay (overtime, premiums and allowances). Understanding appropriate compensation is vital for setting expectations and ensuring fairness. Role type, geographic location, industry benchmarks and internal budgets influence compensation ranges.
The compa-ratio measures base salary or hourly rate only. It does not consider additional elements in your total rewards package.
How to calculate the compa-ratio
The compa-ratio calculation is:
Compa-ratio = (employee salary/midpoint of salary range) x 100
Divide the employee’s annual salary by the median salary for similar positions and multiply the result by 100 to get the compa-ratio. You can use a compa-ratio calculator or a spreadsheet to do calculations on a larger scale.
For example, if an employee earns $55,000 and the midpoint for the salary range is $60,000, divide $55,000 by $60,000 and multiply the result by 100.
55,000/60,000 x 100 = 91.7% (compa-ratio)
This result tells you the employee is earning 91.7% of the market midpoint. Depending on your compensation philosophy, the figure may indicate that the salary is not aligned with the market or that the employee is new or developing in their role.
How to interpret compa-ratio results
Understanding what a compa-ratio means is critical. Follow this general guide:
- < 90%: Less than 90% indicates the employee may be new to the role, or their salary is not aligned with the market
- 90%-100%: Typically, between 90% and 100% is within a fair market range
- > 110%: Greater than 110% may signal exceptional performance, long tenure or difficult-to-fill positions
Interpretation can depend on the employee’s experience, job performance and company compensation strategy. A lower compa-ratio isn’t necessarily negative; it might indicate that a person is on a development path. Those who are new to their role and have less experience may have received compensation at the lower end of the spectrum to allow room for growth. Longer-tenured employees who consistently exceed performance expectations and remain in the same role, as well as those with rare skill sets, may earn salaries closer to the upper limit.
Types of compa-ratios
There are three common types of compa-ratios used by Canadian employers:
- Individual compa-ratio: This compares one employee’s pay to the midpoint of the company’s pay grades or the median salary for similar jobs in a specific market or industry. It’s commonly used during performance reviews to help managers and HR professionals differentiate rewards.
- Group compa-ratio: Average compa-ratio across a team, department or demographic. This type is helpful when planning budgets or evaluating the effectiveness of pay policies.
- Company-wide compa-ratio: Evaluates pay practices across the entire organization.
Practical use of the compa-ratio in compensation planning
Knowing how to use a compa-ratio helps you make data-informed decisions. For instance:
- Benchmarking employee pay before performance reviews
- Identifying salary compression issues
- Supporting pay transparency conversations
- Adjusting for inflation or cost-of-living differences
Compa-ratios can highlight trends in compensation fairness and market competitiveness.
Using the compa-ratio to identify pay gaps and inequities
Compa-ratios are particularly useful for uncovering inequities in your compensation structure. If certain groups consistently have lower compa-ratios, it may point to unconscious bias, lack of promotion opportunities or outdated salary ranges.
Monitoring this data can help you promote pay equity, close wage gaps and meet provincial pay transparency requirements.
Common compa-ratio use in pay structure practices
Throughout the employee life cycle, workers are expected to gain experience, acquire new skills and improve their job performance. Here’s how that generally translates to pay structures and compa-ratios:
- 80% to 90%: New team members in the early stages of their development or those who may need help with performance
- 90 to 110%: Experienced employees who consistently demonstrate strong performance
- 110% to 120%: Employees with rare skills or long tenure who consistently exceed performance expectations
Paying any employees outside of this structure, either below 80% or above 120%, may erode trust in the compensation strategy.
Compa-ratio use in merit increases
During annual salary reviews, compa-ratios can inform merit increases. For example, a person with a 110% ratio who needs help with performance may qualify later, while a person with an 85% ratio who consistently exceeds expectations might need a market correction.
Incorporating compa-ratio into merit planning can help ensure increases are equitable and justified.
Understanding the limits of the compa-ratio
While useful, compensation ratios don’t provide the full picture. They overlook total compensation (benefits, bonuses, vacation), role-specific adjustments or leadership influence, regional market rate variations, non-financial incentives, and culture fit. Combining compa-ratio data with performance metrics and market research is essential. Do not consider these sources in isolation.
Looking to learn more?
Explore how the right payroll and HR support can help simplify compensation planning as your business grows. Read our guide to evaluating new payroll and HR providers.
FAQs
Why is compa-ratio used?
Employers use the compa-ratio to ensure that employee pay aligns with market and industry standards. Doing so can help the business attract top talent, reduce turnover, control payroll costs, and comply with fair pay policies.
What does a compa-ratio of 90 mean?
Employees with a compa-ratio of 90 are paid 90% of the median salary for their specific roles. Since 100% is seen as the midpoint, these employees earn slightly below market value, depending on the organization’s pay policy. This ratio might suggest a newer employee, someone in development, or a potential pay gap that should be examined, especially if performance or tenure indicates a higher salary is appropriate.
What is the difference between compa-ratio and position in range?
While compa-ratio compares an employee’s salary to the midpoint of their salary range, the position in range refers to how far their salary is within the entire range, from minimum to maximum. Both offer different insights. Compa-ratio is best for equity and benchmarking, while position in range can help with pay progression tracking.
Where should my compa-ratio be?
Employers usually set their pay structures to range between 80% and 120% of their midpoint. If an employee’s base salary or hourly rate falls outside these limits, it can be seen as notably below or above market value. This might require a more thorough review of the company's pay policies or a reassessment of the role within the pay framework; however, even when a compa-ratio is between 80% and 120%, it does not automatically indicate that a pay equity problem does not exist. Employers need to regularly perform pay gap analyses to ensure compliance with equal pay laws and remain competitive in the market.
This article is intended to be used as a starting point in analyzing the compa-ratio and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
