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Private12036

   
What is a good Compa-Ratio?  
Posted: 06/26/2009 01:02pm   1701 Views
   (1 rating)

I am looking for a resource that will help us compare our range structure and compa-ratios to others.  For example, where do other companies or industries typically land?  Is it different based on organizational level?  Any suggestions for resources?


Private10790

   
What is a good Compa-Ratio?  
Posted: 06/26/2009 01:22pm   Revised: 06/27/2009 08:17am  
   (6 ratings)

That's like asking the right employee-boss height ratio.  It'll be different between companies.  And NBA teams will stand out, in more ways than one.

Compa-Ratio is a relative measure of your current ability to reach your policy structure line.  There are too many organizationally-unique variables involved for any one answer to be "right" or normative. 

  • grade width
  • job progression protocols
  • population maturity
  • market ratio policy
  • accuracy of your grade assignments
  • precision of your grade midpoints
  • performance of your employees
  • timing and frequency of increases
  • desired competitive posture
  • the statistical distribution of individual C/Rs

... and more.  Long story short, if there are surveys of that, they will be of limited relevance since they will always measure someone else's internal equity scheme and pay progression history against someone else's competitive market classification system.  Basically, if you are way under 90%, you are non-competitive under your own terms and if you are far over 110% you are paying more than you think you should pay for typical performers.

If you can't find the March 1980 article, "The Problem with Salary Ranges and a Realistic Solution", which focuses on the underpinnings of such range penetration metrics, let me know and I'll send you a scanned version, since it predates electronic filings.  It was in The Personnel Journal, which is now WorkForce Managzine.


#1

What is a good Compa-Ratio?  
Posted: 06/26/2009 01:42pm  
   (1 rating)

Are you referring to the market compa-ratio? Which is the ratio of internal pay to competitive pay for a company, group or individual, calculated by dividing the internal weighted average pay by the related market weighted average pay.

Depends on how you want to position yourself compared to the market--even, behind or ahead.


Private10790

   
What is a good Compa-Ratio?  
Posted: 06/27/2009 08:15am   Revised: 06/27/2009 08:22am  
   (3 ratings)

Compa-Ratio:  The ratio of an employee's actual salary (the numerator) to the midpoint of the applicable (the denominator) salary range. To calculate an individual's compa-ratio, divide the actual salary by the midpoint of the assigned salary range.

Market Index:  An index that is used to calculate an individual or groups market pay by dividing the current pay of an individual by the market pay.

Market Ratio:  An index that is used to calculate salary policy or midpoint accuracy by dividing the salary range midpoint by the relevant market pay target figure.

 


Private10767

   
What is a good Compa-Ratio?  
Posted: 06/27/2009 08:53pm  
   (4 ratings)

Some surveys will share the market data for the salary ranges.  As with anything, they are a data point along with any other compensation data. 

In general, flags are up for me if someone is below 80% compa-ratio or above 120% compa-ratio.  Flags start to go up between 80 - 90% and 110 - 120%; I look at the performance history, work experience, time in position, etc. to see if any or all of the above will provide the context for why someone is in that particular range of compa-ratio.  Sometimes it is perfectly understandable; other times I know there is significant compression, disparity or possibly misclassification of a person's role - just to name a few.

If you have a market-based structure and your position midpoints are targeted toward the market data that reflects your compensation philosophy, then - as Jim said very well - attempting to compare yourself to other companies doesn't make sense.  You've already done that with your midpoints.  Your compensation philosophy then drives the size of the range, number of grades, midpoint-to-midpoint spread, etc.  Then you can watch your own compa-ratios for areas of concern.


Private10905

   
What is a good Compa-Ratio?  
Posted: 06/29/2009 10:31am  
   (3 ratings)

I advise clients to pay particular attention to the compa ratios that fall below 0.80.  It is important to note that compa-ratios are only as good as the midpoints of the ranges so ensure that you are reviewing the ranges on a periodic basis.


Private10796

   
What is a good Compa-Ratio?  
Posted: 06/29/2009 12:22pm   Revised: 06/29/2009 12:23pm  
   (3 ratings)

I was once given this general rule of thumb (which assumes slicing the pay range into thirds) about compa ratios, as it relates to employees in general 

<90% - should be generally comprised of those who are relatively new to the job (learning) or poor performers

90 - 110% - should generally be comprised of those who have mastered the job and perform well

>110% - should generally be comprised of those who are high performers (though if the organization rewards tenure, could also include tenured staff)

This isn't intended to be hard and fast, or perfect and all encompassing; just general guidance


Private23514

   
What is a good Compa-Ratio?  
Posted: 06/30/2009 12:57pm   Revised: 06/30/2009 12:58pm  
   (1 rating)

Generally your midpoint of your salary range should be where you want to target pay in relation to the market (25th, 50th, 75th percentiles).  So a low compa ratio means you are low compared to target pay/market.  Generally a person at the mid point represents an employee who fully meets all of the requirements of the position and is fully functional in the role.  A new employee or newly transferred employee generally take three to five years to reach this level.  What I have typically done is work with a range of 80% to 120% compa ratio.  80% of midpoint allows for an employee through merit and/or adjustments to reach the midpoint within 3 to 5 years.  Paying at 120% means that you are probably starting to reach a salary which is more in line with the next grade level and therefore should be capped.


Private10790

   
What is a good Compa-Ratio?  
Posted: 06/30/2009 01:27pm  
   (3 ratings)

How can you move an employee from 80% C/R to 100% in 3 years?  That's almost 7% per year net salary growth each year to move from junior marginal entry rate to experienced journeyman/woman rate.  If the market moves as little as 2% per year, you will require a 9% gross increase each year to keep them on track (after market movement) to close the gap to what "the standard going rate is" within a 3 year period.  We'll pay you fairly in four years is not much of a recruiting pitch or retention device. 

For that simple reason alone, I cringe when I see hiring rates below the 90% compa-ratio level even for marginally qualified raw entry candidates.  Seems like it's just asking for trouble later on down the line.  Both internal equity and external competitiveness will become issues when your own system tells your people they will be paid less than the standard market rate for 3 to 5 years or more.  Maybe not so much of a morale problem today, because now they'll just jump ship to that other employer willing to pay them "the standard rate" today instead of a few years from now.  Or am I just being a nudge?


Private12009

   
What is a good Compa-Ratio?  
Posted: 07/01/2009 11:35am   Revised: 07/01/2009 12:12pm  
   (3 ratings)

Jim,

 I think you are right on target! My experience with salary ranges having 50% spreads is that employees with average performance levels, who are started at minimum (an 80% compa-ratio) take 14 years or more years to reach midpoint. With the smaller merit budgets and structure moves, most of the average employee's pay increase is taken up just keeping up with the structure movement. When designing the pay range the goal is to structure the range spread to cover both the market 25th and 75th pay percentiles. That does not mean those pay percentiles are actually located at the minimum and maximum or the pay range. Assuming the midpoint was at or around the market median, the 25th percentile for many jobs, such as engineers, are often around a compa-ratio of 90%. I found that most of our exempt competitive starting salaries were at compa-ratios of 90% or higher in order to start at or above the job's market 25th pay percentile. Depending on how far above the market 's projected merit increase budget the company's merit budget was actually set, the top performers would perhaps be the only employees able to reach midpoint in five years.

In answering what I think might be the original question, my rule of thumb was that as long as my company's overall compa-ratio (Sum of the payroll / sum of the all employee midpoints) was somewhere around  0.97 to 1.03, then I felt that my company was in a relatively good competitive pay position. This is assuming I didn't have a new company full of mostly new employees or a large number of recently promoted employees not fully experienced in their jobs.

 


Private10775

   
What is a good Compa-Ratio?  
Posted: 07/02/2009 05:40am   Revised: 07/02/2009 05:44am  
   (2 ratings)

Seems like a lot of the discussions on this string apply to salary structures with a traditional grade-to-grade progression and range width.

But organizations that are experimenting/adopting broad bands to cover a collapsing of traditional grades will find a whole new set of compa-ratio patterns. 

For example I know of one agency that uses a broadband to cover the whole spectrum of attorneys from entry-level to senior-level professional.  A single compa-ratio for that broad band becomes almost meaningless.

Another agency using broadbands established them by collapsing a varying number of traditional grades.  Some were a collapsing of 2 grades, some a collapsing of 4 grades.  So the compa-ratio for these different bands come from a different dynamic.

So I would suggest that anyone doing compensation research and development using compa-ratios first make sure of the nature of the structure around the compa-ratio.  


Private12009

   
What is a good Compa-Ratio?  
Posted: 07/02/2009 07:27am   Revised: 07/02/2009 07:29am  
   (1 rating)

Paul,

I agree that compa-ratios are typically used with the more traditional pay structures. I also agree that the compa-ratio statistic does not mean much of anything when applied against an entire broadband structure containing multiple job families. However, almost everyone I knew who adopted braodbands also (behind closed doors) applied "shadowbands" within their structure to help ensure some reasonable degree of individual job pay alignment with the market. The compa-ratio statistic could be applied to those "shadowbands" in that regard.


#1

What is a good Compa-Ratio?  
Posted: 07/02/2009 08:55am  
   (2 ratings)

We also used the equivalent of compa-ratios in our broadband system, by giving each position a market reference rate to judge it against.


Private15518

   
What is a good Compa-Ratio?  
Posted: 07/02/2009 11:23am  
  

Typically you may want to see your employees between 75% - 125%. Depending on your company though, the compa-ratios could average around 86% - 90%.


Private10775

   
What is a good Compa-Ratio?  
Posted: 07/02/2009 12:22pm  
  

Cathy,

I'd be interested in hearing why you gave the answers you gave. 

Paul


Private13785

   
What is a good Compa-Ratio?  
Posted: 07/07/2009 01:11pm  
   (2 ratings)

Comparatio is supposed to communicate how salaries (individual or collective) compare to the market.  A "good comparatio" should be an accurate one.  Ideally, we want our comparatios to reflect that we are competing well, meaning we're spending our compensation dollars well.

I've never subscribed to broadbanding.  I believe one of our primary responsibilties to our organizations is to ensure market competitiveness, how ever we choose to define it.  That translates to maintaining a very good understanding of market pay practices and translating that back to the organization in a way that gives them confidence that compensation dollars are being well spent.  That has led me to a more precise market pricing approach and away from broadbanding which tends to obfuscate market competitiveness.  The creation of shadow bands as one responder disclosed bears testimony to the need/desire for some tracking relative to market.

I'm arguing more recently that we need to abandon grading structures as an obsolete practice that was, in its time a creative solution to help managers administer pay across large and diverse organizations.  I'll bet many thinking compensation practitioners have had at least fleeting thoughts of the inherent ineffectiveness of grading strustures that put jobs into the same grade that may actually differ in market pricing by as much as 20%-25%.  It's a feet in the oven, head in the freezer result that our comparatios tell us "feels just right" but is clearly nnot fully competitive or efficient for the company.

Today, we have the system processing capabilites to assign market pricing to every position with appropriate ranges of pay to recognize experience, performance, etc.  That range can be narrower than our typical ranges due to its greater market precision.  This translates to greater precision and efficiency in pay delivery and far more effective discussions with employees who are now doing their own salary studies online.

Resolving the issues pertaining to all the other things that we've attached to grades, incentive targets, office size, etc. can be more effectively managed when artificial grade designation are removed and are replaced by participation bands or some othre grouping definitions.

I'd enjoy reading others' comments on this approach.


Private10790

   
What is a good Compa-Ratio?  
Posted: 07/07/2009 01:35pm  
  

No argument from me, David. 

Back in 1970, oversaw a global compensation system for over 50,000 emps with no grades, just "job value" rounded to the nearest $100, as you outlined.  As the relevant local/industry/sized competitive market rates changed, so did each job value, accordingly.  None of this "whatever they get, I get, as long as it's more" attitude about prior grade-mates... each position moved as its market target moved. 

About ten years later, designed and installed a national pay scheme based on minimum entry replacement cost.  The customized job evaluation plan included a "replacement time" factor that increased job evaluation points (translating to current dollars) for positions in shorter supply requiring longer and more extensive searches.  Except for using entry rate instead of median market rate as the comparison amount, it otherwise following the same logic as above.  Nicest part was that everyone earned over 100% Compa-Ratio, because if anyone fell below 100%, they were doomed to be leapfrogged by any most marginally competent new hire.  Really easy to understand, apply and administer, as well as more "popular" for open disclosure than systems that showed folks literally underpaid (i.e., <90% C/R).

Grades are subjectively constructed (don't get me started on the forced symmetry) status symbols and frequently-arbitrary buckets used for peer internal equity sops and over-market slottings, IMHO.   But others love them for their simplistic "rules".


#2

What is a good Compa-Ratio?  
Posted: 08/24/2010 08:31pm  
  

Hi James,

I'm interested in reading the March 1980 article you referred to in your post; it would be great if you could send me a scanned version.

Many thanks,

Sharon


Private10790

   
What is a good Compa-Ratio?  
Posted: 08/24/2010 09:24pm  
  

You will have to send me a non-Community email address, because the OC email protocol doesn't support attachments.  My email is ej.brennan@erieri.com.


Private10790

   
What is a good Compa-Ratio?  
Posted: 06/19/2014 11:54am  
  

Since this string ended, an updated version of the 1980 Personnel Journal article on "the problem with salary ranges and a realistic solution" was published here http://www.compensationcafe.com/2013/01/solving-the-pay-progression-dilemma.html where everyone can access it.  Compa-ratios and their rate of closure over time are at the heart of pay progression practices. 


 
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