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How to Calculate a Salary Compa-ratio

How to Calculate a Salary Compa-ratio
The salary compa-ratio is used to compare one's current salary to the one paid by other companies for the same designation. Workspirited will tell you how to calculate a salary compa-ratio.
Workspirited Staff
Keep In Mind
A slightly higher or lower compa-ratio is an exemption if the employee in question is a brilliant performer with good experience or a fresher with no experience, respectively.

In any company/firm/organization, every position has a designated salary range. This salary range includes a minimum point, a midpoint, and a maximum point. Compa-ratio stands for comparative ratio. Salary compa-ratio is a formula that helps employees determine where they stand in the industry, compensation-wise. A 100% comp-ratio indicates that the employee is being paid exactly according to industry standards, not a penny more, not a penny less.
A value more than this indicates that the employee is being paid more than what he deserves, while a lesser value indicates that he is being paid lesser that the standard amount. In the paragraphs to follow, you will learn all about salary compa-ratio and the steps to calculate the same.
Formula

The formula for compa-ratio is as follows:

Salary Compa-ratio = (Actual Salary / Salary Midpoint) * 100
Steps to Calculate the Salary Compa-ratio

Step I
  • Begin by obtaining the salary details - all of it.
  • You must be equipped with the compensation data of your business, i.e., the salary ranges and information to determine the minimum, midpoint, and maximum point of every designation.
Step II
  • Calculate the salary midpoint range.
  • For this, you need to identify the salary ranges for every position and establish the midpoint.
Step III
  • Divide the actual salary by the midpoint.
  • Multiply this value with 100, because the compa-ratio is generally calculated in percentages.

Once you find the ratio, you can determine whether you are a highly paid employee or you deserve to be paid better.
Example

Some compa-ratio examples are given below.
Example I
  • Suppose your actual salary is USD 40,000 per year.
  • To begin with, find out the salary ranges that are paid for your position in other companies. You can use the BLS to obtain information as well.
  • Once that is done, find out the midpoint range.
  • This can be obtained by first determining the maximum and minimum wages for that particular position.
  • In this case, let us assume that the starting salary for this post is USD 30,000 and the maximum one can get paid is USD 50,000.
  • Now, subtract the minimum limit from the maximum limit and divide the result by 2.
  • This amounts to: 50,000 - 30,000, which gives 20,000.
  • Dividing the result by 2 gives you: 20,000/2 = 10,000.
  • This value should be subtracted from the maximum value or added to the minimum value to find the midpoint range.
  • In this case, 50,000 - 10,000 or 10,000 + 30,000 = 40,000. This is the midpoint range.
  • Now, consider your actual salary. It is USD 40,000 as per the assumption.
  • Divide the same by the midpoint and multiply by 100.
  • Thus, 40,000/40,000 * 100, which is nothing but 100%.
  • Thus, in this scenario, your compa-ratio is 100%. This indicates that you are being paid exactly according to the standard industry rate.
Example II
  • Now, suppose your salary is USD 37,000.
  • Let the minimum and maximum values of the standard salary for this position be the same as above, i.e., 30,000 and 50,000.
  • Now, the midpoint will be: 50,000 - 30,000 = 20,000. Dividing by 2, we get 10,000.
  • Subtracting the same from 50,000, we get 40,000 as the midpoint again.
  • Now, calculate the compa-ratio: 37,000/40,000 = 0.925. Multiplying the same by 100 gives us 92.5%. Thus, you are being paid less than what you deserve for you designation.
Example III
  • Again, consider the same figures as above, changing your actual salary to USD 44,000 instead.
  • From the above calculations, it is clear that the midpoint range is 40,000, yet again.
  • Calculate the ratio: 44,000/40,000 = 1.1. Multiplying the same by 100 gives you 110%.
  • The compa-ratio is higher than the standard midpoint range, thus, you are being paid 10% more than the standard compensation for your designation.

Some Vital Points to Remember

  • An accurate compa-ratio indicates that you are being paid appropriately, with no unfair means whatsoever.
  • A lower compa-ratio indicates that you are being paid less than the standard amount, which means that the company risks losing an employee, since you might very well quit and search another employer who pays you what you deserve.
  • A higher compa-ratio indicates that the employee is being paid more than required, technically.
  • However, there are other points to be considered in this case, like tenure, work quality, etc.
  • If, however, two employees with the same experience, at the same designation have lower and higher compa-ratios respectively, you could risk losing a good employee because of unequal pay.
  • Many organizations and industries use the compa-ratio matrix to simplify the remuneration of several employees. This structure can be created using Microsoft Excel.
  • Salary ranges and compa-ratios can be calculated faster by adopting the quartile method, i.e., using grades for every designation, each of them with a minimum point, maximum point, and a midpoint.
  • If a lot of inequality is found with regard to the computation of compa-ratios, it might cause unnecessary discontent among employees.
  • For instance, a very senior employee, who has been in the company from the first quartile to the last will expect to have either an accurate or a higher compa-ratio.
  • If not, the fact may still not cause a problem, unless a younger employee climbs up the corporate ladder faster and is receiving a higher pay.
  • This may rightfully irritate the senior employee, considering that he has given his valuable years to the company and is not being treated the way he feels he deserves to be treated.
  • This treatment may be justified only if the other employee truly has exceptional talent, has come up with brilliant, innovative ideas, etc.
  • As a matter of fact, every employee should have an exact compa-ratio (unless he is sloppy and irresponsible, and hence, is being paid less).
  • If not, it's time to find a job where you may be paid better, according to your designation.
  • There are a few reasons why senior employees must have an accurate compa-ratio.
  • Point one, it would be difficult to find a job at that age, and also to learn new skills all over again.
  • Point two, they have given their precious years and contribution to the job, they have established a comfort zone that is difficult to get out of.
  • And, the principal point, even if he quits and joins another company, he is going to make the same, probably lesser.
  • Therefore, to retain good employees, it may be better to pay them according to industry standards.

Calculating the salary compa-ratio is vital in order to understand your position in the industry. Frankly, neither a high nor a low ratio is good for the employee. Sometimes, if the employee is highly skilled and indispensable to the company, it is understandable to see why he has a high compa-ratio. The same should not hold true for employees with a lower ratio, every employee has the right to receive what is due to him. The salary should be decided according to the standard industry rules as well as influencing factors, like performance, behavior, target completion, etc.