How to Calculate Compensation Ratio

If you own or manage a business or organization, labor cost is a major concern. However, managing a compensation program requires more than just knowing how much the payroll is. The compensation ratio, or compa ratio, is a metric that allows you to determine how the salaries of different employees compare. This makes the compa ratio a valuable tool for controlling labor costs and determining if the salaries you are paying are adequate to attract and retain qualified people.

The compa ratio compares a salary amount to other salaries in a given category by measuring the salary as a percentage of the midpoint of a salary range. Suppose your organization has established a salary range of $48,000 to $72,000 for a category of employees. The midpoint of this range is $60,000. An employee with a salary of $72,000 has a compensation ratio of 120 percent of the midpoint, while someone who is paid $48,000 has a compensation ratio of 80 percent. You can use the ratio to determine where a particular employee stands relative to others holding the same job. You can also use the compa ratio formula to compare different groups of workers or to compare your salaries to market rates.

Before you can calculate a compa ratio, you need to establish a salary or compensation range. Companies normally base compensation ranges on market rates. To create a salary range, first gather information on salaries for the occupation you are examining. Salary data is available from the U.S. Bureau of Labor Statistics and from industry, academic and commercial research organizations. You can then choose an appropriate salary range. For example, you might conclude that a salary range of $40,000 to $60,000 will meet your needs, or you could set a higher range to recruit and retain highly qualified people.

The compa ratio formula is the annual salary divided by the midpoint of the salary range. In general, an average employee will have a compa ratio of about 100 percent. An experienced worker with good performance ratings might have a ratio of 120 percent, while a new hire might be paid 80 percent of the midpoint amount. Suppose you have an employee who is a top performer and has been with your company for several years. The salary range is $48,000 to $72,000, with a midpoint of $60,000. If the employee is paid $66,000, dividing this amount by the $60,000 midpoint yields a ratio of 110 percent. This gives you useful information when it comes time to give raises. In this instance, although the employee is already making a salary that is more than the midpoint, you might want to consider her for a raise in view of her good work and tenure.

You can also calculate group compa ratios and use them to compare groups of workers or to see how your actual salaries stack up to market rates. To calculate a group compa ratio, add up the salaries of all of the employees in the group. Next, add up the midpoints of the salary ranges for each employee. Divide the total salary amount by the total of all the midpoints.