From: http://www.bizjournals.com/

Many employers tout a system of salary increases based on merit or employee performance. The intent is to reward employees for a job well done, while keeping salaries competitive within the organization and the marketplace.

But that system might have weaknesses.

If salary increases are across-the-board percentage increases for all employees, such a system might unintentionally obscure pay equity or fail to reward high-performing employees.

Compa-ratio may be one way to ensure competitive and equal pay for all employees.

What is a compa-ratio?

Compa-ratio — also known as comparison or compensation ratios — is calculated by dividing the actual salary paid to an employee by the midpoint of the salary range for that position. The resulting percentage measures how an individual’s rate of pay compares to the midpoint of the salary range.

Employers should strive to set the midpoint of the salary range at a competitive market rate for the position.

The range of an employee’s compa-ratio should fall between 80 and 120 percent — equal to the lowest and highest salaries within the range, respectively. For salary management purposes, many employers divide the compa-ratio range into five smaller segments, with 100 percent reflecting an employee who meets expectations, as follows:

• 80 to 87 percent — new or poorly performing employees
• 88 to 95 percent — employees gaining experience but not fully competent in the job
• 96 to 103 percent — employees meeting expectations and fully competent in the job
• 104 to 111 percent — employees performing higher than expectations
• 112 to 120 percent — employees consistently performing higher than expectations and outperforming coworkers

For example, if the salary range for a particular job is $30,000 to $42,000, and an employee is earning $34,500, the employee’s compa-ratio would be 95.8 percent (calculated by dividing $34,500 by $36,000, the midpoint of the range).

Using this metric, if the employee has been performing the job for two or three years and has the knowledge and experience to be considered fully competent in the job, then he is paid appropriately. However, if he is a high-performing employee who has been at the job for 10 years, he is probably underpaid.

Application on a broader scale

Compa-ratio can be used as a metric for more than just individuals. Using it to track company-wide metrics can be especially helpful. It might even expose critical flaws in a company’s current pay structure. Consider the following questions:

Performance rating

What is the average compa-ratio for employees who meetperformance expectations, as compared to those who areexceeding expectations? Are high-performing employees truly being rewarded?

Department comparison

How does the compa-ratio for the marketing department compare to the finance department or the engineering department? Are some professions being paid a higher salary because the market demands it, or because of an oversight?

Gender or race comparison

Are pay practices discriminatory? How does the compa-ratio compare between male and female employees, or between members of different ethnic groups? Is there an unintended salary disparity between different classes of employees?

Monitoring this metric over time can provide valuable information for both individual employees and company-wide statistics. Using the information correctly can help establish a pay structure that is performance-based and equitable across the organization.