1. The Math: How to Calculate It

The Compa Ratio formula compares an employee's salary to the midpoint of their pay range, calculated as (Employee's Salary / Salary Midpoint) x 100, resulting in a percentage that indicates how close their pay is to market value (100%). A ratio below 100% means they're paid below the midpoint, while above 100% means above the midpoint, helping assess pay equity and competitiveness. 

2. Interpreting the Results

A ratio of 100% means the employee is paid exactly at the midpoint. However, "100%" isn't always the goal for every employee. Most organizations use a spread of 80% to 120% to define a healthy range.

Ratio Range	Typical Interpretation	Action/Context
80% – 90%	Developing	Often seen in new hires, recent graduates, or those new to the role.
90% – 110%	Target Zone	The "sweet spot" for fully competent, consistent performers.
110% – 120%	Highly Experienced	Reserved for top performers, those with niche skills, or long tenure.
Above 120%5	Red Circle6	May indicate the employee has outgrown the role and is ready for promotion.7

3. Using Compa-Ratios for Strategic Decisions

A. Merit Increase Planning

Compa-ratios are the foundation of a Merit Matrix. To ensure pay equity, companies often give larger percentage raises to high performers with low compa-ratios to bring them closer to the midpoint, while giving smaller percentage raises to those already at the top of the band.

B. Identifying Pay Equity Gaps

By looking at Group Compa-Ratios (the average ratio for a whole department or demographic), you can spot systemic bias.10 For example, if the average compa-ratio for men in a department is 102% while women are at 94%, you have a data-backed reason to investigate and correct the disparity.

C. Budget Control

If your company’s Average Compa-Ratio is creeping toward 110%, your payroll costs may be becoming unsustainable. Conversely, if it’s at 85%, you are likely at high risk for "talent poaching" from competitors who pay closer to the 100% market rate.

4. When the Ratio Fails (Common Pitfalls)

• Outdated Midpoints: A 100% compa-ratio is meaningless if your market data is three years old. • Ignoring Performance: A low ratio isn't always a problem if the employee is underperforming. • Geographic Blindness: A 100% ratio in a low-cost area might be a 70% ratio in a tech hub like San Francisco.

Summary

The compa-ratio is more than just a number; it is a story about where an employee stands in their career journey and how well your organization is honoring its financial promises. Use it to remove emotion from salary negotiations and replace it with equity and evidence.

The Merit Matrix Template

Assumes a total merit budget of 3%__.

Performance Rating	Low Compa-Ratio (<90%)	Mid Compa-Ratio (90–110%)	High Compa-Ratio (>110%)
5 - Exceptional	6% – 8%	4% – 6%	3% – 4%
4 - Exceeds Expectations	4% – 6%	3% – 4%	2% – 3%
3 - Meets Expectations	3% – 4%	2% – 3%	1% – 2%
2 - Below Expectations	0% – 1%	0%	0%
1 - Unsatisfactory	0%	0%	0%