Salary compression and compa ratio
  • Blog post

Salary compression and compa ratio

Salary compression can be the cause of serious mistrust

Compa ratio (Comparison Ratio) is the equivalent of saying replacement cost. In other words, what are we paying you already, compared to the market? Now is the market on any given job as the first point of reference an internal one or an external one?

The internal market can be tricky.
Employees can become very discontented when they find that new hires are being paid more. This is known as salary compression. The reality is if you’re going to replace a manager of accounting, you don’t do it with an architect or vice versa. This becomes especially difficult with hard to fill jobs The first point of reference when you’re looking at compa ratio is the external market and secondly, it’s internally.

Salary grades are how we develop compa ratio. A salary range is simply a reflection of a market expressed in some graphical form here saying there’s a minimum you pay a given job, there’s a mid-point you pay for that job and there’s a maximum. And you also see there’s a first quartile and a third quartile, so you can see where an employee fits in relative to the average in the market.

That looks like what a salary range normally would be. It’s interesting because salary ranges can overlap. In other words, if that young accountant is moving up really fast and the older accountant has been there a long time, it’s possible for a short while that the older accountant could be paid less than the younger one and that would actually make sense. Most people opt out at some point. They don’t want to be a supervisor and they certainly don’t want to be a manager and they definitely don’t want to be an executive. But if you want to be all those things, the ladder keeps going up to wherever the top of your organization is.

Salary compression issues
This leads into a second problem of salary compression that occurs when two people of the same salary grade with only a few years difference can have a major pay disparity. The person being paid less will have major issues with the company. They will try and chase the dollars. However, your replacement costs if you do not make up this gap are higher than the pay rise required.

In these cases you’ve got to separate the whole conversation of performance from the conversation of pay. Separating performance will also help reduce issues around salary compression. If you can disconnect these things, you’re going to have a more interesting conversation on both ends — an interesting conversation about pay, and an interesting and longer conversation about career and potential and the things you can do to contribute more and take on more responsibility if you’re inclined in the company to grow yourself.

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