1. What is Compensation Ratio?

Compensation Ratio is a metric used in human resources to compare an employee's actual pay to the midpoint of their pay range. It helps organizations assess how employee compensation aligns with market rates and internal equity.

2. How Does the Calculator Work?

The calculator uses the compensation ratio formula:

Where:

• Employee Pay — The actual salary or wage of the employee ($)
• Midpoint — The middle point of the pay range for the position ($)

Explanation: The ratio indicates how close an employee's pay is to the market midpoint. A ratio of 1.0 means the employee is paid exactly at the midpoint.

3. Importance of Compensation Ratio

Details: Compensation ratio analysis helps organizations maintain competitive pay structures, identify pay compression issues, and ensure fair compensation practices across the organization.

4. Using the Calculator

Tips: Enter the employee's current pay and the midpoint of their pay range in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a ratio below 1.0 indicate?
A: A ratio below 1.0 indicates the employee is paid below the market midpoint, which may suggest the need for a salary adjustment.

Q2: What does a ratio above 1.0 indicate?
A: A ratio above 1.0 indicates the employee is paid above the market midpoint, which could be due to experience, performance, or other factors.

Q3: How often should compensation ratios be reviewed?
A: Compensation ratios should be reviewed annually during salary planning cycles or when significant market changes occur.

Q4: Are there industry standards for compensation ratios?
A: While ratios between 0.8-1.2 are generally acceptable, optimal ranges vary by industry, company size, and geographic location.

Q5: Can this calculator be used for hourly employees?
A: Yes, the calculator works for both salaried and hourly employees. Convert hourly rates to annual equivalents for consistent comparison.