When to use comparatio and market ratio

When to use comparatio and market ratio

One of my contacts commented to me recently :

“I am curious about something…. If compa-ratio defines the relationship between a person’s pay and his internal pay grade mid-point, should there not be a different name for the metric that defines the actual pay rate of the incumbent with the target market midpoint?”

You are right : comparatio (CR) is base / midpoint of salary range and it is an internal measure.

Market ratio (MR) is base / market value of that job (or that level of jobs in the same job family in the survey if you don’t have info on that specific role). The market value is defined by whichever percentile you have declared as relevant for that position (eg : median, 3rd quartile…)

Comparatio should be close to market ratio when the internal salary range midpoints are actually defined in alignment with the pay philosophy, ie the salary range midpoint is closely based on the target market value.

As an extension, comparatio is often used as a form of “proxy” for position-to-market, based on the assumption that the salary range is actually built on market data.

But as you know, this is not always the case !

I usually recommend to use CR as the basis for salary decisions, when the midpoints are aligned with target market pay, and also because we don’t always have data to calculate MR for all jobs.

I recommend to use MR when data is available and when we know that our salary ranges are disconnected from market values (for example they were not updated for many years, or they were created when the company was targeting to pay at median of market but now the company wants to pay at the 65th percentile…).

I did not invent the term Market Ratio, and I think the definition is quite widely accepted, just like the definition of comparatio. But market ratio and when to use it vs when to use comparatio is a concept that is a bit more advanced, so fewer people in the region are aware of the subtle differences between the two.

I hope this short explanation helps you understand these nuances. Which one do you use in your organisation ?

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Comments

  1. I have learned the concept of CR in my comp class. , but this is the first time to learn the concept of MR. Thanks for this explanation!

    However, I still got another question that has bothered me for a long time. When comp professionals analyze the market data, how do they decide which metric(s) to use, mean, quartiles, or weighted mean? When we did our school project, we have compared the differences among the three. For example, using “mean” sometimes will dilute the influence of the data of large companies. However, I am still not sure what factors should we consider to decide which metric to use after comparing the differences.

    • John Nichols says:

      Ellie

      Data providers will usually have their own preferred methodology but produce mean, median and quartiles for participants to chose the one which suits their own philosophy of where they want to be in the market.

      Median and mean both have their advocates. My base line is mean but will also add in median and quartiles when sample sizes permit – as per the US Anti Trust rules on minimum participation.

      Whether large companies’ data is diluted will depend on which figures you include in the analysis for example do you “average” that company’s data before including it in the survey analysis or do you add in each data point for each company in which case the companies with larger numbers of employees will have a bigger influence.

      Just some thoughts

  2. Two minor after thoughts, Sandrine:

    (1) Your contact mentioned in part “…a person’s……internal pay grade midpoint…”. Seems like small stuff to most, but it always gets my attention….and you ask why? Because it’s an indicator of your contact’s possible mindset or the mindset of his/her company that people have pay grades. Sorry to emphasize the obvious, but people are in jobs that have been assigned to pay grades based on internal equity and external competitiveness. I emphasize this ad nauseum because there is such a fixation in this region and in others by employees who want to to be moved to the next higher grade.

    (2) When the data array for a job is sufficient, I prefer to use the median since very often there are significant outliers on the high or low side that can artificially move the mean up or down when the bulk of the array is so different. Beyond this I will use weighted averages for larger populations of jobs, e.g. the number of employees in different jobs.

    • Hi John,
      Indeed your first comment is really important. People are not linked to pay grades, they are in jobs that are linked to pay levels determined by a mix of internal practice and market competitiveness. Thanks for highlighting this !
      Sandrine

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