Are you using comparatios without thinking ?

Are you using comparatios without thinking

In the compensation world, comparatio is defined as an employee’s base pay divided by the midpoint of the salary range linked to the employee’s job grade. Comparatios can be expressed as a percentage (110%) or a number (0.9).

Uses of comparatios

We use them mostly at the time of salary reviews, in companies that use merit matrices that link comparatio and individual performance rating in order to define the “acceptable” salary increase for each employee.

They are also useful in organisations where managers are given a budget to manage salary increases, as they allow for a simple comparison across employees in different job grades. For example, a team leader may be the highest earning in absolute dollar, dirham or euro value, but actually be comparatively less well paid than some of his direct reports. Using the comparatio can help guide the manager’s decision on where to focus some of his discretionary spending.

Similarly, a manager with employees in the same grade but in different countries can use their comparatios for getting an understanding of how well each employee is paid in his/her respective country – without having to undertake a PhD in cost of living and tax differentials analysis. This will also be useful when deciding how to allocate the salary review budget.

A recent conversation with a Compensation colleague made me realise however, how easy it is for us to make assumptions and not check them to assess if our practices are still relevant or not.

When comparatio is not useful

His organisation uses a performance management system with guided distribution curves for performance ratings, calibration of ratings across Divisions, job grades determined through one of the predominant methodologies on the market, annual participation to multiple compensation surveys, and budgeting based on a mix of affordability and salary trends.

However, as I contended, in this company, comparatios are valid only for an internal use, but don’t really work as a proxy for external competitiveness. I suggested, in time, the use of another metric to replace comparatio (I’ll elaborate on this later on), or a deep redesign of the company’s compensation structures.

How come ?

The average comparatio there hovers around 70%. Yet the company is known for being one of the best payers not only in its industry, but in the whole country – and they never fail to attract talent, even when they offer the minimum of their salary range.

The midpoint of the salary range is supposed to represent market value, as defined by the company compensation philosophy : (“We pay at market median” or “We pay at the third quartile of the industry”), but in his organisation, midpoints are actually totally disconnected from any market value. And they have not been adjusted (down) for at least 4 years, probably more.

In that case, as I say, comparatios become only meaningful as an internal tool.

They can still be used for setting salary increases. But managers should not be led to believe that a low comparatio is “bad” in these circumstances.

Introducing market ratios

For that organisation, most employees end up in the lowest section of the merit matrix, as the majority are all aggregated towards the bottom of (market-irrelevant) salary scales. In effect, this kills most of the differentiation we are supposed to implement during salary reviews.

Using “market ratios” could be a better indicator of whether some job families need an adjustment or not. These “market ratios” are the comparison of the employee base pay to the market value for their job, as per survey results (based on the target position of the company at median, average or whatever percentile).

As his company participates in multiple surveys every year, they may even be able to tie each job to a survey result, and use the “market ratio” instead of the comparatio as one of the axes in the merit matrix.

Market ratio could obviously also be used in companies with broad banding, especially if there are no “pay reference zones” by job family within each band. Another type of company that may use them is start-ups, where pay is still fluid and salary scales are not needed yet.

A lesson about assumptions

Overall though, my point is : don’t forget to question why you use certain industry standards when you work on compensation matters. These prevailing approaches may or may not be fully relevant to your organisation. As I usually advocate, best fit is better than best practice. Design what works for your company, and feel free to ignore the latest fads if they don’t suit your organisation.

So, what about your organisation ? Do you use comparatios in your salary reviews ? Have you checked whether these comparatios make sense ? Please share your thoughts in the comments section !

 

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Comments

  1. Doaa Mahmoud says

    Hi Sandrine,

    I recently joined your blog, kindly I need your feedback about how to use salary surveys in salary bench marking & specifically of Hay

  2. If the salary grades are not closely aligned to the market, then I would agree that there is an opportunity to improve your employee’s relative stance to the market, through market-ratios (btw – we have the Market Ratio as a standard field in the Compensation Tool).

    The down-side that I see, however, is that using market ratios does require quite a bit of work, as all jobs would need to be market priced, and have agreement on the matches being used. Companies using a singular data source might see greater than expected fluctuation year-over-year (both up and down), which may have unexpected consequences for your employees.

  3. I use compa-ratios to determine where people are in relation to our midpoint and in relation to their skills and even more importantly, their performance. To gain a good perspective on where things stand as far as compensation goes, I always benchmark a few jobs to ensure our mid point is actually still “ market” ( or wherever we want to be in relation to market). I wouldn’t use compa-ratios if I don’t do periodic checks on grading structure. I would only use market ratios for start-ups or small firms.

    I do feel that comp-ratios can be misused however, especially when the goal becomes to keep people below a midpoint or within a percentile without regard to other factors ( competition, experience, and performance).

    • Yes you are right right Rania. Sometimes organisations try to keep salaries low in the hope of reducing their direct costs. Iwrote an article about how this is a false saving, which can help anyone facing this situation to argue with the CFO or GM and see that the whoe salary range is used (assuming the salary range is aligned with the target position to market). Here is the link : How low salary is not low cost (always)

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