Reference: I was an auditor at one point. The below is my personal assessment of Compa-ratio "for the 80%". You will likely see and hear different information than the below at some point, because Compa-ratio is used and implemented differently based on the needs or assumptions of each organization.
If you're on the lower level of salary you may never have heard of this tool. But it's almost a sure bet that you're subject to it. In order for you to have any leverage as you move to different jobs, it's critical you at least understand what this is and what effect it has on you.
In simple terms: Compa-ratio is a ratio (from 0.0 to 1.0) of pay in a range for a given position, based on the market value of that position as determined by the company.
When I say "market value", it's literally like a store. What's the most common "price" you'd expect to pay if you had to replace that person? Much of this comes from the public sector, who is required to publish their salaries. Some of it is assumptive. Some of it is a "nod-nod-wink-wink" between companies (read up on the Apple/Google salary collusion: https://www.latimes.com/business/technology/la-fi-tn-tech-jobs-settlement-20150903-story.html). Some of it is based on cost-of-living, which is state by state.
This "price" will change by state, because of course, it's easier to find certain types of jobs than others based on the state, because many states have concentrations of a given type (Detroit was heavily concentrated with auto workers, for example, but Seattle is/was not). In situations where a position is saturated (i.e. fast food workers) and there's no shortage, the price is obviously lower. This is why for certain jobs it actually makes better sense to consider relocating to a different state where the demand is high but the talent pool is low.
In my current field, this is the case; I can easily find work in my field paying what I want in states like North Dakota, Idaho, Nevada, etc., but nearly impossible in states like Pennsylvania, Florida and Texas. It's not that the jobs aren't there, they just don't pay what they should, due to saturation of the talent pool. In California, I once had a company offer 2.5x what I would normally make (basically, more than you'd pay some CEOs!), if I was willing to relocate vs. working remote. I refused, because I hate California and their terrible tax system. But I digress.
So let's use a real-world example. And I'm going to focus on annual (i.e. not hourly) pay, as it's easier to understand the numbers, but it applies regardless. Say you're fresh out of college, no work history, but you got your bachelor's and you're ready to work in a state where minimum wage is about $9/hour. You find a cashier job at the local department store and you apply. They offer you $23k/year (just over $11/hour). Freeze that moment.
What they offered you is not the highest they could offer you. In actuality, it's closer to the lowest they can justify paying you, based on what you bring to the table. If someone else who had experience working at department stores applied, they'd likely get a higher offer. If someone who had no degree and no experience applied, they'd likely get lower.
Why?
The intent of Compa-ratio, at least in some companies, is to try to use data to accomplish four main objectives.
- Determine the amount of money that is most likely to keep a person from leaving, assuming a given role. This is the higher end of the ratio.
- Determine the minimum amount of money that they're willing to pay for a given role. This is the lower end of the ratio.
- Determine a fair rate from which to start and be able to adjust upward or downward, based on a person's fit for the role. This is the median of the ratio.
- Determine raise potential, if any, based on where the person is at any time in the range and the target for 100%/1.0 of Compa-ratio.
So in the example I gave, assuming the fair market value for that exact role in the state is $22k/year, the actual pay range for that position might be something like $19k - $27k. Everyone with the same role then has a different salary within this range. SO if you accepted $23k/year, you'd be at a .5 Compa-ratio - the middle rate between the two.
In the company's mind, this opens you up to multiple (usually small) raises until you got to the 27k, which means less of a glass ceiling than if they offered you, say, $25k. To you, it feels low, and it should - because it's designed to be low to begin with, but provide raise potential over time as you prove you're worth the money.
Now, if you're in the middle of a Compa-ratio, you might get raises of 5% or so for a few years before it starts to go down, because you've got room to grow. If you're at the upper end of the Compa-ratio, you might get raises of 2% or so, because you're just too close to the max to pay more. Lower end, you might get "huge" raises. The company's goal is to keep you away from the 1.0 Compa-ratio, because they know that once you hit that, they no longer can justify paying you more, and you have a risk of leaving, unless your role is re-priced. TO avoid this, smart companies will usually re-assess the ranges every year to make sure they're not underpricing a given role and keep your momentum towards 1.0 without actually letting you reach it.
How does minimum wage play into this? Sort of like musical chairs, actually. A lower minimum wage results in a lower base salary for ranges, which (in theory) results in businesses being able to create more ranges within a set of lower-skilled labor roles. When the minimum wage goes up, these ranges usually aren't bumped up, they're eliminated completely along with the roles where people were paid at the lower end of the spectrum. Any position that's currently paying less than $30k, should be considered at risk to get cut at some point if more states start adopting $15/hour minimum wages or the Feds do.
Think math: if I have 50 positions with pay ranges of $20k - $40k with 40 of those people making at least $30k, and minimum wage goes from $9/hour to $15/hour, not only do you need to get everyone over the $31-$32k/year threshold so you meet the minimum, you also have to bump everyone else due to the median having changed and the potential to get too close to the highest part of the range (which creates a risk of not being able to give any more raises, thus increasing the risk they leave). So the cost isn't just getting those underpaid good, but also increasing everyone so it's fair, including part-time workers.
It can add up quick - and it's mostly because of how Compa-ratio works. It was never built to handle significant increases in minimum wage in a short time, but rather a graduated, steady increase that's reassessed annually. The businesses' default response is to increase the price of their product (assuming they're a for-profit) and/or cut lower level, "non-essential" roles.
You've likely heard people tell you to negotiate your salary. If you're in position to do so, then I agree. The hard part is to make sure you have enough leverage to negotiate when you're up against Compa-ratio. Fresh out of college, you probably don't unless it's a position in such demand that the company will flex a bit - and they won't tell you that straightaway. You'd just have to know based on the industry or learning track that there aren't many other people available that can do what you know how to do.
Ultimately though, you may need to settle for a middle or lower Compa-ratio without realizing you're at that point. Don't be afraid to ask at the point of the interview with HR if they use Compa-ratio and where the offer sits in the range. If you consider it low, ask for more, but be reasonable based on your experience. Know also that HR usually has a bit of pull to approve an increase to an offer by a small percent - usually up to 5% or so of the original offer, as long as it's still within the Compa-ratio range. So in the example above, you might be able to get them to go up to $24k without too much heartburn.
Long term - and this isn't easy - you have to train yourself to settle for less than you think you should be paid until your worth is increased, so you can get more leverage to negotiate for more. At some point, with enough experience in a strong field, you'll be able to literally ask for a specific salary and know you'll get it. It may put you super high on Compa-ratio and limit raise potential, but if you use that as a stepping stone for promotions, you may end up in a higher range that puts raise potential back on the table. Or, be willing to potentially uproot and move to another state where they specifically need what you have to offer, and are willing to pay better for it.
In closing, my observation is that Compa-ratios miss something huge: value. What's the value of this person to my organization and how can I maximize that value? Not value as compared to fair market value. Value based on the individual's results. In a value-based system, the range wouldn't be directly tied to any one role, only the starting pay. The maximum potential pay would then be a median of the organizational pay; which means that as people deliver value to the organization, they earn raises. As they earn raises, the median increases. As the median increases, the maximum potential increases. The percentage of raise is then adjusted based on the value the individual brought, which is directly tied to results delivered as assessed - thus encouraging people to show up every day and work as hard as they can. But that's just me.
Hopefully this is of some help.
Submitted January 01, 2019 at 06:38PM by mrstackz http://bit.ly/2CKaGNO
