JULIUS NYERERE SCHOOL OF SOCIAL SCIENCES

NAMES : BLESSING PHIRI

REG. NUMBER : M222846

PROGRAMME : MSc HUMAN RESOURCES

COURSE MODULE : ANALYTICS

COURSE CODE : HRMM524

LECTURER : DR MASHAVIRA

LEVEL : 1.2

QUESTION: ANALYSE THE COMPA- RATIO AND MARKET RATIO UNDER THE
FOLLOWING SUBHEADINGS:

A. HOW IT IS COMPUTED [ GIVE AN EXAMPLE]

B. ITS SIGNIFICANCE IN ORGANISATIONS

C. EXPLAIN ANY TWO COMPLEMENTARY METRICS THAT CAN BE USED

ALONGSIDE EACH OF THE TWO METRICS.
Pay and compensation metrics are essential for businesses, as these measurements allow them
to form compensation packages for their employees. When employers establish pay structures,
they consider various factors that can influence employee salary. Additionally, pay metrics can
help you understand how your salary compares to industry, demographic and expected pay
rates. Measuring pay metrics is essential to understanding how your salary compares to
industry averages, expected ranges and established compensation policies. When employers
measure pays metrics, they track important data that allows them to make decisions regarding
employee income ranges. Additionally, evaluating the income bracket that outlines suggested
rates for similar positions in the market can help you negotiate appropriate compensation
effectively.

Compensation is a systematic approach to providing monetary value to employees in exchange

for work performed (Patnaik and Padhi, 2012). Compa-ratio considers how much an employee
is making and where their compensation falls compared to the midpoint of a salary or, often,
the average market rate. Compa-ratio is calculated as the employee's current salary divided by
the current market rate as defined by the company's competitive pay policy. Compa-Ratios are
position specific. Each position has a salary range that includes a minimum, a midpoint, and a
maximum. These three values represent industry averages for the position. The compa-ratio is
calculated by dividing an employee's salary by the reference target salary. The target reference
salary could be an internal grade midpoint point salary or a target market position. When
comparing to the market, the comparison in calculating the compa-ratio should always be a
target point of interest, such as the market median. It could also be the grade midpoint when
you are comparing it to an internal pay structure midpoint. All these comparisons aim to assess
the relative standing of your salaries versus the reference point.

As explained above, the formula for the compa-ratio is as follows

1. Compa-ratio=Employee's salary/Target market position * 100

2. Compa-ratio – Employee's salary/grade midpoint * 100

Compa- ratio is used to assess the competitiveness of an employee’s pay. A compa ratio of 100
indicates you’re paying an employee their full market value. For example, in Zimbabwe, an
Engineer who is employed by ZESA is currently getting a salary of 3000usd. Research has
indicated the average salary of an Engineer in Zimbabwe to be 5000usd. Therefore, the
calculation will be as follows:
Compa-Ration = 3000/5000 * 100 =60

Compa-Ratio Analysis

>100 Salary is above market rate

<100 Salary is below market rate

100 Salary is at market Rate

Hence from the calculations above and based on the data provided, ZESA is paying an engineer
salary below market rate by 40%.

Any compensation plan should evaluate market data to determine the market rate for a
company’s target employees. Data points can come from internal market studies, and
information from recruiters and new hires. The market-ratio is the current pay divided by the
market equivalent. The market ratio metric shows a company how close you are paying to your
target policy. It compares the midpoint of internal salary range to the market pay rate.

Formula

Market Ratio= Average Pay rate/Market Rate at your target percentile.

A Compa-Ratio of 1.00 or 100% means that the employee is paid exactly what the industry
average pays and is at the midpoint for the salary range. A ratio of 0.75 means that the employee
is paid 25% below the industry average and is at the risk of seeking employment with
competitors at a higher pay that is perceived equitable. A ratio of 1.15 compa-ratio would mean
the employee is paid above the industry average.

An illustration below shows five employees with the same job titles. Suppose the company's
competitive pay policy is the median.

Market Compa-Ratio
Market Market 75th
Employee Salary 25th (Median-
Median Percentile
Percentile based)

Employee A $7,500 $6,500 $10,000 $14,590 75%

Employee B $9,900 $6,500 $10,000 $14,590 99%

Employee C $10,000 $6,500 $10,000 $14,590 100%

Employee D $10,100 $6,500 $10,000 $14,590 101%

Employee E $16,000 $6,500 $10,000 $14,590 160%

In the example above, employee A is earning below the target market as they are at 75% compa-
ratio and employee E has a compa-ratio of 160%, meaning that they are above the normal
compa-ratio range by 40%. The normal compa-ratio range is 80% to 120%. No employee
should be paid in this kind of compa-ratio range unless there are exceptional reasons for doing
so. Such reasons include the employee possessing rare skills that will cost the company money
should the employee leave. All the other employees in the example above are within the normal
compa-ratio range.

Another way to interpret the same results above is as follows; An employee earning a salary at
0.8 or 80% compa-ratio means that the employee is paid 20% below the market. A is at risk of
being lured by a better offer from other companies. A compa-ratio of 1.2 or 120% means that
the employee is paid a salary that is 20% greater than the market rate. Companies may need to
justify salaries above this level, as in the case of Employee E.

b. its significance in organisations

Determining the compa-ratio for all employees allows the organization to know whether it is
paying them competitive salaries. If the salaries are below market rate the organization risks
losing top performers to competitors. If the salaries are way above market rate, the profit or
bottom line for the organization will be negatively impacted. Employees earning lower salaries
may be at the risk of seeking employment with companies offering higher salaries, which may
be seen to be more equitable. Again, this compa-ratio targeting depends on the organisation's
overall compensation strategy. The compensation strategy can be driven by the supply and
demand of the critical skills. Those organisations that operate in very competitive markets
could target to pay their top performers at above 100% compa-ratio. Too often, there is no
acceptable blanket compa-ratio. Instead, compa-ratios can be varied depending on the scarcity
of the skills. For example, in Zimbabwe Engineers are scarce because of their demand outside
Zimbabwe therefore are a flight risk hence companies tend to pay them more. It should be
noted compa-ratios may be attributable to one or more of the following factors: differences in
aggregate performance levels or performance ratings; differences in average job tenure -
average tenure may be short when people leave the job through promotion, transfer, or
resignation before they have moved far through the range, and this would result in a lower
compa-ratio. Or a higher ratio may result if people tend to remain in the job for some time; the
payment of higher rates within the range to people for market reasons, which might require
recruits to start some way up the range; the existence of anomalies after implementing a new
pay structure; the rate of growth of the organization - fast-growing organization might recruit
more people towards the bottom of the range or, conversely, may be forced to recruit people at
high points in the range because of market forces. In a more stable or stagnant organization,
however, people may generally have progressed further up their ranges because of a lack of
promotion opportunities. Some differences may be entirely justified, others may need action
such as accelerating or decelerating increases or exercising greater control over ratings and pay
reviews.

c. Other complementary metrics to compa- ratio are range penetration and salary range

Range penetration should be used in conjunction with the compensation metric (compa-ratio).
Range penetration looks at a salary in relation to the whole pay range rather than comparison
to one piece of data, the mid-point range. Range penetration is a pay metric that compares the
salary an employee is paid to the total pay range for their position or similar positions within
other companies. This pays comparison describes how far into the pay range the employee’s
pay has progressed. Range penetration also helps identify opportunities to increase an
employee’s pay. Reviewing range penetration helps employers determine if their pay ranges
are too wide or too narrow for the organization to comfortably support. Narrower ranges are
better for lower-level positions where employees are starting their careers and are more likely
to be promoted faster. Wider ranges help retain mid to late-career employees because they
don’t have to forgo competitive pay increases as they continue to grow experience and
expertise in their current positions.

Formula

Range penetration = (Salary –Range Minimum)/ (Range Maximum – Range Minimum)

Salary range or salary band is another complimentary metric. Salary band metrics are essential
for understanding target income ranges for each role within a company's hierarchy. Salary band
metrics are also important to track because they provide insight into whether an organization's
income ranges reflect adequate compensation. Measuring salary bands also helps businesses
assess the percentages of employees above and below established income ranges so they can
adjust pay structures if necessary. A salary range represents the range within which an
employer is willing to pay an employee. The employee can either be a current employee or a
new employee. It represents the value an employer is willing to pay to a group of jobs as defined
by the job grade. Salary ranges are used when designing a pay or salary structure. A salary
range can be viewed as the differences in pay between the maximum salary and minimum
salary in a job grade. The purpose of a salary range in a pay structure is to give an organisation
scope to vary the salaries of employees in the same grade based on other factors such as
performance, experience, and educational qualifications. Creating a pay structure with no
credible salary range can lead to pay compression, leading to employee equity complaints

In conclusion offering the right compensation is of the key to attract and retain the best talent,
so as to avoid high employee turnover, cost of recruiting over and over again, training costs
and other expenses associated with staff recruitment. In as much as this is key it should be
noted however that other aspects like organisational culture, job design, and other aspects apart
from compensation also play an important role in employee retention and motivation.
References

Drucker, P. (1954). The practice of management. New York: Harper & Row.

Humble, J. (1968). Improving business results. New York: McGraw-Hill.

Humble, J. (1970). Management by objectives in action. New York: McGraw-Hill.

McGregor, D. (1966). Leadership and motivation. Cambridge, MA: M.I.T. Press.

Odiorne, G. (1970). Management by objectives. New York: Pitman.

Reddin, W.J. (1971). Managerial effectiveness. New York: McGraw-Hill.

1.https:// employpartners.com/2017/12/27/What Is the Difference Between Analytics and

Metrics in HR? (employpartners.com)

https:// /www.marketingstudyguide.com/Difference between marketing metrics and analytics

- THE Marketing Study Guide

https://fitsmallbusiness.com/compa-ratio/What Is a Compa Ratio & How to Calculate It

(fitsmallbusiness.com)

https:/www.paycor.com/resource-center/hr-glossary

. https: //www.myhrtoolkit.com/blog/calculate-average-training-cost-per-employee-hr-blog