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The Merit Matrix, Market Index, and Compa Ratios Explained
A breakdown of the merit matrix and how the market index and compa ratios can help with compensation planning
What is a merit matrix?
The merit matrix is a mathematical grid, utilized in compensation planning, that helps administer salary increases to employees. A merit matrix considers performance rating and some measure of relative salary placement, typically compa ratio.
Differences between market index and compa ratio
Market Index
Compa Ratio
What is the market index?
The market index is a ratio that compares salaries to the market average for those positions.
Comparing salaries to the target position of the company (median, mean, 50th percentile, etc.) may help companies learn whether certain job families need a compensation adjustment. The market index compares base salary to the external marketplace.
Compa Ratio
What is a compa ratio?
A compa ratio compares base pay to the salary grade midpoint and is expressed as a percentage.
It is calculated by dividing the actual salary by the midpoint of the corresponding salary range. The compa ratio compares base salary to internal structures.
Mean vs. Median
Mean
Mean refers to the average value of a dataset, specifically, the sum of the values divided by the number of values.
Median
Median refers to the middle value of a series of values arranged in numerical order, from smallest to largest.
Which one is more useful?
The difference in utilizing the mean and median comes down to data outliers.
Median is less influenced by outliers or when distribution is skewed. However, with larger sets of numbers or industries
where there are a few people who are paid extremely well, the median can give an inaccurate view of the typical salary.
How do I use compa ratios to make informed compensation decisions?
The compa ratio can reveal many things about how the employee is paid.
If the salary range midpoint aligns with market data at the 50th percentile, then it means that the employee is paid at the same rate as others in the relative market.
Establishing pay rates
- This is useful information when determining candidate job offers.
- A compa ratio of 100% indicates that the salary in question is paid at the market rate that one can expect to pay for fully competent, experienced incumbents.
Annual compensation reviews
- Compa ratio formulas can be used to get an overview of where positions fall in relation to the external market and determine whether compensation adjustments need to be made.
Planning merit increases
- Many companies use a merit matrix to determine increases based on performance and market comparisons.
- An employee’s progression through the pay range may be directly related to performance.
- A merit matrix provides guidance on how to match performance ratings to compa ratios when determining merit pay increases.
Compa ratios, the market index, and the merit increase matrix are statistical tools that can help you make the right decisions for your business. SalaryExpert's Salary Assessor includes compa ratios to help you benchmark salaries.
An investment of time to know the company’s pay structure, jobs, and niche talent market, as well as the compensation strategy, can help you use these tools effectively and meaningfully apply the results.
Compa ratios are another important tool when it comes to compensation planning for your business.
Our Salary Assessor easily calculates compa ratios to ensure that you have the data you need to create a fair and competitive total compensation package. To try a free sample of our compensation data, check out our demo.
