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.
Compa Ratio
What is a compa ratio?
A compa ratio compares base pay to the salary grade midpoint and is expressed as a percentage.
Mean vs. Median
Mean
Median
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.