How much you pay employees can determine how productive they are and how long they stay at your company. This article discusses why compensation benchmarking is vital for staying competitive. We also explain how to conduct a benchmarking exercise.
Inside this article:
- Steps in compensation benchmarking process
- How to present benchmarking data
- Tips for benchmarking compensation
- Why should companies benchmark salaries?
How Is Compensation Benchmarking Done?
Compensation benchmarking can draw data submitted by individuals or companies. HR adds benchmarking data to a human resources management system that automatically calculates salaries, deductions and benefits while managing tax and compliance guidelines.
Compensation benchmarking is part of the annual compensation cycle, which allows companies to adjust pay bands. The practice is key to understanding how your salaries compare with similar roles at competitors. In an employee’s market, businesses must offer competitive wages to recruit and retain top talent. Some organizations find the process expensive and time-consuming. Therefore, they limit how often they benchmark and do it for a limited number of roles.
New employees often negotiate higher salaries than current ones. Sometimes certain demographics receive inconsistency, or managers compensate staff based on negotiating skills or personality rather than merit and performance. Regularly reviewing compensation helps a business pay fairly and competitively. Salaries that meet or exceed the market average help encourage employee retention. Regular compensation benchmarking is also part of continuous improvement.
Key Takeaways
- Compensation benchmarking can help your company control costs and raise profitability.
- Compensation benchmarking helps you attract and retain top talent.
- Don’t compare apples to oranges — decide who your competitors are before using their data to benchmark salaries.
- Study job duties and descriptions rather than titles to ensure you correctly reward an employee for all the responsibilities in a position.
What Is a Salary Benchmarking Process?
The salary benchmarking process compares a company’s salaries to other organizations. They use the data to determine the market rate or what most businesses pay for a job. A company may decide to pay more, less or the average.
This process differs from a competitor analysis, which identifies competitors and analyzes their strengths and weaknesses. The external process also differs from internal salary benchmarking, which compares jobs at the same pay grade across an organization. For example, a secretary in the same pay grade in sales should not make five times more than a secretary in the same pay grade in engineering.
Steps in the Compensation Benchmarking Process
The compensation benchmarking process has a few general steps. Decide the roles and job descriptions to benchmark, collect external data, analyze it and determine adjustments.
Use these compensation benchmarking steps to get started.
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Assign each employee a role and pay grade.
Identifying roles and pay levels provides transparency and encourages role ownership. Clearly detail job descriptions in preparation for benchmarking because job titles do not always correspond to duties. To match job descriptions, look for jobs that list 70% to 80% of the same work. Remember that job titles do not always correspond to responsibilities.
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Decide which roles to benchmark. Not every position needs regular
benchmarking.
Benchmarking can take time and money, so you don’t have to benchmark every role annually or semiannually. Ask yourself which positions are competitive or critical to fill. Consider any jobs you may not have benchmarked in a long time — the salary landscape is probably different for those.
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Research and obtain salary survey data that aligns with your business.
Make data-driven decisions about compensation. Select accurate and current data that aligns with your business. Consider sources that cover your industry, location, and size. Data should cover a range of skillsets, experience levels and educational backgrounds.
Choose data from several sources:
- Salary survey data, also called crowd-sourced data. Look at real-time online data sources from published surveys. You may also receive information about salaries from individual employees or employers.
- Company-sourced data or aggregated HR data. Sites pull this data from human resource management systems (HRMS) to provide salary snapshots by geography and industry.
- Third-party data. This information often comes from large companies that regularly upload data to consulting firms to analyze and package for benchmarking.
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Assess and analyze the data.
Review your compensation program’s competitiveness. Develop merit and performance compensation packages and bonus and incentive programs that work for your company. Remember, what other companies do isn’t necessarily beneficial to yours. You will use these findings to create pay ranges and assign pay grades to each employee.
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Apply your compensation strategy.
A compensation strategy specifies how your compensation plan should align with the organization’s business strategy. To align efforts, ask these questions:
- Who do we want to compete against?
- How should we position ourselves compared to our competitors?
- What are the goals of our compensation program?
In general, compensation packages serve to attract new quality talent and retain existing employees through motivational perquisites. Low morale and employee dissatisfaction can lead to high employee turnover. Salary is an important tactic in keeping staff. However, also consider compensation packages that include bonuses, healthcare, retirement plans like 401(K) or club memberships.
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Identify your market position.
Market positions are expressed as a percentile of the market. Midpoint is also known as the 50th percentile. Often companies use a comparative ratio or compa-ratio: current salary/midpoint of the market rate for each job. A rating of 1.00 or 100% indicates that the current wage exactly matches the industry average. You can choose to pay above or below the market rate, depending on how you value a position or a candidate’s skills.
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Create pay structure and salary ranges.
Create a pay structure with salary ranges that contain pay grades. A pay structure includes the entire set of hierarchical jobs and salary ranges within an organization. A pay structure helps you decide what to pay people based on their experience, training, and accomplishments.
A pay range, also called a salary band or pay scale, specifies the minimum and maximum base salary a company intends to pay for a specific role or role set. The minimum defines the lowest salary you must pay to attract a qualified candidate and the maximum the most you are willing to pay or can afford to pay. Recruits and employers often discuss ranges in negotiations. Pay ranges also have a midpoint called the 50th percentile, where half of the employees make less, and the other half make more.
You break pay ranges into pay grades. Pay grades provide a structured way to reward employees for performance, experience and longevity while keeping compensation fair and managing costs. For example, a salary range for a senior technical writer might be $80K to $90K. You might break the range into pay grades this way:
Pay Grade 1 Pay Grade 2 Pay Grade 3 Pay Grade 4 Pay Grade 5 $80k - $82k $82k - $84k $84k - $86k $86k - $88k $88k - $90k It may be challenging to find an exact duty and salary match for some specialized or hybrid positions. In these situations, organizations typically merge or weigh data from multiple jobs to determine a salary that best fits the job.
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Benchmark existing employees.
Compare internal salaries to benchmarks to see if you are under- or over-paying people. Remember that just because an external benchmark differs, you don’t have to adjust your salaries to meet it. Your organization is unique, and so is your compensation plan.
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Make adjustments.
If large gaps appear between market averages and your midpoints, consider amending salaries. You don’t have to align internal compensation with external rates. However, you may feel compelled to make some changes. For example, if you face compliance issues around gender and ethnicity, you might need to consult your updated pay scale to adjust some salaries. In other instances, you might find that your current salary strategy supports strategic aims and leave it alone. However, if new recruits are negotiating higher salaries than existing employees, you may want to adjust pay bands upwards.
Consider these types of pay adjustments:
- Market adjustments align salaries and wages to match the market (if differences exist).
- Cost-of-living adjustments, sometimes called across-the-board changes, because they apply to all employees.
- Merit pay is an increase based on performance and is usually a percentage of an employee’s base salary.
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Present the compensation benchmarking.
Share the benchmarking data with the hiring team and relevant employees. You communicate with the hiring team by sharing a report that includes data and collection methodologies. You can share results with each employee in the form of a total compensation statement that details all wages and benefits.
How to Benchmark Non-Standard or Hybrid Roles
Hybrid or non-standard roles sometimes appear in small companies and start-ups where employees must take on many duties from different functional areas. Today, many jobs combine skillsets. Analysis of the Burning Glass Technologies database of almost a billion job postings found that as many as one-eighth of all jobs combine skillsets.
You can choose from a few compensation benchmarking methods for hybrid roles:
- Percentage: Consider what percentage of time a role devotes to each skill. Look at market rates and use each percentage to calculate the total salary.
- Internal equity: Look at the responsibilities of similar jobs within your company to find a salary level.
- Value: Compare market rates with critical skillsets for your company and adjust pay accordingly.
- Highest responsibility: Ask what is the highest responsibility that role carries and assign a pay grade based on that skill set.
How to Present Compensation Benchmarking Data
How you present compensation benchmarking data depends on the audience. For hiring teams, complete a report that lists roles, data sources, methodologies, and salaries. For individual employees, you use a total compensation statement, which lists salary and all benefits.
For reports, the context for the data is critical to the audience. HR teams probably know compensation planning but hiring managers may have little to no experience recruiting and hiring people. They need to understand where the data comes from to make fair salary decisions. Consider conducting a training session with HR teams and hiring managers before releasing the report. You’ll also want to make the report scannable with short sections.
A benchmarking report includes the following content:
- The critical results of your survey and overarching trends
- The benchmarking area and why it matters
- The research methodology including sources, types of companies benchmarked along with demographics
- The benchmark findings, which you might want to highlight by adding graphics to depict key information visually
- The plan of action and next steps
For individual employees, provide a total compensation statement at key career events such as hiring, giving a raise or promotion, during an annual review or bereavement or family leave. Total compensation reports include direct compensation like salaries and bonuses. They also list indirect benefits such as the following:
- Healthcare benefits
- Life and other paid insurance
- Retirement benefits, such as 401(K)
- Education benefits
- Paid time off
- Family or bereavement leave
You’ve Nailed Compensation Benchmarking… Keep Going!
Tips for Benchmarking Compensation
Compensation benchmarking can help you highlight pay inequities and improve morale and performance. Benchmarking begins with knowledge of each role’s skillsets and ends with a revised compensation plan. You can’t rush compensation benchmarking. Forethought and planning support a good result.
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Decide who are your major competitors.
These are the companies you will compete with to recruit and retain staff. Your list may include a mix of large and small companies. Consult with your HR team when you make the list. They will have unique insights into which companies are also recruiting potential candidates.
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Find the correct salary data.
Some companies collect and publish salaries. Some third-party salary benchmarking companies use employee surveys and reported data, while others get information from company surveys and aggregated market data. You must often pay to access the data, which may be expensive for a small company that infrequently uses the site. Other sites draw from both employee and employer contributions and share this data for free. Free salary data by locale(opens in new tab) is available from the U.S. Department of Labor. You may want to find additional sources for hot jobs and specialized jobs.
Hiring a compensation consultant may reduce benchmarking costs in the long run. Consultants usually have access to robust salary databases, which means you don’t have to purchase surveys.
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Check your data sources.
Be aware that the salary ranges employers post often indicate what they are willing to pay rather than what they are currently paying employees.
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Consider different ways to track salary data.
Not all jobs and data are comparable. A big-city company may reward the same duties differently than a small-town company. Also, consider that the cost of living can fluctuate and will affect salaries. Rather than adjusting pay ranges, think about offering bonuses or incentives.
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Focus on your differences.
Compensation isn’t always about money. What can your company offer that your competitors can’t? Are you located in a beautiful small town? Does your locale offer hiking and outdoor sports? Do you sponsor a robust research and development track? Does your team comprise leaders in your field?
How Do You Carry Out a Salary Benchmarking Exercise for the First Time?
Start your first salary benchmarking project by confirming every job in your company has a detailed job description along with current salary information. Then, follow the ten steps in the compensation benchmarking process listed above.
Don't do this compensation benchmarking process in a silo. Reach out to co-workers and peers to share insights and challenges you find along the way. If your company doesn't have a designated compensation strategy, help confirm or facilitate one before moving forward. If you cannot find a relevant salary data set easily, consult with multiple third-party salary data companies for more information.
Why Should Companies Benchmark Their Salaries?
Salaries are the biggest expense for employers. Benchmarking answers critical questions about your offerings. For example, are you compliant legally and free of pay inequities? Is your compensation strategy set to attract and retain top talent?
In addition to helping keep employees happy and productive, salary benchmarking helps companies accurately peg salaries for new positions. All compensation plans should reflect a company’s strategic aims as part of a comprehensive HR analytics strategy.
Why Is Compensation Benchmarking Important?
Compensation benchmarking provides a solid foundation for fiscal management. Compensation plans can help with financial gains. Profits result from cost restraints based on fixed salary budgets and reduced staff turnover.
Talent loss results in the added expenses of recruiting and onboarding new staff. Particularly in an employees’ market, companies must offer competitive rewards. To stay current, organizations will often perform annual or semiannual salary benchmarking. Learn more about the current employment landscape in our HR statistics article.
Benefits of Compensation Benchmarking
Compensation benchmarking helps employers offer competitive salaries while remaining profitable. Labor is a big expense, but people are your greatest asset. When you understand salary benchmarking, you understand how to reward staff.
Salary benchmarking can support you and your employees throughout the entire employee lifecycle. Salary benchmarking offers these benefits:
- When you’re offering salaries and benefits that are competitive, you can attract and keep top-notch talent. Benchmarking can inform what you offer new employees.
- A result of compensation benchmarking is creating total compensation statements for your employees. Providing them with this information gives them insight into exactly how much they’re receiving in terms of salary, bonuses, and benefits and if their package is competitive.
- A key step in benchmarking is to conduct a job analysis to write detailed descriptions of positions. You can use this document to see if the work someone is currently doing in that position is aligned with the newly researched information and make any necessary adjustments. Additionally, having this information on hand can expedite the hiring process if you need to rehire for that job.
- When employees know they are receiving fair compensation, it can decrease employee turnover costs. Read our article on conserving human capital to discover signs that an employee might leave.
- Once you have benchmarked salaries and budgeted for any adjustments, you’ll see how much you can spend on employee incentives. For example, you can develop bonus plans that reflect your company culture.
- A benefit of compensation benchmarking is that it forces you to distinguish salary tiers for lower, middle, and top-performing employees. In this way, you’ll have a set process for how much to pay staff based on their performance and, similarly, what salary to offer new hires based on expectations.
- Using accurate data to set salaries will keep you competitive when hiring new talent and help ensure you don’t go over the budget for a specific position.
- After completing a compensation benchmark for your company, you’ll know how to calculate and adjust salary data — a valuable skill that will help you whether you’re setting the salary or negotiating a new one for yourself.
Potential Barriers to Compensation Benchmarking
Barriers to compensation benchmarking may be internal or external. Externally, it may be hard to match responsibilities to job titles and find data. Internally, hiring managers and executives may think the process is an attempt to limit their control.
Sometimes organizations feel that benchmarking is a waste of time and money. Whereas benchmarking can streamline the benefits process and save on excessive salaries for new recruits and unplanned raises.
Compensation Benchmarking Can Be Hard. Invest in an HCM Solution to Make Easy.
Compensation benchmarking takes a big investment of time and resources. Benchmarking tasks include defining internal roles, assigning them to staff and tracking external jobs and salaries. Managing these details requires a solution that stores this data in a central location.
Human capital management (HCM) systems can detail duties, track employee lifecycles and more. Integrated platforms can connect with payroll to seamlessly implement raises and bonuses. Many solutions include self-service functions to expedite employee time-off requests and other HR queries. Having a central repository for all employee and salary data can save time, provide real-time insights into staffing and performance.
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Ensuring that you’re correctly compensating people is an essential element of limiting employee turnover. Although compensation benchmarking can take some time to do correctly, having a tool that can keep all salary and benefits data in a central location can streamline the process. That’s why NetSuite’s human capital management solution resides in the cloud and features HR localizations for managing global workforces. HR departments will appreciate reporting and compliance that comes with NetSuite’s SuitePeople.
