Salaries represent most businesses’ largest single line item. By performing salary benchmarking, companies can both control that expense and compensate employees fairly to minimize attrition. This comprehensive guide provides all the how-to steps and best practices you need to understand the salary benchmarking process.
Inside this article:
- Why is benchmarking important in the compensation and benefits functions?
- How to do salary benchmarking
- Elements of salary benchmarking
- What are compensation or salary best practices?
- Job matching methodologies
What Is Salary Benchmarking?
Salary benchmarking, also known as compensation benchmarking, compares one company’s job descriptions and pay ranges to similar jobs in other organizations. The process shows the average or market salary for each job. Benchmarking — and then using that data to adjust where necessary — is essential to retain staff and recruit new talent.
When benchmarking salaries, HR departments must consider attributes such as company size, industry, training, location and necessary education. This analysis is particularly crucial when creating positions because a company must set a competitive salary scale to attract the right recruits.
Teams track their competitiveness through metrics including the pay range midpoint, which is the average that an experienced staff member would expect in salary. Companies often add data and analysis to a compensation benchmarking template that they tailor for each role. Benchmarking committees or consultants can then present comprehensive reports to hiring managers and other stakeholders.
Salary is only one element of compensation, albeit an important one. Overall compensation may include, for example, employer contributions to retirement or other saving plans, paid insurance, paid time off or stock options. So look at a salary benchmark as one key element in an overall compensation picture for a given job.
Read our compensation metrics and KPIs article to discover salary metrics and formulas. Also, see our article on HR analytics to learn about tracking and analyzing metrics.
Key Takeaways
- Salary benchmarking helps companies attract and keep quality talent by ensuring they provide competitive compensation.
- Compensation benchmarking helps control labor costs, which in turn helps manage operations costs.
- Salary benchmarking can help to highlight and remedy pay inequities in your company.
What Is Compensation Benchmarking?
Compensation benchmarking, which is related to salary benchmarking, is the process of comparing salaries and benefits between organizations. A company first defines duties for its roles and then matches those to jobs in peer companies.
Why Is Benchmarking Important in the Compensation And Benefits Functions?
Benchmarking helps with compensation budgeting. This budgeting, in turn, helps with cost management. A set salary/benefits budget allows room to reward valued talent. Paying competitive wages also reduces costly staff turnover.
Compensation and benefits also contribute greatly to employee engagement. When employees feel fairly compensated, they tend to perform better and are less likely to seek employment elsewhere. To learn more about compensation and benefits, read our employee compensation article.
What Is the Purpose of Salary Benchmarking?
Salary benchmarking helps companies make data-driven decisions. It removes the guesswork and reduces favoritism. By setting a pay range for each job, a company can vary compensation according to staff skills, longevity and performance.
Salary benchmarking also ensures companies pay competitive market wages and helps them recruit quality candidates and reward and retain current employees.
What Are the Advantages of Salary Benchmarking?
The advantages of salary benchmarking are that it controls salary costs and ensures that wages are fair. Benchmarking also contributes to better job descriptions and salary and benefits transparency.
Salary benchmarking may seem like an arduous task. But, once done, it forms a pay structure that you can adjust and update without extensive additional research. It can make the company more profitable.
How to Do Salary Benchmarking
You can complete salary benchmarking in three main steps. These high-level steps include choosing data sources that line up with your company, aligning the data with your compensation strategy and creating salary ranges. Read our how to do compensation benchmarking article for a more detailed, step-by-step process.
Choose data sources that work for your organization
To choose data sources that work for your organization, consider alignment with your job descriptions, industry and location. Then consider the data’s age, completeness and accuracy.
Data may be available from free surveys, but those sources may not offer the most accurate salary picture. Paid, aggregated data may be more precise. When weighing that cost, consider that it can be time-consuming to manually compile and analyze data from multiple sources.
Apply a compensation strategy
A compensation strategy describes how your salaries and benefits align with the overall company goals. Do you want to be seen as having highly competitive salaries and benefits to hire the very best people, or are you more middle of the road?
A defined compensation strategy can show which businesses you’ll compete with to attract talent. The practice also indicates how you will respond to salary requests from current and prospective employees.
Create salary ranges
A set of fixed salary ranges can help you predict and manage salary costs while reducing pay inequities among staff. Use benchmarking and analysis to provide a data-driven basis for pay grades. It is important to communicate to employees the criteria for various pay levels.
Elements of Salary Benchmarking
The elements of salary benchmarking include compensation strategy, salary surveys and job matching. Together, they help you find the correct data and then analyze and interpret it.
Compensation Strategy
A compensation strategy or plan describes how a company intends to align HR costs with its overall goals. A compensation strategy helps promote salary equity internally. It also defines a competitive approach to attracting new talent.
To set a compensation strategy, you first need to look at your organization’s goals. What do you want to achieve this year? Longer term? What skills are needed to get you there, and what does that talent cost? Include the CEO, board, top leadership and other stakeholders as you brainstorm: If you want to grow the business, think about rewarding salespeople. If employee retention is an issue, benchmarking may shed light on compensation solutions.
Consider your financial goals and changes you could make in your company culture to help with retention. Gathering this information provides a framework for creating pay ranges and insights into how adjusting benefits may help.
Once you know what you want to achieve with your compensation strategy, look at what your budget allows and make necessary adjustments.
Salary Benchmarking Surveys
Salary benchmarking surveys help experts and managers set pay ranges for a company by pinpointing the average salaries for roles with very similar job descriptions. The data is specific to industry, geography and company size.
While HR teams could gather this data manually from multiple free sources, many choose to work with leading salary survey companies such as Aon, Compensation & HR Group, Croner, Culpepper, Korn Ferry and Willis Towers Watson. Survey companies sometimes specialize in industries.
Even with the best consultants and sources, there’s no substitute for industry insights born of long experience, so ensure that senior people review data that will be used to set pay grades.
Job Matching Methodologies
Job matching methodologies analyze a position to define its importance and assign the proper pay level. There are four methods for evaluating jobs: ranking, grading, point-factor and factor comparison. Each has its benefits.
Some specialists group these methodologies into two categories: quantitative and non-quantitative. Non-quantitative methods include ranking and grading. Quantitative methods include point-factor and factor comparison.
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Ranking method: This method ranks jobs based on their difficulty and/or value to the company’s overall aims. It is critical with ranking to start with detailed job descriptions to ensure fairness and remove personal preference. This method does not gauge market salaries.
You may find job ranking complex in a large company. If this is the case, group jobs according to types, training levels or experience.
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Grading method: The grading method involves dividing one job into grades according to skills, education or responsibilities. For example, a trainer position could have grades for Trainer 1, someone with a degree but no experience; Trainer 2 with five to eight years of experience; and Trainer 3 for those with eight or more years under their belts. Companies may find this easy to do for straightforward roles, less so for hybrid jobs.
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Point-factor method: The point-factor method weights jobs on the value of skills, responsibilities or other attributes and assigns points for each. The higher the overall score, the higher the pay level. This method rates the importance of duties for a department or company but does not consider how other departments or companies rate duties or a role’s market value. The point-factor approach may not reflect a job’s market value.
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Factor comparison method: Similar to the points method, the factor comparison method distinguishes factors for each job and then finds the market value. This approach is complicated and may be challenging to communicate to employees but could be useful in companies where individual roles span a variety of duties.
Job Evaluation Methods
Approaches for Benchmarking Hybrid Jobs
Benchmarking hybrid jobs may require other approaches. In small companies and startups, people may wear more than one hat, such as technical writer and web manager. To decide the salary for a hybrid job, consider these four approaches.
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Blending method: For the blending method, determine which roles someone performs, gather data for all relevant roles and compile a composite to reveal the average salary. This approach may make it difficult to establish pay ranges.
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Internal equity method: For this method, look inward to review similar jobs, duties and skills within the company and correlate salaries. Ensuring pay equity is important for keeping your best workers and complying with laws against wage discrimination. Read our employee retention guide to learn more.
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Highest responsibility method: In this method, you consider the highest-level role performed by someone who wears several hats. If you need to fill that position again, you will have to offer pay at that rate. For example, company, location and experience level may be determining factors for a technical writer/web manager.
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Duty frequency: Duty frequency is a key factor for figuring out hybrid role benchmarking. Determine which role someone performs during, say, 70% of the workday. Then that role serves as the basis for deciding the job title and pay.
Great! You’ve got salary benchmarking methodologies down.
How Do Employees Respond to Compensation Benchmarking?
Employees generally respond well to compensation benchmarking because it can keep salary and benefits packages transparent and equitable. Employees appreciate knowing they receive the same pay as others in comparable jobs within and outside the company. Therefore, benchmarking helps to retain staff.
However, employees might react negatively to information about salaries and benefits — for example, if they learn that someone with similar skills or job experience receives more money. Establishing pay grades based on market rates can help companies implement data-based pay ranges for all staff and supply objective explanations for pay assignments.
Compensation benchmarking should consider not only market salary rates but also benefits packages. Benefits can include employer contributions to retirement or other saving plans, paid insurance and paid time off. Salary is only one piece of the puzzle.
What Are Compensation or Salary Benchmarking Best Practices?
Compensation or salary benchmarking best practices include picking the right competitors and jobs to benchmark. HR teams should also work with department managers and use the resulting data to create a thorough, accurate report.
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Consider the salary benchmarking big picture. Consider how benchmarking will affect salaries and bonuses, incentives, employer contributions and benefits, and your promotion and hiring plan.
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Define why you are benchmarking. Because benchmarking takes time and effort, your company should agree on which roles require it and your goals.
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Choose the right competitors. Benchmarking from the right companies is crucial to an effective result. Consider the companies you would recruit from or where your staff finds employment when they leave. Be sure to include peers in the same locale, industry and size.
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Limit what you benchmark. You don’t need to conduct a compensation benchmarking analysis on every position annually or semi-annually. Consider staggering positions to be analyzed, but stay flexible in case a particular role rises in importance or a skillset starts to be scarce.
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Review salary and benefits. Compensation does not consist of just evaluating an employee’s pay. Compare not only salary but also incentives, bonuses and benefits to understand the complete compensation package.
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Work with department managers. Suppose HR conducts the benchmarking process without a salary consultant. In that case, they are well-advised to work with hiring managers to accurately describe job duties and responsibilities, not just what everyone thinks each role entails.
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Use reputable salary surveys and data sources. You want the external data you benchmark to be as accurate as possible. Keep in mind that compensation consultants have the training to source and analyze data. Engaging a salary professional may be worth the expense.
Why Should You Invest in an Integrated HCM Solution?
Salary benchmarking is a complex but vital part of HR and operations that can also boost morale and reduce costs. But to ensure good results, benchmarking also relies on volumes of internal and external data.
To help make salary benchmarking more efficient, busy HR managers and staff need an enterprise-wide human-capital management (HCM) solution. An integrated suite of apps should track the many pay grades for each role, benefits packages, rewards and eligibility criteria. An HCM becomes your one-stop-shop for managing all stages of the employee lifecycle, with the bonus of compliance tracking and reporting.
Read the HCM guide to learn more about how an integrated HR platform can help you.
NetSuite Human Capital Management Solution Simplifies HR
Quality data is key to salary benchmarking. Many companies are already collecting this information, but important data stores may be in disparate locations. That’s why it’s essential to store salary and benefits in a central repository where HR pros can use it to make informed decisions. NetSuite provides a powerful, centralized HR data solution so managers can efficiently access all the internal salary and benefits data needed for compensation benchmarking.
Leverage internal HR data with the power of the cloud’s number one enterprise resource planning system with SuitePeople from NetSuite. Oversee payroll, benefits and performance management in one human capital management platform. The solution empowers employees with self-service capabilities for time-off requests, contact updates, peer recognition and more.
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Salary Benchmarking FAQs
Why is compensation benchmarking an important best practice?
Controlling compensation plans help companies control costs. Compensation benchmarking is an important best practice that helps senior leaders define salaries and benefits, attract top talent and keep morale among existing employees high.
How does compensation benchmarking help set salary ranges?
Compensation benchmarking analyzes internal job descriptions and compares them to external roles. With this approach, a company can set salary ranges and use market averages for salaries to define minimum, midpoint and maximum pay grades.
The salary range process includes the following steps:
- Decide on a compensation strategy. This plan shows what skills and experience a company needs to meet its short- and long-term goals.
- Analyze the job to define the exact duties and responsibilities. After conducting thorough research, a company may decide to redefine the job.
- Evaluate and rank jobs. Evaluation involves comparing job duties to those of similar internal and external positions. A company ranks positions to show how valuable they are to its operations.
- Define a salary range. The range describes the minimum and maximum a company will pay someone for a given role.
- Create pay grades or job grades. Pay grades define increments in a salary range based on experience, longevity, skill and performance. Pay grades offer a path for employees to advance to positions with more authority and pay without having to join another company.
What are the ways to decide the companies for benchmarking in salary surveys?
Tracking current salary trends can be difficult for an HR professional who already has a full plate of duties. HR often turns to salary consultants who select the best competitive matches and maintain databases of competitive statistics.
If you must conduct benchmarking on your own, consider these approaches. If your business hasn’t matured into its vision, choose competitors you want to emulate. Look for companies in the same industry with processes you want to echo. Or look at benefits programs in locales with an active job market.
