Salaries represent most businesses’ largest single line item. By performing salary benchmarking, companies can control that expense and minimize attrition by compensating employees fairly. This comprehensive guide provides all the how-to steps and best practices you need to understand the salary benchmarking process.

Inside this article:

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 among organizations. A company first defines duties for its roles and then matches those to jobs in peer companies.

Conditions That Influence Compensation Benchmarks

Compensation benchmarks aren’t set in stone; they’re influenced by dynamic factors that can significantly impact how companies structure their pay scales. Understanding these conditions is crucial for creating competitive and fair compensation packages. Here are some of the key factors that can impact compensation benchmarks.

  • Industry expectations: Industries have different standards for compensation, often driven by the specific skills and expertise required. For example, technology companies might offer higher salaries to attract top software engineers, which might not be the case in, say, a nonprofit organization.
  • Location: Salaries for the same position can vary considerably from one region to another—especially on the United States coasts. Location influences factors such as cost of living, local job market conditions, and regional economic factors.
  • Economic conditions: During economic booms, companies often offer higher wages and better benefits to attract talent. Conversely, recessions might lead to wage freezes or less appealing compensation packages.
  • Demand for skills: When there’s a shortage of qualified workers for in-demand positions, companies are often willing to pay premium salaries to secure top talent.
  • Company size: Larger companies can often offer competitive compensation packages, including bonuses and stock options, while smaller enterprises might not.
  • Company performance and profitability: Companies that are performing well financially can usually offer competitive salaries and benefits. On the other hand, businesses that are struggling often need to adjust their compensation strategies to manage costs.
  • Regulatory and legal requirements: Labor laws, minimum wage regulations, overtime rules, and other legal mandates can vary by country, state, or even city and often set the baseline for compensation in certain roles or industries.

What Is the Purpose of Salary Benchmarking?

Salary benchmarking helps companies make data-driven decisions about the compensation packages they offer employees. It removes the guesswork and reduces favoritism. By setting a pay range for each job, businesses can vary compensation according to skills, longevity, and performance. Salary benchmarking also ensures that 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 main advantages of salary benchmarking are that it controls salary costs and assures 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 it’s done, it forms a pay structure that a company can adjust and update without extensive additional research.

Why Is Benchmarking Important in the Compensation and Benefits Functions?

Compensation benchmarking plays a crucial role in shaping a company’s pay strategy and overall success. By comparing internal compensation practices with market standards, businesses can make informed decisions about their salary structures, benefits packages, and talent management approaches. This process allows companies to remain competitive, compliant, and attractive to both current and potential employees. Here are some of the ways that benchmarking can have a positive impact.

  • Developing a competitive advantage: Benchmarking lets companies position themselves strategically in the job market. By offering competitive compensation packages, businesses can attract top talent and stay ahead of industry rivals.
  • Attracting qualified candidates: With accurate salary data, companies can create appealing job offers that align with market expectations. This helps streamline the recruitment process and increases the likelihood of securing high-quality candidates.
  • Encouraging pay transparency: Benchmarking supports the development of clear compensation standards, promoting internal wage equity. This transparency helps employees understand how their pay is determined and fosters a sense of fairness within the organization.
  • Complying with regulations: Regular benchmarking allows companies to adhere to state and federal labor regulations, including those related to equal pay, minimum wage, and fair labor practices.
  • Improving employee satisfaction and retention: Fair and competitive compensation, based on benchmarking data, leads to increased job satisfaction and employee engagement. This, in turn, reduces turnover rates and associated costs.
  • Enabling better budgeting and cost reduction: Compensation benchmarking provides insights that help businesses optimize their rewards spending. It allows for more-accurate financial planning and can lead to cost savings by reducing unnecessary overpayment while still remaining competitive.
  • Facilitating performance management: Benchmarking provides a framework for aligning compensation with performance and career advancement. It helps companies create clear salary bands and job levels, which can be used to structure promotions and pay increases.
  • Supporting diversity, equity, and inclusion (DEI): Compensation benchmarking can play a key role in identifying and addressing pay disparities related to gender, race, or other demographic factors. This data-driven approach supports efforts to create a more equitable workplace and can help companies meet their DEI goals.

How to Perform Salary Benchmarking

You can complete salary benchmarking in five 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 compensation benchmarking article for a more detailed, step-by-step explanation of this process.

  1. Choose Data Sources That Work for Your Organization

    To choose data sources, consider alignment with your job descriptions, industry, and location. Then consider the data’s age, completeness, and accuracy. Data might be available from free surveys, but those sources may not offer the most accurate salary picture. Paid, aggregated data is often more precise.

  2. Categorize Your Positions

    Effective salary benchmarking requires a clear understanding of the roles within your organization. Begin by categorizing your positions based on job responsibilities, required skills, and level of experience. This process helps ensure that you’re comparing like-for-like roles when benchmarking. Consider creating job families or job levels to group similar positions together, which can streamline the benchmarking process and provide a clearer picture of your organizational structure. Accurate categorization is crucial for making meaningful comparisons with market data and developing a fair compensation structure.

  3. 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.

  4. 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. Note, however, that it is important to communicate to employees the criteria for various pay levels.

  5. Document Your Methodology

    Documenting your benchmarking methodology is important for consistency, transparency, and future reference. Clearly outline the steps you’ve taken, including data sources used, criteria for selecting comparable positions, and any adjustments made to account for your company’s unique situation. This documentation serves as a valuable resource for explaining your compensation decisions to stakeholders, including employees and upper management. It also provides a foundation for future benchmarking exercises.

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. For example, if you want to grow the business, think about rewarding salespeople. If employee retention is an issue, benchmarking may shed light on compensation solutions.

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 be sure to have 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 nonquantitative. Nonquantitative methods include ranking and grading. Quantitative methods include point-factor and factor comparison.

  • Ranking method: This method ranks jobs based on their difficulty and/or value to the company’s overall aims. It is critical 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.

  • 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.

  • 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.

  • 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

salary benchmarking
This chart shows how quantitative and nonquantitative job evaluation methods flow and differ.

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.

  • Blending method: For the blending method, determine which roles employees perform, 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.

  • 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.

  • 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.

  • Duty frequency: Duty frequency is a key factor for figuring out benchmarking for hybrid roles. 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.

Now it’s time to get an ERP that utilizes HCM software to better make those decisions.
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Can Employers Evaluate Salaries Without Benchmarking?

While it’s possible to evaluate salaries without formal benchmarking, this approach can lead to significant challenges and potential pitfalls. Without benchmarking, businesses tend to rely on outdated information, subjective opinions, or limited internal data to determine compensation. This can result in pay structures that are misaligned with the market, potentially leading to difficulties in attracting and retaining talent. It also can create issues with employee satisfaction and engagement.

There are, however, some alternative methods that can provide partial insight into salary evaluation. These include informal industry networking, reviewing job postings for similar positions, or conducting exit interviews to understand why employees leave for other opportunities. While these methods can offer some perspective, they lack the comprehensive, data-driven results that benchmarking provides. Ultimately, while employers can evaluate salaries without benchmarking, doing so can put them at a competitive disadvantage and increase the risk of pay inequities. Benchmarking remains the most reliable and systematic way to ensure fair, competitive, and strategically aligned compensation practices.

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.

Salary Benchmarking Best Practices

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. Here are eight best practices to help guarantee effective salary benchmarking.

  • Consider the salary benchmarking big picture. Understand how benchmarking will affect salaries, bonuses, incentives, employer contributions and benefits, and your promotion and hiring plans. This holistic approach ensures that your compensation strategy aligns with overall business objectives and market trends.

  • Define why you’re benchmarking. Because benchmarking takes significant time and effort, leadership should agree on which roles require it, as well overall benchmarking goals. Clearly articulating the purpose of benchmarking helps focus resources and makes sure the results will be actionable and valuable to the organization.

  • Choose the right competitors. Benchmarking against 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 company size.

  • Limit what you benchmark. You don’t need to conduct a compensation benchmarking analysis on every position annually or semiannually. Consider staggering the positions to be analyzed, but stay flexible in case a particular role rises in importance or a skill set becomes scarce.

  • Review salary and benefits. Benchmarking goes beyond just evaluating salaries. Compare not only salary but also incentives, bonuses, and benefits to understand the complete compensation package.

  • Work with department managers. Suppose HR conducts the benchmarking process without a salary consultant. In that case, they’re well-advised to work with hiring managers to accurately describe job duties and responsibilities.

  • Use reputable salary surveys and data sources. The external data you benchmark against should 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.

  • Ensure your job descriptions are accurate. Up-to-date and precise job descriptions are critical for effective salary benchmarking. It’s important, therefore, to regularly review and update job descriptions to reflect current responsibilities, required skills, and experience levels. Moreover, job descriptions provide a clear basis for discussions with employees about their roles and compensation, supporting transparency and fairness in your pay practices.

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 package, rewards, and eligibility criteria. An HCM system becomes your one-stop shop for managing all stages of the employee lifecycle, with the bonus of compliance tracking and reporting.

Read the human resources management system 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.

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 emulate. Or look at benefits programs in locales with an active job market.

How frequently should salary benchmarking be performed?

The frequency of salary benchmarking can vary depending on a company’s size, industry, and market conditions. However, as a general best practice, businesses should conduct comprehensive salary benchmarking at least annually. This annual review helps ensure that compensation remains competitive and aligned with current market trends. It’s important to balance benchmarking frequency with the resources required to conduct thorough and meaningful analyses. The goal is to stay current with market trends without overwhelming your HR team or creating unnecessary disruptions to your compensation strategy.