Routine compensation analysis helps companies shape competitive compensation plans amid evolving compensation trends. Here’s how and why.
To provide employees with fair and desirable compensation, savvy companies routinely conduct a compensation analysis. By identifying the right compensation strategy, you can establish a competitive pay structure to help attract and retain talent. Compensation is the largest operating expense for most employers, and you’ll want to get it right.
According to the U.S. Bureau of Labor Statistics, wages and salaries in September 2022 accounted for 69% of reported compensation costs. Additional benefits made up the remaining 31%.¹ Due to the complexity of factors associated with employee compensation, it’s vital to know how to use market data to develop appropriate pay structures and identify pay inequities.
By a compensation analysis, you’ll benefit from all the data and, subsequently, the knowledge you’ll need to make pay decisions regarding salary ranges and benefits for prospective employees. This article will discuss what an effective compensation analysis looks like and how to conduct one.
What is compensation analysis?
A company’s pay practices can be established by conducting a compensation analysis. Factors included in this analysis are:
- Regional salary data.
- National salary data.
- Differences in employee levels.
- Internal compensation and pay range comparisons.
It’s common for job market trends to shift. So undertaking compensation analyses routinely can help you adjust as needed to attract job seekers and retain talent you’ve already hired.
Why is compensation analysis important?
The compensation analysis process helps employers to understand market value when it comes to salary and benefits. With that knowledge, they can compete with other employers to recruit top performers. Aside from keeping up with the competition, doing this evaluation also helps employers:
- Remain in legal compliance.
- Avoid hiring biases.
- Offer performance motivation.
- Maintain responsible operations.
Any insight you gain from doing a thorough compensation analysis will also help you to develop a salary range and provide benefits that align with the market average. All of this empowers you to remain appealing to applicants while maintaining profitability by not unnecessarily overspending. You’ll be better able to determine the most effective ways to spend your pay and benefits budget.
Advantages of conducting compensation analysis
In assessing the market value of your own compensation packages, you gain new and useful opportunities for:
- Better, more informed decision-making.
- Developing transparency about compensation.
- Evaluating employee pay fairness.
- Shaping helpful and insightful compensation conversations.
- Identifying opportunities to improve.
All of the above can help elevate you to an employer of choice in the minds of both entry-level employees and seasoned veterans seeking competitive pay and generous overall compensation.
Steps to conducting a compensation analysis
To conduct a successful compensation analysis, plan to be well organized. Examine internal and external data on the average salary in your geographic location and/or industry and your company’s actual salary offerings. Ways to go about this efficiently include:
- Assigning responsibility to human resources or other designated personnel to collect and evaluate compensation information.
- Taking advantage of compensation management technology to help you gather and run data for your salary analysis.
- Setting goals for what’s affordable so you can best align your budget with market averages.
The process should involve:
- Accessing wage and salary surveys to review typical pay structures and data points.
- Looking at salary benchmarks and other compensation metrics to compare internal pay details to the external market.
- Defining job categories to clearly outline employee responsibilities.
- Collecting data for salary ranges, work experience, and education to align with average salary structures.
- Exploring employee geographical location to hit the correct market trends.
- Looking at performance reviews to align with salary increases.
- Comparing your compensation practices to market averages.
- Using collected data to make pay structure decisions. Are you over- or underpaying employees?
- Conducting quarterly or annual compensation analysis reviews and implementing changes as necessary to reflect the current job market.
Once you’ve begun analyzing your company’s pay practices and compensation plan, you can effectively answer the big, important question: Do you offer competitive salaries and benefits, or are missing the mark?
Mistakes to avoid
While regular compensation analysis is important, it’s equally essential to avoid some of the biggest compensation mistakes lest your efforts be for naught. Common mistakes include:
- Not updating your compensation structure on a regular basis. This is not a plan you develop and then shelve for a few years if you want to attract top-performing talent.
- Neglecting to allow your managers to fix compensation issues or other problems affecting employee satisfaction as they crop up. Let managers help you keep employees happy and avoid unnecessary employee turnover.
- Not being transparent about pay decisions and the rationale behind them.
- Providing blanket raises to all, rather than merit-based raises as warranted per individual employees’ progress, performance, and expertise. Arbitrary pay increases may deter productivity and hurt your ability to recruit and retain top performing employees.
Among the biggest mistakes a company can make is not conducting a compensation analysis to help shape competitive compensation plans. A good compensation strategy is flexible in the face of evolving compensation trends.
All employers should prioritize their compensation and benefits plans
Employers who don’t analyze pay and prioritize employee compensation strategies may be overlooked as an otherwise good choice for prospective and existing employees. For help developing or refining your company’s compensation strategies, follow our complete guide to creating a compensation plan.
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- Employer Costs for Employee Compensation Summary for September 2022, Bureau of Labor Statistics, December 2022