Compensation Management: Salary Benchmarking and Beyond

Ensuring workers are paid fairly is key to hiring and retention. Learn how to do compensation benchmarking even within a small business.


Note: This story was last updated April 21, 2021

Many small businesses assume they don’t need to worry about compensation management. But no matter the size of your company, it shouldn’t be put off.

Salary data surveys are a good first step to determine pay scales for a wide range of positions. Note that survey data should be collected by a third party rather than self-reported by employees to ensure accuracy.

There are several salary comparison tools to help aggregate data for specific roles. The Bureau of Labor and Statistics offers years of comparative wage data for many occupations at the national, state and metropolitan level. Indeed and Glassdoor also provide a free tool for salary comparisons. Other tools like PayScale,, and LinkedIn Salary require a subscription or payment to access data but contain a larger number of job titles and data sets.

Once the right data is in hand, it’s time to put it to work by matching internal job descriptions to external job data. This process is called compensation benchmarking. It’s intended to help ensure employees are paid fairly. The goal is to promote a happy, engaged workforce.

How is compensation benchmarking done?

The first step in compensation benchmarking is to build a list of salary ranges for current and future job roles. This data can come from traditional salary surveys, paid salary software programs, or custom surveys which are performed by a consulting firm.

To calculate pay grade, consider the size of your organization, the range in the hierarchy between your lowest and highest ranking jobs, and how you calculate pay increases and promotions within your organization.

Once you’ve set your pay grades, it’s time to set salary ranges. The first step is to find the midpoint of the market value for each job title, based on salary data. Next, calculate the spread between the minimum and maximum salaries for the role. Lastly, determine the minimum and maximum salary for the range, referring to the midpoint market value of each role as a guide.

Setting pay ranges helps keep you competitive within your industry. You can expect to offer candidates who are very qualified the higher end of the salary range, and candidates with minimum qualifications the lower end.

Compensation benchmarking is designed to maintain fairness for both the employer and the employee. It’s a central element of a well-structured compensation plan.

How do I analyze compensation packages?

When building compensation packages, employers should pay special attention to the job type and geographic location of the role. Cost of living can have a dramatic impact on the salary range. States with higher costs of living typically offer higher average wages; workers in Silicon Valley will likely receive higher salaries than workers in the Midwest. If you have a distributed workforce with employees in different states, it’s a smart business practice to adjust wages based on cost of living and make them market appropriate.

To ensure an accurate comparison between salary data and roles, look at job responsibilities and descriptions rather than job titles, as titles often vary by organization.

Lastly, look beyond base pay as you analyze compensation. Consider how you will balance salary with bonuses, performance-based pay increases, and other forms of equity, like stock options or shares.

What are some other means to evaluate compensation without benchmarking?

Occasionally, compensation benchmarking isn’t feasible for a particular role because data either doesn’t exist or the role is brand new to the market. In these cases, you must determine appropriate compensation from scratch. You can do this by evaluating the business impact of the role, gathering background information for job responsibilities, and comparing the overall compensation package to similar roles.

Finally, you’ll need to gain leadership buy-in for the new pay structure. Be sure to document the compensation decision-making process to aid in future evaluations.

If you are in charge of recruiting, hiring, and retaining talent for your company, then you know the challenge of competing against other organizations to attract the right employees. By using compensation benchmarking, you can protect the interests of current and future employees while positioning the company for sustainable growth.

This article is intended only for informational purposes. It is not a substitute for legal consultation. While we attempt to keep the information covered timely and accurate, laws and regulations are subject to change.

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