Am I paying my employees an appropriate salary? Without a compensation management tool, determining the answer to that question can be difficult.
Note: This story was last updated April 21, 2021
At some point, every hiring manager has to ask themselves one important question. Am I paying my employees an appropriate salary? Without a compensation management tool, determining the answer to that question can be difficult.
Perhaps you are starting a new business or organization, and you’re hiring your first employees. Maybe you are expanding operations and adding on new positions. Or you might have noticed that you’ve lost a few good employees to other companies that pay more than you do.
In any case, if you manage people, you want to pay them fairly, and that means that you need to employ good compensation management practices. One of the best places to start is with salary benchmarking.
What are salary benchmarking and compensation management?
Compensation management is an important component of employee retention. It is a process for attracting new talent, reducing turnover, and boosting performance by offering competitive salaries and non-monetary benefits. One of the most important aspects of compensation management is ensuring that the salary and benefits an employer is offering measure up to the market rate for each job the employer is offering. People who work in compensation management utilize a pool of data. Much of the data they use comes from a process called salary benchmarking.
Salary benchmarking is the process employers use to determine the market rate for each position within their organization. Someone — usually an HR manager charged with compensation management — looks at all of the organization’s job descriptions. Then, the manager finds jobs in other companies with similar responsibilities and looks at their reported salaries. They use those data to come up with a market rate for their own company’s jobs.
There are several factors that the compensation management staffer will consider when coming up with a salary benchmark:
- The job responsibilities for each position: This is one of the most important pieces of data to factor into a compensation management report. Employees should expect equal pay for equal work. So if you work for Company A and you employ people who are responsible for making 100 widgets per day, you should be paying them around the same as people making the same number of widgets in Companies B and C.
- Geographic location: The location of the job is also important to consider. In some states, employers pay more than in other parts of the country. Sometimes the difference is based on the area’s cost of living. In other cases, local demand for a particular type of work changes the market value for the job. For instance, a public relations manager in Texas can expect to earn about $124,170 per year. But in Washington, DC — where the cost of living is very high and thousands of lobbyists are in the market for good PR — this same job earns $204,270.
- Education level: In general, jobs that require higher levels of education pay more than jobs that don’t. But there is also a difference in salary between people with similar job responsibilities at different levels of education.
- Years of experience: Employees with more seniority at an organization often earn a higher salary than new employees. This is because it’s typical for them to receive a pay raise every year. But even if a person has spent years working at another similar company, having that experience can boost that person’s salary as they’ve had more time to practice and hone their skills or expertise.
A good compensation management professional will look at all these data and analyze them to come up with an accurate portrayal of the market rate for a particular job, both in salary and non-monetary benefits.
Why bring data analytics into your payroll process?
After the compensation manager gathers data on competitor’s salaries, job descriptions, geographic location, education, and experience, he or she will analyze them. For our purposes here, we don’t need to go into the specifics of how that data analysis works. But we do want you to understand why it’s important.
When you hire new employees, you are starting a foundational relationship. Your organization will be built on the work of your staff, so hiring the right people under the right circumstances is vital to your company’s health and future growth.
In order to attract the right people, you have to offer the correct salary. This means that you need good data and a skilled employee to analyze them. If you offer a salary that is too low, you won’t attract talented candidates. Why would they work for you when they can get a job doing the same thing for more money? If your pay is too high, that means that you’re spending more than you need to, which isn’t cost-efficient. You might also set unrealistic expectations for pay raises in the future, which could create employee dissatisfaction, poor engagement, and high turnover.
How to choose a compensation management system
Generally speaking, there are two types of compensation management systems. There are free salary comparison websites, and there are more sophisticated tools that you have to purchase. There are many benefits to the second option.
Many free salary comparison websites offer job listings and allow employees to self-report salaries and ratings for their employers, such as Indeed and Glassdoor. HR managers often pay attention to these sites because they influence public opinion about their companies, and they may influence a recruit’s decision about whether or not to work there.
However, the salary comparison tools on these free websites may not be the most accurate or reliable. As we mentioned, employees self-report their salaries. This means that:
- The accuracy of the data is dependent upon the honesty of the reporters.
- The data are incomplete. Only employees who choose to participate have their salaries included.
- They don’t consider all of the variables that we have discussed, such as geographic location and education level.
An advanced compensation management system, on the other hand, uses only accurate and complete data compiled by professionals. You can use them to compare salaries based on all of the relevant factors, including job descriptions, location, and education level.
When choosing a compensation management system, look for one that:
- Uses reliable cloud technology. Internet data are less expensive to gather and store, and they can be accessed from anywhere.
- Is easy to configure with your existing systems. The software is only useful if you can use it with your current computing system. You don’t want to choose something that will force you to make major, expensive changes.
- Eliminates the risk of errors. The most important quality of a compensation management system is accuracy. Choose a product with a good track record for avoiding errors.
- Includes top-notch security. Your HR department handles very sensitive data. Be sure that whatever compensation management system you choose is secure enough to handle that.
When you hire new employees, it is important to offer a competitive salary that is in line with your competitors. We hope that these tips help you to choose a good compensation management system to help you recruit and retain the best employees for your company.