Learn how to use compensation benchmarking to see that workers are paid fairly. It’s an essential part of hiring and retention.
Note: This story was last updated January 31, 2023
If you want to attract and retain top performers, the salary you offer matters. You want it to be enough to close the deal. But you don’t want to put the new hire out of sync with your budget, other people doing similar work, and your compensation philosophy. One exercise businesses can undertake to find the sweet spot is compensation benchmarking.
This competitive compensation strategy can help employers promote fair and competitive compensation offers. This article will explain what compensation benchmarking is and how you can execute it as part of your hiring practice.
What is compensation benchmarking?
Sometimes called salary benchmarking, compensation benchmarking is a process HR professionals and business managers use to help them match an internal job with market pay data, salary surveys, or other compensation metrics to identify the market rate for each position.
It can help you to offer fair (or even competitive) market rates, and make you a more competitive employer in the quest for top-notch talent. Compensation benchmarking can also help keep your employees happy and satisfied in their jobs. When people find out they are making less than someone with the same same job title or job description trouble often ensues.
Compensation benchmarking can make it much easier to balance your budget while reducing or eliminating salary disparities — a win-win for both employer and employee.
How is benchmarking done?
Salary data surveys are a good first stop as you determine pay scales for positions. Remember that survey data collected by a third party is more accurate than information self-reported by employees. Several salary comparison tools aggregate market 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.
- Glassdoor and Indeed provide a free tool for salary comparisons.
- PayScale, Salary.com, and LinkedIn Salary require a subscription or payment to access data, but contain a large number of job titles and data sets.
Once the right data is in hand, match internal job descriptions to external job data. This process is the essence of compensation benchmarking. It can get a little complicated, however.
Many companies, especially small businesses, have roles filled with people who wear many hats. So it’s important to identify the key attributes of a position. If a given position involves, for example, running social media, explore the going rates for social media marketers. Estimate the percentage of time you expect your employee to dedicate to social media. With that number, you can decide how much of their labor costs should reflect that work. Break down the rest of the position in the same manner to help determine the labor costs associated with the position. The most valuable skill in the job description, however, might carry extra weight as you determine the pay range.
Some companies hire a compensation consultant to help them sift through the salary benchmarking process. These experts are skilled at analyzing salary data and labor costs. They also are aware of the best practices to use in comparing your internal jobs to external market rates.
Set pay ranges and salaries
Once you’ve aggregated the internal and external data associated with each of your job descriptions, you can begin to set a pay range for each position that is aligned with current market trends or a reliable salary survey. As you develop your list of salary ranges for current and future job roles, consider:
- The size of your organization.
- The range in the hierarchy between your lowest and highest ranking jobs.
- How you calculate pay increases and promotions within your organization.
The compensation management strategy at many companies is to target the middle of a salary range. They want to leave wiggle room for salary negotiations. 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, or how much negotiating room you want to create.
Setting pay ranges can help keep you competitive. Candidates who are very qualified might come from either end of the spectrum.
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 instead of locking themselves into set salary ranges across the board. 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 for the same job title.
If you have a distributed workforce with employees in different states, consider adjusting wages based on the cost of living. 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 data. Consider how you will balance salary with bonuses, performance-based pay increases, and other forms of equity, like profit sharing and stock options.
Can I evaluate compensation without benchmarking?
Occasionally, compensation benchmarking isn’t feasible for a particular role because survey data doesn’t exist. Sometimes the role is brand new to the market and there is little information for comparing salaries.
In these cases, you must determine appropriate compensation from scratch to develop a competitive salary. 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. Document your process to aid in future evaluations. This will be important, in part because a market salary for that new position will begin to emerge and influence future salary benchmarks.
How do employees respond to compensation benchmarking?
Because compensation benchmarking keeps pay transparent and more equal, employees tend to love it — especially if it applies to promotions, too. This goes a long way toward earning employee retention and boosting employee morale.
Of course, compensation is about more than just money. Fair and competitive compensation includes benefits like 401(k) matching, paid time off, and vacation time. As you establish the levels at which people will receive promotions and what those promotions will contain, remember that a promotion can come with a mix of these elements.
Because compensation benchmarking helps to ensure that you’re not underpaying your employees, both in relation to their coworkers and to outside rivals, you can establish yourself as a competitive employer with high job satisfaction rates. This helps to attract the attention of top talent.
The value of a compensation philosophy
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 future and existing employees while positioning the company for sustainable growth.
Want to learn more about compensation strategies or other elements of employee compensation? Visit Workest by Zenefits daily for news, tools, and helpful articles on HR and business management.