How do you know the competitive salary range for each position at your company? The answer: Compensation benchmarking.
What is compensation benchmarking?
Compensation benchmarking is the process by which compensation professionals on your human resources (HR) team analyze salary data in the marketplace for each specific job at your company. They match your employees’ jobs with similar jobs in compensation surveys to get an accurate picture of what other professionals in those roles are earning.
In combination with other company-specific factors, such as size, industry and location, compensation benchmarking is an incredibly important tool to help you make the best pay decisions for your organization.
Why it matters
Engaging in this exercise gives you important insight into the appropriate range of pay for employees and aligns your salaries with market rates. This matters greatly for:
- Paying employees equitably and consistently
- Avoiding problems such as pay compression
- Motivating employees and improving their discretionary effort
- Encouraging transparency surrounding your pay decision making and practices
- Making salary an objective, data-driven decision as opposed to a subjective one
- Staying updated on market trends
- Remaining competitive in the job market and attracting quality job candidates
- Protecting your HR budget by keeping rapid wage growth in line and not overpaying employees
Compensation benchmarking is always an important exercise, but especially so in our current environment of economic uncertainty and rising inflation coupled with a highly competitive job market and continued elevated resignation rates among employees. Against this backdrop, companies should pay employees fairly and competitively so they feel supported and valued in their workplace.
Together, all the benefits of compensation benchmarking can have a significant impact on a business.
Who is involved
Typically, compensation benchmarking is a joint effort between the larger HR team and compensation professionals. However, it is also very important for management to be involved in this exercise. Their contribution of knowledge about the organization and job functions helps to ensure that the end results are as accurate and useful as possible, which we will discuss more in the following section.
The compensation benchmarking process
1. Assess organizational structure and create job descriptions
It cannot be overstated how critical job descriptions are to the accuracy of compensation benchmarking.
In-depth detail about organizational structure, job levels and job descriptions, including the core responsibilities, necessary skills, experience and educational requirements for each job, helps to complete the picture of what a job entails and how senior the employee should be.
Compensation specialists performing benchmarking analysis must have a solid understanding of the job at hand – not just a vague title and a few high-level bullet points – so they can find the closest job matches possible within the survey vendor database. This is where managers and HR professionals can assist most significantly during the process.
Ideally, managers and HR build out thorough job descriptions, along with an explanation of where each position fits within the company hierarchy and its level of seniority, and then hand that information off to compensation professionals.
2. Identify reliable sources of data and analyze the data
So, how exactly do companies learn about salaries elsewhere and perform benchmarking analysis? In most cases, this involves accessing salary survey data through reputable vendors. Subscribing to data from salary survey vendors to get the most up-to-date information tends to be the most efficient method.
Next, how do you evaluate the quality of the vendors and the reliability of their survey data? Examine these factors:
- Number of organizations that participate in surveys
- Whether the surveys cover your industry, location and the types of jobs your company has
- Types of surveys and methodology used (for example: traditional, aggregated, crowdsourced or artificial-intelligence-powered surveys)
- The age and timeliness of survey data
- How frequently surveys are distributed
Using multiple sources of survey data to gather more data points enhances the accuracy of your results.
Tips for matching internal positions with external jobs
As you’re in the process of analyzing data, it can be helpful to review the survey job summary to make sure it matches your job.
What are survey job summaries?
Survey job summaries are short, generalized descriptions of the jobs contained in a salary survey database.
Throughout this process, keep these tips in mind:
- Remember the essential functions of your job or “core” job duties
- A good match is one that’s at least a 70% match to your job
- Don’t focus on the incumbent, focus on what’s required for the job
- Confirm level based on job’s required experience and education
- Keep in mind, survey job summaries are general. You may have to consider more than one to find a match for your job
3. Consider your compensation philosophy or strategy
Your company should have a compensation philosophy, or a compensation strategy, in place that describes how your compensation practices tie into HR and organizational goals as well as the mission, vision and values. It should also define the parameters of your compensation policies.
Any decisions you make regarding salary need to align with your compensation philosophy and support your organizational strategy and mission as a whole.
4. Determine salary ranges
Once your positions are matched to survey job summaries and salary data is gathered, you can create salary ranges for each role. How high or low a job candidate or employee falls within the range depends on several factors, including minimum job requirements met, experience level and even where the individual candidate is based.
Summing it all up
Compensation benchmarking is the process in which compensation specialists, aided by HR professionals and management, use detailed job descriptions to match company jobs to external jobs in the wider market. Relying on data from reputable salary survey vendors, these compensation specialists identify the optimal pay range for specific jobs. This ensures that companies pay employees fair rates and remain competitive in attracting and retaining talent, while improving employee morale.
Recruiting and retaining top talent calls for a well-rounded approach, from offering a strong salary and benefits package to a positive workplace culture, supportive leadership and plenty of learning and development opportunities. Want to learn more about how your company can stand out to job candidates, in addition to a competitive salary? Download our free magazine: The Insperity guide to attracting, recruiting and hiring top talent.