3 Problems That Compensation Benchmarking Can Solve

January 13, 2023
November 7, 2023
Jennifer Ernst Beaudry
Lattice Team

It’s hard out there for small businesses. While there are plenty of upsides, of course, to being a nimble operator or startup, when it comes to accessing some of the tools that can help take your business to the next level, being small can put you at a disadvantage. For firms that employ fewer than 1,000 people, for instance, compensation benchmarking can be a headache. Trying to find accurate compensation data that fits your size, your field, and your location is already hard enough, but the cost of accessing it can be prohibitive — if small firms can even get a call back from some of the major benchmarking players. 

Chad Atwell, a total rewards consultant and advisor, said the complexity of the data makes investing in benchmarking data a dicey proposition for small companies. Most small companies, he said, “won't be able to afford the kind of customization that lets them drill down to the level that makes sense for them, where you can get into the size of the company by revenue, the overall number of people, the HR roles, and more. It’s a big hurdle.”

There’s no doubt that starting the process can be daunting, but the opportunities are big. And while there’s no denying there can be hurdles, the right tools can make the process seamless enough that you can get right to using the learnings. Here’s what you need to know about common issues companies encounter in launching their corporate benchmarking programs and how to troubleshoot to get the most out of yours.

Why Compensation Benchmarking?

Compensation benchmarking — the process of comparing the salary your company is paying for a job to what other companies are paying for the same or similar roles — is a tool used broadly across industries to assess the salaries and benefits they pay, and compare how they stack up to their competitors. The process, which generally combines outside compensation surveys or third-party data sets to create a database of positions and pay, is used to create salary ranges for positions, inform recruiting efforts and salary negotiations, and help guide planning for future staffing. 

The process can not only be a boon for employee retention and recruiting top talent, but it can also deliver important, actionable information about how a company compares to others in the industry in structure and pay; help guide spending; and advance diversity, equity, inclusion, and belonging (DEIB) goals by ensuring compensation is fair, equitable, and research-based.

[Companies need to ask themselves,] 'Is this data reflective of what we want?'

Common Hurdles to Benchmarking

Knowing what to expect from the benchmarking process can help companies prepare. Here are the obstacles that small firms most often encounter.

Problem 1: Is the data right — and right for us?

Atwell said the first question companies need to ask themselves when they’re contemplating a given set of benchmarking metrics is, “Is this data reliable?” It’s the key question: Finding an accessible, vetted data set can be tricky (and expensive), especially for small businesses.

Many firms begin their benchmarking process when they realize that the informal tools they use to shape their compensation strategy — employee surveys, feedback from job candidates given to recruiters or to Human Resources, industry conversations, or even publicly posted data online — aren’t comprehensive enough, up-to-date enough, or rigorous and vetted enough to use to make decisions. 

Even beyond questions of trust, Atwell said, companies need to ask themselves, “Is this data reflective of what we want?” To be of maximum use, the information companies consider needs to correlate with not just the right industry, but with the size, scope, and even geography of peer companies if it’s going to be a useful measure of a firm’s competitive set. 

If a different industry in your local area, for example, recruits candidates with some of the same skillsets as you need, then you need to have them on your radar. On the other hand, if you’re a 150-person startup firm with total compensation that reflects your size, but you’re competing with major, established tech firms for the same engineering hires, that will affect the compensation scale as well.

The takeaway: Look for a tool with data from sources that vet their information, and can share details on how it was collected and what it does and doesn’t cover — and screen it to make sure it’s a match for your industry, your size, and your area.

Problem 2: Is the data legible?

Apart from the accuracy and relevance of the data, Atwell said, the way a salary benchmarking tool presents the information can have an outsized effect on how easily a company is able to make use of it.

For small firms especially, it can be daunting to find a data tool that reflects your working reality. “For smaller companies and startups, it’s a stage in your company’s growth to have these relatively broad responsibilities — for someone to be both an accountant and a project manager, for example,” said Atwell. “There can be a lot of mixing going on in terms of job responsibilities.” 

All the major compensation benchmarking firms have their own set of job titles, gradations of seniority, and job descriptions, and firms may find that the job descriptions at their own company don’t match up neatly with positions listed within the tool. Even when it is a fit, there can still be differences in nomenclature. As Atwell put it, ”Your software engineer II is my senior software engineer.” It can make doing comparisons of things like base pay and even compensation structure more challenging.

The takeaway: Go into the process knowing exactly what each role at your company does (and doesn’t do), and focus on job descriptions more than titles when you’re looking for a match. Even if your firm doesn’t neatly fit the template, a robust tool should let you make useful comparisons. 

If you’re using January’s data for planning for the next year to come, there’s data you missed...You can’t just set it and forget it.

Problem 3: Is the data timely?

While the overall talent market may have cooled slightly, Atwell said, he expects it to continue to be highly competitive for top performers and in critical positions. “As we're seeing in the market in general, the demand for talent is not slowing down,” he said. That competitiveness makes having up-to-date information crucial when making offers or calculating raises and compensation packages.

“[Salary] surveys used to be on an annual basis, but with what was happening in the economy and things moving fast with job turnover, there was a need to increase the frequency of the survey data to see where the movement was happening,” Atwell said. While not every role and position will see the same degree of volatility, being behind the compensation trends can have a big impact on business. “If you’re using January’s data for planning for the next year to come, there’s data you missed,” he said. “You can’t just set it and forget it: There’s a need to update these sets throughout the year.”

Keeping tabs on market moves more frequently can be a smart and cost-effective counter to wage compression, Atwell added. The phenomenon — which occurs when new-hire salaries rise quickly in competitive fields, quickly bringing new hires to parity or close with more senior and more experienced colleagues — is a source of major dissatisfaction among seasoned employees. 

Left unchecked, wage compression can be a serious threat to the talent pool: When experienced top performers don’t see opportunities for their compensation to keep pace with pay increases or grow with the market, they leave. It’s a serious enough threat that many companies faced with it overcompensate, giving broad market-adjustment raises across the board. Targeted and timely market data on competitive fields let HR departments more surgically deploy market adjustments and offers without being dependent on a traditional annual compensation cycle, letting them be more nimble.

The takeaway: Prioritize finding a tool with a regular and frequent update schedule, and know how often you’ll receive fresh information. 

The Benefits

Firms that can find a way to make robust benchmarking part of their compensation plan design reap plenty of benefits. 

For starters, firms can feel secure in their pay structures because there’s data, not just anecdotal information, backing up the plan. It bolsters recruiting confidence, and it can also keep internal stakeholders focused, Atwell said: “A lot of people think they know better — benchmarking is a good way to combat against that,” he said. Firms can feel confident in making offers knowing they aren’t overpaying and causing downstream issues with the budget, and they can know exactly where they stand when they’re making offers to the top talent they need to drive success. 

Benchmarking can also be a strong hedge against attrition. It’s critical for companies invested in retaining top talent to know that employee compensation is competitive. Total compensation, which includes the employee’s salary and bonuses but generally doesn’t cover healthcare offerings or internal equity, is a key metric employees use to assess potential moves. For companies in competitive markets, knowing how similar roles are compensated means having a handle on how their own offering stacks up. 

Additionally, outside benchmarking data can be an asset to firms with DEIB goals. Looking at pay ranges across the industry is a great source of data points that companies can use to guide compensation decisions, and can highlight any pay gaps that need to be addressed. 

Small businesses need to take all the advantages they can get — and when it comes to compensation, benchmarking can be a tremendous leg up. The obstacles are real, but so is the opportunity, and for any company that’s serious about its investment in people, a robust tool can make all the difference in using benchmarking data to enhance results. 

Ready to learn more? Explore what Lattice Compensation Benchmarks, powered by Mercer has to offer and how it can help your business flourish.