Do you know what your employees are worth? Sure, you probably know their salaries, the value of their benefits, and what kind of incentives they might be eligible for in a given year. But do you know how much those same employees might be worth to another company looking to hire them? Your business needs its top performers, so how can you be sure you’re compensating your employees exactly where you should be?
If you can’t answer these questions with 100% certainty, then your company could use compensation benchmarking. In business, it’s often said you can’t improve what you don’t measure, but when it comes to employee pay, many firms, even ones that rely on data to make other important business decisions, can have a blind spot. This is where salary benchmarking (also known as compensation benchmarking) comes in.
What Is Compensation Benchmarking?
Compensation benchmarking — or 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 an essential step in recruiting and hiring strong candidates. It’s also an important tool for businesses to better understand their place in the market, as well as their prospects for recruitment and retention.
Compensation benchmarking is 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.
There are a number of reasons for instituting a compensation benchmarking process, including:
- Creating salary ranges (also called compensation bands) to use in recruiting and to drive compensation changes for existing employees
- Assessing compensation gaps, and identifying attrition risks stemming from those gaps
- Formulating informed guidance about giving raises, promotions and making compensation budget decisions
- Planning and forecasting for headcount
But, for many organizations — especially smaller companies, newer firms, or those that have seen rapid growth in headcount — compensation benchmarking raises a lot of questions:
- What kinds of benchmarking information is available?
- What information and resources can your company afford?
- How does the data apply to your business specifically?
Despite these challenges, at Lattice, we believe compensation benchmarking is not only worthwhile — it’s essential, for both your employees and your firm as a whole. Considering benchmarking at your firm? Here’s everything you need to know about the process, from what it entails to the benefits it can provide to your business.
Where Does Compensation Benchmarking Data Come From?
Compensation benchmarking is the process of comparing the job summaries and descriptions at one firm to the same or similar positions in the industry to determine the current market rate for any given job.
Firms looking to benchmark their jobs have typically turned to a few different options:
- They could use government data, like the data sets the US Bureau of Labor Statistics (BLS) maintains, or they may refer to free salary survey sources that collect information from various sources, including crowd-sourced compensation data volunteered by individuals looking to gain some of their own market data.
- Companies with larger budgets, especially big corporations, often use benchmarking survey reports published by specialist firms with data tailored to their specific industry or geography.
- Less formally, some companies rely on insights gathered from candidate interviews, industry networking, and the public-facing job postings of competitors to determine what other firms are paying candidates with similar skill sets for similar roles.
Robust benchmarking data takes into account specific job responsibilities and qualifications, as well as considerations for location, company size, and industry. High-quality data will also include other financial incentives like bonuses, benefits packages, and other elements that tie into a person’s total rewards in order to provide a more complete picture of what different jobs command.
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Why Is Compensation Benchmarking Valuable?
While the benchmarking process has always been insightful, the recent job market favoring employees has made knowing the industry norms around pay more important than ever. And while there are some signs the overall recruitment and retention environment has become more normalized, Atwell said the repercussions of this recent trend will stick around.
“We’re coming off a crazy-hot talent market, and every company is figuring out how to set salaries and compensation more broadly to be competitive. It’s not just that there was a lot of movement in the market, but also the people who left received 15-20% increases, and now there’s also inflation and other pressures overall in the economy,” said Atwell. “Things are cooling off a little, but it’s going to continue to be a talent-driven market, and people are looking to move to new jobs with sizable [pay] increases.”
Making sure candidate expectations are aligned with the market gives recruiters and HR managers the knowledge they need to make data-based offers.
This is where benchmarking can be invaluable, since companies relying on precedent, intuition, or feedback from job candidates (or even exit interviews) aren’t necessarily getting the full picture, he said.
By reviewing impartial data, decision-makers can be confident they’re allocating payroll resources responsibly rather than being swayed by good (or poor) negotiators — either as candidates or on their own staff. They also have more assurance they’re not going to be routinely outbid on attractive candidates. Making sure candidate expectations are aligned with the market gives recruiters and HR managers the knowledge they need to make data-based offers.
Benchmarking isn’t just critical for recruitment, however. When it comes to employee retention, knowing how your company’s pay scale and bonus structure compare with those of other firms in the industry is crucial if you’re looking to reward and keep top performers. “Employees have more access to market data today than ever before,” said Atwell, “and the trend towards pay transparency means they will be able to evaluate salary ranges from several companies. That means you as an employer need to have a curated data set on which to defend your pay practices.”
By reviewing impartial data, decision-makers can be confident they’re allocating payroll resources responsibly.
Wage compression — the slow upward creep of starting salaries that generally outpace standard performance increases and annual raises — means that in firms where this phenomenon is not addressed, newer and potentially inexperienced hires can end up earning as much as highly skilled, experienced workers. Although wage compression is fairly common, it can be a huge source of dissatisfaction among longtime employees, especially if a company’s advancement opportunities are limited.
Employees who realize they can’t or won’t get the career advancement and compensation growth they desire at their current employer are more likely to leave, and the costs associated with losing seasoned employees who possess deep institutional knowledge are significant — both for a company’s culture and its bottom line. So ensuring compensation for your experienced employees is keeping pace with their value is crucial.
Compensation Benchmarking and Pay Transparency
But as important as it is now, salary benchmarking may be even more critical going forward. The salary transparency law that recently went into effect in New York and the similar law that will go into effect in California in 2023 demand that for all but the smallest employers, postings for both internal jobs and external-facing listings need to include salary range information. In total, there are currently 30 states in the US with some sort of pay transparency law, and more states are expected to pass legislation requiring employers to disclose salary ranges. For companies in those states — or businesses with a remote workforce that might encompass workers or candidates in those states — salary ranges will become public information.
“That is a new source of market data which, when combined with 3rd-party published survey sources, will have a big input into how organizations set their salary range minimums and maximums,” said Atwell. Making sure the data source you use is relevant to both your industry and your location is critical to setting informed salary ranges that the company can justify, to both internal and external stakeholders.
How Does Compensation Benchmarking Work?
1. Audit jobs across the organization.
Generally, the first step of the compensation benchmarking process is conducting a detailed internal job audit, with the goal of cataloging not only what jobs exist within the company, but also the responsibilities and qualifications that each require. For each identified job, it’s important to establish the range of existing salaries the company pays. While it’s not critical to establish salary ranges, it’s also helpful to analyze non-salary compensation for each job, including bonuses, performance incentives, and any stock or equity grants. A job audit can very quickly help you understand if the levels in your organization are substantiated by a clear difference in salary and non-salary elements.
2. Choose data source(s).
Once a company has taken stock of its internal positions, the next step is to determine which source or sources to use for market data — like viewing the BLS data or purchasing a customized report from a consultancy, as mentioned earlier. While there are a number of salary survey companies, finding those that offer the specific peer group of companies and data insights your company needs requires research. It can be helpful to work with your company’s leadership to come up with a list of peer companies as criteria when speaking with representatives from various survey companies.
3. Compare pay scales.
Once the reference source or sources has been determined, someone from your HR team or an external consultant can compare your company’s existing salaries and salary ranges with the data for similar roles from the survey(s). Comparing job descriptions, rather than titles, often provides the most accurate points of reference, and lets companies determine where their pay scales are competitive, where they’re leading the market, and where they’re falling behind.
4. Make adjustments.
From there, any decisions — whether it’s to adjust the ranges offered within a given position, reevaluate starting offers, or move to a more structured range within established positions — can be made knowing how internal pay scales compare to industry norms.
Learn how to take a holistic, transparent, and tactical approach to employee pay with HR’s Guide to Setting a Compensation Strategy.
Additional Benefits of Compensation Benchmarking
While making adjustments to the company pay structure is what most firms expect to take away from the benchmarking process, there are a number of other equally valuable learnings that can come out of it. The information gleaned from the compensation benchmarking process will enable you to respect company budgets by allocating compensation dollars not only where they’ll be most effective, but in ways that directly help the organization reach its goals. The potential benefits include:
1. More Equitable Practices
Ensuring compensation is fair, equitable, and research-based — an especially critical element for firms prioritizing Diversity, Equity, Inclusion, and Belonging (DEIB) initiatives. Armed with a deeper knowledge of what’s happening regarding compensation — both within your company and your industry at large — HR teams and management can make unbiased, informed decisions when it comes to pay practices at your organization.
2. More Alignment
The compensation benchmarking process can also be a way for firms to answer crucial foundational questions, like: What do we value as a company? What is our place in the broader market? Does our compensation and benefits strategy support our vision? And, if it doesn’t, then what actions do we need to take at the corporate level to get our company mission and compensation plans into alignment to support the ultimate aims of our business? Considering these questions will provide valuable insights to your team — and help catalyze actions you can take to strengthen your pay practices and create alignment throughout your organization.
3. More Strategic Decisions
At the end of the day, compensation benchmarking is about acting strategically to attract top talent and reduce turnover by ensuring that employees are competitively paid. Seeing how similar firms structure their jobs can push companies to reevaluate their own structures: should there be more levels for some jobs to provide more natural advancement opportunities, for instance? Or, conversely, are there too many gradations for some positions with too few distinctions between each? Is our reporting structure on par with most others in the industry? And if it’s not, is it nonetheless the right structure for our needs?
While benchmarking is an important tool for firms of all sizes, smaller companies may find the insights they glean from the process can be transformative, Atwell noted. “[Smaller firms] are going to have to figure out how to architect their internal structures, and it’s a leg up to be able to start off with this kind of data,” he said.
The compensation benchmarking process can be transformative for the companies that undergo it. With a more thorough understanding of the company architecture, industry norms, and where compensation spending is going, management teams and HR have the insight they need to more effectively retain high-performing employees and recruit new talent. Salary benchmarking will also enable your firm to align its resources of time, talent, and money where they best serve company goals, furthering the success of your organization as a whole.