What is an compensation benchmarking?
While the tide may be shifting in terms of what attracts an individual to a position (most notably flexibility, work-life balance, and opportunities for further qualifications), the fact remains that a competitive salary is a key factor when it comes to securing and retaining employees. Companies need to strike a balance between offering a reasonable wage, remaining within the budget of the department or division, and maintaining pay equity throughout its ranks.
This is where compensation benchmarking comes in. As a data-assisted tool designed to determine how much an employee is “worth” in their position, compensation benchmarking draws on the information listed in job descriptions, compensation surveys, government databases, labor ministry data, and compensation consultation services to establish a strong picture of the salary landscape for a particular role, industry, or category of worker. This allows the company to evaluate its internal salary structure based on these external findings and conclude whether it is indeed paying its employees enough to retain them — or if changes need to be made sooner rather than later.
Armed with these insights, a company can put together salary packages that are both attractive to candidates and within their own hiring budget. When tied into an optimized recruitment process (comprising a rewarding candidate experience, a thorough interviewing process based on targeted candidate profiles, and a smart onboarding workflow), this boosts the chance of retaining new and existing employees in the long term.
Why is compensation benchmarking important?
Job satisfaction and employee morale are rooted largely in employees’ perception of receiving fair compensation for the duties they fulfill. If an employee feels undervalued, this increases the chance that they will be attracted by a better offer from a competitor. If this happens, your company could be at a disadvantage on multiple fronts:
You lose an employee you have trained, along with all the experience they have gained, to a competitor.
This compromises the knowledge transfer chain, potentially leaving a team or department without a qualified expert in their field.
You have to initiate a new recruitment process, which is expensive, time-consuming, and comes with no guarantee that you will be able to replace the departed employee.
Your company’s reputation may become tarnished, making it less attractive as a place to work among the wider talent pool.
Compensation benchmarking is an essential way to keep track of your salary structure and ensure your employees remain satisfied and motivated in their roles for the months and years to come. Of course, it’s important to keep in mind the factors that can influence compensation benchmarking — after all, no two companies are alike, and an SME operating in two locations may not find it useful or appropriate to compare its salary structure with a multinational corporation. Compensation benchmarking can be influenced by the following factors:
Geographic location/country
Cost of living
Education/qualification level
Industry/segment
Own company size
Duties/responsibilities of the employee
Additional skills unique to the role
These elements should all be considered when applying compensation benchmarking in order to provide more accuracy regarding the results.
How to use compensation benchmarking
Benchmarking typically prompts employers to align their salary structures with the industry median, as this has been proven to yield positive results in terms of employee retention. As a rule of thumb, following the industry average is a good way to use compensation benchmarking, though it is also possible to raise your salaries beyond this if you wish to increase the chance of hiring a well-qualified employee quickly.
Benchmarking data can be used in the following ways:
To set the wages of new hires during the interviewing/onboarding process
As a basis for entering salary negotiations with new or existing employees
Establishing and refining salary ranges for specific positions or areas of expertise
Determining a salary range to be listed on a job requisition or job description
It is important to note that compensation benchmarks are varied in scope. The following are all legitimate data sources that can be used as part of your internal salary benchmarking process:
Government data based on household and business surveys
Crowdsourced information from anonymous employees
Data exclusive to clients of consulting firms (if you choose to work with one)
Academic and industry studies
Working with a compensation consulting firm can be of significant benefit to your company, as they often provide exclusive access to the aggregated earnings data of their clients (presented in anonymized form). Such firms then streamline and present the data in easily digestible formats, e.g., as graphs or charts on a dedicated platform or user interface.
Advantages and disadvantages
Compensation benchmarking comes with numerous benefits, especially when employed as part of a holistic recruitment process (comprising a well-written job requisition, accurate candidate personas, a rewarding candidate experience, and a thorough onboarding process).
These advantages include:
- Internal job equity, or the practice of ensuring that employees are paid fairly for their contributions to a company.
- Employee satisfaction, as the staff member feels valued by the company.
- Better productivity, where fairly compensated employees are motivated to work harder and potentially for longer.
- Employee retention, as individuals have fewer reasons to search for job opportunities if they feel fairly compensated, motivated, and valued.
- Attraction of new talent, which is especially critical given the scarcity of skilled workers and the war for talent being waged between competing companies.
What to avoid
Salary benchmarking isn’t foolproof, and there are a few points to keep in mind to avoid becoming too reliant on this tool alone:
- Lack of flexibility: Relying too heavily on benchmarks may lead to overly rigid salary structures that fail to take individual performance, unique skills, or other qualitative factors into account.
- Overemphasis on external comparisons: Focusing too single-mindedly on external trends can undermine the perceived level of fairness within the organization, which could lead to dissatisfaction.
- Erosion of company culture: Adapting your salary structure too closely to the market average may prove too generic, as it overlooks other benefits provided by your company, including work-life balance initiatives, perks, and embodiment of values.
- Risk of pay compression: Being too rigid with salary structures could lead to a compression of wages between experience and qualification levels, which may demotivate employees who have been in their position for longer.
Best practices
Compensation benchmarking is beneficial both when taking the general temperature of the industry and for obtaining specific insights into the salary landscape for individual positions. Additionally, there are some best practices that can be employed to leverage this tool to maximum effect:
Define the benchmarking objectives
Decide exactly why you are using compensation benchmarking, e.g., to attract new talent, to stay competitive in a hotly contested industry, to motivate the existing workforce, or to ensure internal equity.
Set specific goals
Be sure to establish measurable outcomes, such as adjusting pay for specific roles or aligning with industry standards.
Apply data from relevant sources
For best results, choose data that aligns specifically with your industry, geographical location, and company size. Moreover, avoid any sources that are not watertight in terms of their traceability — rely on government publications, industry groups, and compensation consultancy firms to provide credible data.
Factor in job matching
It is prudent to compare similar roles based on responsibilities — not just job titles, as titles can vary significantly across companies. In addition, be sure to match the level of the role — e.g., entry, middle management, executive — to guarantee accuracy.
Focus on total compensation
Shining the spotlight solely on base pay is short-sighted, as there are various ways to supplement a salary that should be considered as part of the compensation package. Aspects such as annual bonuses, benefits, and perks allow for a more comprehensive comparison.
Finally, keep in mind that the sharing of salary data between competitors within the same industry can be both sensitive and risky, as it can pave the way for talent poaching and put your company at a strategic disadvantage. This is why it may be prudent to withhold detailed information about your organization’s salary structure and offer only a general overview in job descriptions and other official documents that are made available to the public. Anonymized surveys are less of an issue, as the data cannot be traced back to your company.
If you do not currently have the resources to apply compensation benchmarking to determine the market rate for an internal position via an external analysis, there are other, less price-intensive ways to evaluate compensation for a position or industry:
Internal equity analysis
Compare roles within the organization to ensure fairness in pay for similar responsibilities and contributions.
Performance reviews
Issue bonuses for strong individual or team performance, and align compensation structures on an annual basis to reward high-value contributions to organizational goals in a timely and suitable manner.
Business financial metrics
Align salary structures according to the company’s ability to pay in order to ensure sustainability, while for roles that are directly linked to business outcomes, pay can be evaluated as a percentage of revenue generated or costs saved.
Total rewards approach
Compensate employees based on robust non-monetary benefits, like flexible schedules, health perks, and/or career development opportunities to create value that goes beyond salary.