The Fundamentals of Salary Benchmarking

For what is pay data used?

There are two types of pay data. The first is internal, and the second is external.

Organizations use internal pay data to ensure that pay across the organization is fair. It does this by highlighting the pay ranges for each job. It shows data about employee retention and performance.

It helps to understand how location affects compensation. This is especially relevant for organizations with a workforce spanning a diverse set of locations. Or, for those with remote workers and gig workers.

The second of the two, external pay data, is necessary for benchmarking.

Why does benchmarking matter?

Salary benchmarking is a crucial part of creating competitive compensation. It keeps compensation internally fair and externally competitive. These factors are both critical to getting compensation right.

If compensation is not internally fair, morale across the company will plummet. This is due to employees not seeing a clear link between effort and reward. Or how pay relates to experience, or skills. As a result, there will be less reason to work. This leads to less productivity, and less long-term growth.

Pay that is not externally competitive brings other problems. If the pay is too low for the market, employees will seek out higher compensation in other places. If it is too high, then the extra expenses will harm internal equity.

Salary benchmarking commonly follows these metrics:

• Industry
• Location
• Job and duties
• Years of experience
• Organization size

Benchmarking methods

Here are the three most common forms of benchmarking:

Market pricing. The most common method. The organization aligns its salary structures with the market rates.

Job matching. Comparing salaries with similar jobs. Different to general market rates, it is role specific.

Points based. Most complex of the three methods. A points-based system where factors such as experience, skills, and competencies earn varying points. This creates a highly customized internal structure.

Sources of benchmarking data

Market reports: Industry groups offer helpful insights on trends.

Salary data sources: Organizations can pay for access to salary data on an ongoing basis.

Competitor analysis: While the data is not fully comprehensive, it is useful to help orient an organization within a specific industry.

Consultations: A helpful source for highly targeted feedback.

Existing network: This could be an informal conversation between professionals. Or it could be feedback forms from members of the organization. Both provide information.

Surveys: One of the most reliable forms of data comes from surveys. This is because the datasets are comprehensive and precise. This means that users can understand each influencer in compensation and create a comprehensive, competitive framework.

The benchmarking processes

1. Collect data

This is a crucial first step. The quality of the data will influence the rest of the process. Inaccurate data will lead to incorrect compensation.

2. Analyze the data

From this data they can then decide on what the pay should be.

3. Match the position

This is the process of finding similar jobs. The phrase “equal pay for comparable work” sums up this exercise. After matching the positions, it is possible to adjust. These changes will be based on the specific differences between the matched jobs and your role.

4. Compare internally.

This is the point to ensure internal equity. The pay needs to fit inside the existing internal hierarchy of jobs. A simple example: a new hire with one year of experience must not receive higher pay than an existing employee with five years of experience.

Limitations of benchmarking

Benchmarking is one of the best ways to ensure that your rates are right. It keeps them in line with what the market is doing. However, there are times when your organization will want to diverge. For example, there might be key employees that are worth significantly more than the industry average. Despite this, it is still important to know what the market rates are before diverging. Without this knowledge, you will not know whether you are paying above or below the market.

The second issue is accuracy of data. There is a wealth of varying quality data available. It is important to understand which is the best data for your needs. It is also critical to know which metrics to focus your resources on. How recent the data is will be a factor to consider. This is especially true for faster moving industries, for example, AI.

Compdata Surveys

These surveys are US focused unlike many other surveys such as IPAS. They allow users to approach compensation from a firm, data-backed foundation. They provide critical information for reporting, helping to communicate decisions around hiring. For example, internal conversations around promotions.

Here is a summary of the benefits of Compdata surveys:

Unparalleled data: The data in these surveys is both broad and deep. As a result, it affords the best and most exact insight available.

Trusted source: With over 25 years of experience leading the compensation industry, Salary.com is among the most trusted organizations. It has set a new standard in survey data quality.

Consistently updated: Our data is not static. Regular updates keep it as relevant and as dependable as possible. Our consultants carefully vet the data, highlighting outliers.

Broad job ranges: These surveys cover a wealth of roles and job families. The data is also effective for more specific, specialized roles. It has data for thousands of individual job titles.

Variety of industries: From nonprofits to health, from public to private.

Pay optimization: These surveys are not just for creating new jobs and roles. They also function well for supporting ongoing competitiveness for existing roles. For example, salaries may not increase across an industry at the same rate. The surveys improve competitiveness across the organization.

Conclusion

Ultimately, benchmarking creates better compensation plans. By reviewing surveys once a year, organizations can feel secure that they are not getting left behind. This is especially important for indirect benefits. They change quickly and reflect the personal needs and lifestyle of employees. For example, paid time off, gym memberships, or money towards a home office. Keeping track of the newest benefits will keep companies competitive. It will also keep employees satisfied and productive.