How to do salary benchmarking: the complete guide
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In 2024, 42% of professionals outlined ‘salary’ as their most valued factor when looking to move roles. Despite this, over a 40% of UK workers are unhappy with their current pay check.
This dissatisfaction comes at a cost. If you're not offering competitive salaries, your organisation will fall behind. It will suffer loss of employees, be outpaced by competitors, and lose control of pay.
The solution? Salary benchmarking. Let's explore.
What is salary benchmarking?
Salary Benchmarking is the process of evaluating and comparing your organisation's internal job salaries against the external market rates for comparable positions.
This process provides valuable insights into whether the compensation your offering is competitive, fair, and aligned with market trends.
Market data of the pay ranges for the roles that we want to benchmark can come from various sources such as compensation surveys, online salary databases, industry reports, and compensation consultancies.
Why salary benchmarking is important
Salary benchmarking is key factor in a robust compensation strategy. and the benefits of it spread throughout the organisation.
Without it, your company is essentially blind, setting salaries and building a compensation structure without any reference points. It’s like trying to set a sale price for your house without actually looking at the going rate for similar properties; a sure-fire way to either lose money or not receive any offers.
Attracting and retaining top talent
26% of job seeker decline offers due to "the compensation and benefits not meeting expectations". And 57% of workers looking for new jobs cite dissatisfaction with pay as the reason for seeking other opportunities.
A proper salary benchmarking process helps you stay competitive by offering rewards and benefits in line with industry standards. It also reduces the risk of losing valuable employees to competitors who make job offers with more lucrative pay packages.
Ensuring fairness and equity
Fairness should be at the heart of any good compensation philosophy.
Salary benchmarks ensure that people are fairly compensated based on the responsibilities and requirements of their roles. It also helps identify any gaps or disparities in compensation.
Cost control
By aligning salaries with market rates, benchmarking prevents the risk of over or underpaying employees. This strategic approach to compensation control allows companies to effectively manage overall costs while remaining competitive in the market.
Compliance with employment laws
You can benchmark salaries to reduce the risk of legal issues arising from equal pay and discrimination laws. This ensures that your company remains within legal boundaries and fosters a fair and inclusive work environment for all employees.
Increased employee satisfaction and trust
Ensuring people feel they are compensated fairly not only boosts satisfaction, but also increases employee engagement and productivity in the workplace. Additionally, the transparency enabled by benchmarking data builds trust between employees and employers.
“Employees keep the business doing what it does. It's important to pay them accordingly.”
Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth
Types of salary benchmarking
When we think of benchmarking, most people jump straight to associating it with the concept of 'external benchmarking'. In other words, comparing internal salaries to external market rates.
Whilst that is generally what people mean when using the term, there's actually three types of benchmarking that fall under this umbrella. To ensure the perfect compensation package, you should utilise them all.
Internal benchmarking
Here, you compare salaries within your organisation to ensure consistency and fairness among those who have similar roles and job level. This allows you to identify any discrepancies or inequities and make necessary adjustments. Remember, there needs to be a good reason for anyone who is above the average salary for a position.
External benchmarking
This is your bread and butter. It focuses on comparing the salary ranges of your to those offered by others in your industry or geographic location. It helps you remain attractive to prospective employees and ensures employee retention.
Global benchmarking
This reserved for multinational companies with operations in different countries. It involves comparing salaries across different regions, taking into account factors like cost of living, local market rates, and currency exchange rates. This helps ensure fair pay package for employees regardless of their location.
Laying the groundwork
Before you dive headfirst, there are a few crucial steps you need to take to ensure a smooth and effective process:
Define your compensation philosophy: A winning compensation philosophy should be your guiding principle for how you approach pay. Do you want to be a market leader, paying top wages to attract the best talent? Or are you aiming for a more balanced approach, offering competitive but not necessarily top-tier salaries? Having clear goals will help you make consistent and informed decisions throughout the benchmarking process.
Get thing in order: When comparing roles, we need to make sure that we're actually comparing the same things. Two jobs with the same title aren't always alike. For example, a "Marketing Manager" in charge of entire team at enterprise organisation might have quite different duties than one as the sole member at a start-up. So, before you start comparing, make sure you have accurate internal job descriptions so that you're comparing like-for-like job roles with similar responsibilities and skill requirements.
Look internally before externally: Before you start comparing your salaries to the market, make sure your internal compensation structure is sound. Are there any obvious inconsistencies or pay gaps within similar roles? Address any internal equity issues first to ensure a fair and transparent foundation for your benchmarking efforts.
Set clear objectives: What are you hoping to achieve with salary benchmarking? Are you looking to fill specific talent gaps, boost retention, or simply ensure your compensation is competitive? Having clear objectives will help you focus your efforts and measure your success.
Assemble your team: Salary benchmarking is a collaborative effort. Bring together a cross-functional team that includes representatives from HR, finance, and relevant departments. This ensures you have diverse perspectives and expertise throughout the process.
Choose your jobs wisely: Not all roles are created equal when it comes to benchmarking. Focus on key positions that are critical to your business, have high turnover rates, or are difficult to fill. These are the roles where competitive compensation can make the biggest impact.
Source your market data: You need market data to compare your roles against. And it needs to be high quality. We're going to go into detail on this next.
Where to find salary benchmark data
Now that you know what to benchmark, let's talk about where to find the data you need.
Take your time to do things right here. If this data is unreliable then your benchmarking will be built on crumbling foundations, making the whole endeavour pointless.
Reputable Salary Surveys and Databases
These are the gold standard. These agencies have the best access to salary information and provide quality surveys that aggregate data from thousands of companies. Some of the most trusted names include:
Paydata: A leading UK-based reward consultancy with 25 years of experience and some of broadest salary benchmarking consultation options available. There comprehensive data can help you compare salaries and benefits with those of your peer groups, industry sector, and the general marketplace.
Mercer: A global player known for their in-depth industry analysis.
Salary.com: An online platform that provides salary data based on a combination of surveys, self-reported data, and statistical modelling.
Industry associations: Many industry-specific groups conduct their own salary surveys, which can be a valuable source of targeted industry benchmarks. For example, the Society for Human Resource Management (SHRM) offers salary data for HR professionals.
Compensation Consultants
These experts can provide custom-tailored salary benchmarking reports that are specific to your company's size, industry, and location. While they can be pricey, they can be worth the investment for companies with complex compensation needs.
Networking (with Discretion)
While chatting with your HR peers at a conference can yield some insight, remember it's all anecdotal information. It's best to use this type of information as a supplement to more formal data sources.
A Word of Caution
Job boards and websites like Glassdoor can be a starting point, but take their data with a grain of salt. Self-reported salaries can be inaccurate, and these sites often don't take into account all the factors that go into determining compensation.
By diversifying your data sources and focusing on reputable options, you'll be well on your way to gathering the reliable information you need to make informed compensation decisions.
Key Factors to Consider in your data
Before you start making critical decisions based on the market data, it's crucial to take a closer look. Remember, not all data is created equal, and understanding the nuances can make all the difference in ensuring your benchmarking is accurate, relevant, and actionable.
A good consultancy should ensure all these things for you, but here what to look out for just in case.
Job Responsibilities and Skills
Make sure that the internal and external job descriptions match for each role. Remember, not everyone with same job title has the same exact role. This is essential for ensuiring the correct salary range.
Industry and Location
Location is as important for salaries as it is for real estate. Certain industries pay more than others, and salaries can vary drastically depending on where your company is located. Think Canary Wharf vs. a small town Yorkshire.
Company Size and Financial Health
Let's face it, bigger companies often have bigger budgets. So, it's natural that a well-funded tech giant might pay more than a scrappy start-up. Your company's financial situation plays a role in what it can offer.
Cost of Living
This is a big issue right now, especially for global companies. You need to factor in the cost of living to make sure your employees are actually making a living wage.
“Some workers will need a pay rise of more than 10 per cent just to keep treading water in terms of their purchasing power.”
Employee Performance and Experience
High performers and seasoned veterans usually command higher salaries. Experience, skills, and track record all play a role in determining what someone is worth.
By considering all of these factors, you'll be able to benchmark salaries with precision. Remember, it's about more than just matching numbers – it's about understanding the whole picture and making sure your compensation strategy is both fair and competitive.
How to benchmark your roles
Now for the fun part (or not, depending on your feelings about spreadsheets). It's finally time to benchmark.
Everything you've done up until this point will have set you in perfect stead to get some great results. Let's look at the steps you'll be taking to actually crunch the numbers.
Compare the Data
Analyse the data you've collected and compare it to your current salaries. Are you paying above, below, or right on target? Look for trends and patterns that can help you make informed decisions.Make Your Move
Based on your analysis, you might decide to adjust your compensation structure. This could involve raising salaries for certain roles, offering more competitive bonuses, or revamping your benefits package. Remember, the goal is to strike a balance between internal equity, market competitiveness, and your company's financial realities.Share the News
Transparent compensation is key. If you're making changes to your pay, communicate them clearly. Failing to do so is fast-track to employee dissatisfaction. Explain the reasoning behind the changes and how they'll benefit the company as a whole. This will help build trust and show your commitment to fair pay.
Remember, this is an ongoing process – the job market is always evolving, so be prepared to adjust your strategy as needed to stay ahead of the curve
The best salary benchmarking tools
There are many tools out there on the market that can help in this process. From job evaluation software that helps accurately grade every job in your organisation, to self-serve salary databases.
We have partnered with Paydata to provide PAYreview customers access to the gold standard of benchmarking data. Paydata are a leading reward consultancy who have one of the most comprehensive salary databases in the UK.
When you pair this with our compensation management software, you can take back control of your pay. PAYreview helps you improve you processes, set solid pay foundations, and reclaim your wasted hours.
Conclusion
The world of salary benchmarking can seen overwhelming at first, but armed with the right knowledge and approach, it's an achievable and necessary goal for any organisation.
By understanding the different types of benchmarking, considering the key factors that influence pay, and utilising reliable data sources, you can achieve your compensation philosophy and elevate HR’s strategic impact.
So, whether you're aiming to attract top talent, reduce employee turnover, or simply ensure fairness and equity, salary benchmarking is the way forward.