Making Informed Pay Decisions with Compensation Benchmarking
What should you pay your IT engineers? Or your CFO? Or any other role for that matter?
Should that change based on their location? What kind of bonuses, if any, should they be eligible for? How should you factor in their increase in skill or experience, while fixing pay?
As an HR leader, you have probably devised a mechanism to figure out answers to these questions and how much each role in your company is ‘worth’ to you. But have you factored in other variables as well? What is the worth that competitors ascribe to the same roles? Are there any government or regulatory norms that define what pay should be?
To answer these questions is where compensation benchmarking is useful.
What is compensation benchmarking?
Compensation benchmarking is the process of determining the ‘market rate’ for jobs in your company by analyzing the rates of similar jobs in the external market.
It aims to create compensation plans that strike the right balance between being market-competitive and also being budget-friendly. By offering similar pay for comparable jobs, you can ensure that people feel valued and respected in comparison to other professionals in similar jobs and industries.
The process of compensation benchmarking considers multiple factors, some of which could be:
- Education & experience
- Prevailing economic factors
- Job complexity and criticality
Benchmarking allows you to get insights into current trends and emerging needs, helping you to craft a meaningful, relevant workforce experience (Wx) for your people. Because compensation is an important contributor to people’s sense of self-worth, benchmarking indicates how serious you are about helping them discover their value to you.
Why is compensation benchmarking important?
Contrary to popular belief, salary benchmarking is not a once-a-year activity taken up secretly by HR departments around the time of salary reviews. It is an activity that impacts how you run your business throughout the year.
The key benefits that compensation benchmarking provides are:
- Talent attraction: Being known as an employer who is aligned with the market and pays competitively can help you attract top talent.
- Talent retention: Analyzing trends can make your people believe that you are focused on paying them fairly and equitably. Therefore, they are less likely to leave due to feelings of being compensated unfairly.
- Improving the Wx: A sense of worth improves people’s engagement, leading to higher productivity and better results.
- Cost control: Training hiring managers and recruiters to make the right salary offers within range for a position improves budgetary adherence. In addition, it ensures that new hires don’t end up at significantly higher salaries than current incumbents.
- Compliance: With pay transparency and pay fairness laws emerging across the globe, compensation benchmarking helps to stay on track with legal and regulatory norms.
How to conduct salary benchmarking
There are a variety of options available to conduct salary benchmarking:
- Qualitative inputs: Based on public posts on social media, job ads of competitors, and insights from candidate interviews, you can piece together some elements of how the market pays for various jobs. However, this strategy is unreliable and time-consuming. You may not be able to get relevant data in a timely manner to use meaningfully.
- Crowdsourced data: Multiple sites offer approximate pay ranges for different roles, locations, and companies. From an overall directional sense, this data might give you some picture. But, because it is based on self-reporting, its accuracy may be debatable. In addition, it may not take into account the complexities of jobs based on job descriptions, and provide misleading insights.
- Data from regulatory bodies: Government entities and regulatory authorities may publish data that provides fair/living wage related details. For example, the US Bureau of Labor Statistics provides free data on hourly wages in all US states. This data may not be timely or reflective of your industry and location(s). But because it is free, it can still be used as a broad indicator.
- Salary surveys: Considered the most accurate and in-depth way to benchmark compensation, salary surveys are typically conducted by various consulting firms. You can buy industry-wise reports that give you salary benchmarks at different market positions (50th percentile, 75th percentile, etc.). Additionally, you can also opt for a custom data set based on your unique needs. For example, if you are a healthtech startup who wants to compare some roles with healthcare companies and others with tech startups, a custom report that includes both data sets can be useful.
The first step to compensation benchmarking is to conduct a job evaluation exercise to understand each job in more detail. Once you have a better understanding of how jobs compare with each other internally and externally, you can bring in richer insights from the benchmarking exercise to attract, engage, and retain people.
To talk about how to make your benchmarking journey a success, reach out to us at [email protected].