Salary benchmarking is a powerful tool for building a stable, motivated workforce and decreasing turnover costs. It helps optimize your compensation planning and satisfy employees by accounting for factors like inflation and industry standards.
Fair compensation is necessary as it is a fundamental driver of employee morale and job satisfaction. Consider that 44% of organizations lose employees because they don’t provide competitive salaries, while employees who believe they are paid fairly are 30% more likely to be satisfied with their jobs.
Contents
What is salary benchmarking?
Why is salary benchmarking important?
How to benchmark salaries
Best salary benchmarking tools and free calculators
What is salary benchmarking?
Salary benchmarking — also known as compensation benchmarking or pay benchmarking — is the process of evaluating a company’s internal salaries based on their external value. This involves comparing job descriptions and pay ranges with those of similar positions in other organizations within the same industry.
Organizations use compensation surveys, government labor databases, and compensation consulting services to gather accurate job market data. This data helps establish competitive salary packages that ensure employees receive pay comparable to what competitors offer for similar roles.
HR professionals use salary benchmarking to assess and enhance the competitiveness of their organization’s compensation packages. Collecting and analyzing this data allows them to create salary packages aligned with company budgets, helping their organizations remain productive and profitable.
Factors that influence salary benchmarking
- Industry: Salaries can vary significantly between industries due to differences in market demand, profitability, and the complexity of roles within each sector.
- Geographical location: The cost of living, availability of talent, and local economic conditions in different regions can significantly influence salary levels for similar positions.
- Company size: Larger organizations often have more resources and may offer higher salaries than smaller companies, which usually have smaller budgets.
- Education levels: Positions requiring higher levels of education and expertise tend to command higher salaries.
- Cost of living: Companies with offices in areas with a higher cost of living often offer higher salaries to attract and retain employees.
- Scope of responsibilities: Jobs with broader or more complex responsibilities typically offer higher compensation to reflect their heightened expectations of employees in those positions.
- Specialized credentials or required skills: Roles that require unique skills or certifications tend to offer higher pay to attract individuals with the necessary qualifications and expertise.
Why is salary benchmarking important?
Salary benchmarking is essential to help your organization remain competitive and retain top talent by providing you with crucial information on the salaries your competitors offer. Understanding these benchmarks will help you develop attractive compensation packages, streamline your recruitment process and minimize the need for prolonged or aggressive hiring efforts.
Offering competitive salaries based on benchmarking data also boosts employee morale and job satisfaction. When employees feel they are compensated fairly and in line with industry standards, they are more likely to be engaged and motivated, leading to improved performance and retention.
Regular salary benchmarking keeps your organization’s pay structures fair and aligned with current market trends. This is vital in a dynamic job market as it helps you remain responsive to changes in industry pay standards. Additionally, it helps you determine costs associated with new hires so you can develop effective strategies to attract and retain top talent while remaining within budget constraints.
Understanding market compensation trends enables you to make informed decisions on salary offers, ensuring both competitiveness and financial prudence. Salary benchmarking is also crucial for compliance with state and federal labor regulations. It ensures your company’s pay practices meet legal requirements, reducing the risk of potential disputes or penalties arising from compensation discrepancies.
HR tip
While sharing salary information amongst industry peers can be risky and sensitive, you can obtain such information through less conventional methods, like Reddit threads. However, do bear in mind that this is just one source of data you can use in your salary benchmarking research — you should not treat it as a single source of truth.
How to benchmark salaries
Develop a salary benchmarking plan
A comprehensive salary benchmarking plan is essential for a successful benchmarking process. You must clearly define both long- and short-term objectives and align them with your organization’s strategic goals. Establishing and adhering to a strict timeline is also crucial for salary benchmarking, especially in a rapidly changing job market where data can quickly become obsolete.
Include a detailed budget to ensure you have sufficient financial resources to acquire quality data. This might include subscribing to salary surveys, investing in benchmarking software, or engaging consultants. Identifying necessary resources (including team members, tools, and technology) can help prevent delays and facilitate the smooth execution of each phase.
Create clear job descriptions
Clear and accurate job descriptions form the basis for comparing your internal roles with external market benchmarks. Detailed descriptions outlining responsibilities, required skills, and relevant qualifications help you match internal positions more precisely with similar roles in other organizations. This precision is critical because job titles alone can be misleading, often encompassing different responsibilities across different organizations.
In-depth job descriptions also enhance internal clarity by aiding employees’ understanding of their roles, which can boost job satisfaction and performance. Regularly updating job descriptions ensures they align with current industry standards and evolving role expectations, enhancing your benchmarking data’s relevance and applicability.
Consider your data sources
Appropriate data sources are crucial for effective salary benchmarking, as the quality and relevance of your data directly impact the accuracy of your benchmarks. Using multiple reliable sources—such as industry-specific salary surveys, government labor databases, and aggregated employer-reported data—provides a comprehensive view of salary trends across different sectors and regions.
Employee-reported crowdsourced data offers additional insights into broader market trends and emerging salary expectations. Regularly updating your data sources ensures your benchmarks reflect current market conditions. This helps you align your compensation strategies with prevailing salary norms and maintain organizational competitiveness.
Analyze compensation data
Effective salary benchmarking starts with identifying roles that require benchmarking and then gathering relevant data from reliable sources. Comprehensive data collection helps your benchmarks accurately reflect market conditions. Additionally, prioritizing roles of strategic importance or with high turnover rates allows you to focus on positions that significantly impact organizational success.
Using multiple sources, such as salary surveys, industry reports, and data-sharing networks, provides diverse salary data covering different aspects of compensation. Benchmarking software, like Pave and Hibob’s compensation management tool, can facilitate efficient data aggregation and analysis, simplifying the interpretation and application of setting attractive salary ranges.
At the same time, regular updates to data collection methods and incorporating emerging data sources will ensure your benchmarks remain accurate and relevant. Trusted salary data sources include surveys from Mercer, Payscale, and the Bureau of Labor Statistics.
Establish a compensation strategy
Aligning salary benchmarks with your organization’s goals is essential for developing a strong compensation strategy. This alignment ensures that salary structures support broader objectives like growth, retention, and competitive positioning — all while remaining financially sustainable. HR professionals can integrate benchmarking data to create salary packages tailored to the organization’s needs.
HR tip
Use exit interviews to understand why employees leave, especially if there are compensation-related reasons. This feedback can provide direct insights into whether your organization’s salaries are competitive. Ask departing employees about their new offers and what influenced their decision to leave, then use this information to adjust your compensation packages and increase your chances of retaining future talent.
Balancing competitive salaries with budget constraints helps attract and retain talent without compromising financial health. Consider factors such as company size, geographic location, and current salary structures to ensure salary decisions are in line with market conditions and organizational objectives.
Set salary ranges
Setting salary ranges involves defining the minimum and maximum pay for each role based on market data and job requirements. This process ensures competitive and equitable compensation, which is crucial for attracting and retaining talent. Using benchmarking data, you can set salary ranges that reflect market values while accommodating different experience levels and skills.
HR tip
Regularly review competitors’ job advertisements to understand the salary ranges they are offering for similar positions. This provides a benchmark for your own salary structures. Set up alerts on job boards and company career pages for roles similar to those in your organization to monitor changes and trends in offered salaries, ensuring you remain competitive in the job market.
Creating salary bands for entry-level, mid-level, and senior positions within each role provides both flexibility and structure, ensuring fairness and internal competitiveness. Regularly reviewing and adjusting salary ranges also helps maintain alignment with market trends and internal changes, as well as overall fairness.
Additionally, adjusting salaries for geographical differences aligns compensation with cost-of-living variations. However, do note that this practice is now changing, as some companies with remote workforces tend to keep salaries for similar positions the same regardless of their employees’ locations.
Document everything
Documenting your salary benchmarking process and its outcomes is essential for transparency and organizational trust. A detailed report must outline your methodology, data sources, and findings in order to support salary adjustments or recommendations with solid evidence.
Maintaining detailed records of surveys, data sources, and analyses ensures consistency and provides a valuable reference for future salary reviews and adjustments. This thorough documentation is critical for demonstrating that salary decisions are not arbitrary but grounded in rigorous analysis.
Sharing this documentation with management and stakeholders helps build understanding and support for proposed salary changes. It ensures everyone involved is informed about the basis of these decisions and bolsters the credibility of the salary benchmarking process.
Best salary benchmarking tools and free calculators
To sum up
Salary benchmarking helps build a stable, motivated workforce and reduces employee turnover costs. By aligning your compensation plans with market standards, you make employees feel valued and satisfied. Competitive salary packages help attract top talent, streamline the hiring process, and enhance overall employee morale and job satisfaction. The results are higher engagement, better performance, and improved retention rates — all crucial for organizational success.
Salary benchmarking also ensures compliance with state and federal labor regulations, reducing the risk of legal disputes or penalties related to compensation discrepancies. Regularly updating your salary benchmarks keeps your pay structures fair, competitive, and aligned with current market trends. This helps your organization stay responsive to changes in industry pay standards, supporting broader organizational goals and building a culture of fairness and transparency.
