Understanding the Salary Benchmarking Process

by Connor Harrison - June 17, 2019
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Salary benchmarking, also called compensation benchmarking, is a process where internal job descriptions are matched to similar external jobs to identify the market pay rate for each position.

Why is Salary Benchmarking So Important?

Salary benchmarking allows your organization to ensure it is hiring competitively. In a talent market where employees are increasingly focused on pay fairness relative to their peers, salary benchmarking is a must in any compensation process.

If done incorrectly using poor market data or user-reported data, you could have a hard time attracting the best candidates. Plus, you could risk advertising a position with a salary range completely out of whack with the rest of the market, giving you poor candidates.

If you hire someone and a salary benchmarking mistake is later discovered, any salary adjustment (especially downward) could create employee dissatisfaction, negative employee engagement, and higher turnover costs as a result of needing to replace the employee.

Salary Benchmarking Best Practices

When creating a new position complete with job responsibilities and a corresponding salary, it is important for your organization to perform an efficient and accurate market assessment and salary comparison.

Here are six salary benchmarking tips for improving the accuracy of your matches and prices.

  • Use data sources that incorporate your business and competition – Data sources that cover the jobs, industries, geographic areas, and company sizes important to your organization. Plus, if you’re purchasing traditional, participant-driven compensation surveys like Compdata from Salary.com, make sure that your competitors are among the participants.
  • Don’t worry about perfect job descriptions – The job descriptions in compensation surveys are not intended to be all-inclusive. They are generic descriptions that best describe the essential functions of a job, rather than the application of that job in a specific company. To find the right job match, look for a survey job description whose content matches 80% or more of the content of your internal job description.
  • Match jobs based on job description content, not just the job title – Similar roles, like accountant and bookkeeper, will be more clearly differentiated in job descriptions. Roles that may be near-identical, but with different names, will also be recognized as such within job descriptions, such as Clinical Trial Manager and Clinical Research Manager.
  • Match as many survey jobs as possible to your company’s jobs – Benchmark jobs, such as those in the Finance, HR, or Marketing job families, should be readily available in the compensation data sets you subscribe to and can provide key pricing indicators for other, harder-to-price jobs.
  • Focus on matching and pricing jobs, not incumbents – A person is not their job. Do not match individual people who perform a job within your organization. Instead, match for the job you are looking to fill. An existing employee may perform less, or more, than what you are seeking to fill moving forward. Be sure to analyze the external competitiveness and internal equity of individual employee compensation packages after you have market priced your jobs.
  • Hybridize jobs judiciously – Jobs can be blended to create hybrid jobs, but no more than two or three jobs per survey should be combined to represent your company’s job. Remember that you’re looking for an 80% or better match for the job, not a line-by-line description of every role that one employee plays in your organization.

Salary Benchmarking Determines Pay

How you choose to price your jobs will determine how you pay your employees. Many organizations target the market’s 50th percentile or lower when pricing. This may help save money and allow room for salary negotiation while still paying new hires equitably. However, you may determine that this approach doesn’t always fit your pay philosophy, recruiting and retention goals, or budget.

As you begin to price the jobs in your organization, consider grouping similar jobs together to drive additional analysis and improved decision-making around prices for all jobs in the group. Ultimately, the salary benchmarking process will feed directly into your organization’s pay structures, allowing you to maintain externally competitive and internally equitable pay over time.

Download White Paper – The Business Case for Compensation Management:

Download our white paper for more information on how compensation management, such as salary benchmarking, can maximize your organization’s competitive potential across the employee cycle.

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