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What is salary benchmarking, and why is it so important?
With a wealth of free information at their fingertips, employees are more informed than ever about market rates of pay for their roles.
Having market intelligence, as well as a good understanding of where your organisation sits in relation to the market, is essential to setting an effective reward strategy.
To compete for talent and retain key people, your organisation must not only develop fair and market-competitive salary ranges, but review them on a regular basis.
This guide will delve into the concept, importance, implementation, and best practices to help you create a fair and competitive pay structure for your organisation.
What is Salary Benchmarking?
In a nutshell, you’re looking at the process of comparing your organisation’s pay rates against market data to ensure you’re offering competitive salaries.
It involves gathering pay information from reliable sources, such as salary surveys, and analysing it to determine the going rates for specific roles in your industry and location.
The Importance of Salary Benchmarking
Attracting Top Talent
Benchmarking serves as a valuable tool in enabling you to offer competitive pay. Salaries that fall below the market rates can result in difficulty attracting and retaining skilled professionals.
By determining competitive pay levels, you can position your organisation as an attractive employer.
Not only that, but including pay ranges and benefits in job descriptions also increases transparency and helps candidates make informed decisions about their career choices.
Ensuring Fairness and Transparency
To comply with the Equality Act 2010, people doing ‘like work’ should be compensated equally.
Salary benchmarking helps compare your pay and benefits structures with industry ranges. As a result, you can ensure that your employees are being paid fairly for their roles, experience levels, and contributions.
This, in turn, contributes to creating a positive work environment and fostering trust and engagement among the workforce.
Managing Company Costs and Budget
Moreover, understanding the answer to the question ‘what is salary benchmarking’ helps ensure you are effectively budgeting for and managing your company’s pay strategy.
By understanding the market rate for a specific role, you can make more informed decisions about pay ranges, thereby attracting the needed talent without overspending.
Making Non-Discriminatory Decisions
By researching salary data and comparing internal job descriptions with those of other companies, you can make impartial, data-led decisions. This approach eliminates bias and promotes diversity and inclusion within your organisation.
Planning for Salary Benchmarking
What Are Your Pay Objectives?
Does your organisation have a reward strategy? If it does, is it linked to your business objectives?
If so, you are likely to have a clear idea of what you are looking to get out of benchmarking salaries in your organisation. Start by answering key questions such as:
- Who are your key competitors?
- Do you want to be a market median payer or lead the market?
- How does base salary fit into your overall reward strategy?
- Are you looking to drive high performance or is retention your top priority?
Review Job Descriptions
Job descriptions are essential for salary benchmarking. They allow for the identification of similar positions in different organisations, even when the job titles may vary.
When it comes to job matching, this process must be carried out by evaluating the roles and understanding the content as well as the required skills and competencies. If your descriptions are out of date or your business has gone through significant change, then you may need to start by reviewing and updating these first.
Quality Data Collection
The quality of data collected will determine the accuracy of your benchmarking. Building credibility can be a challenge, so you must understand how market surveys work. You should be able to clearly articulate:
- How the data is collected
- Whether it is aged
- Geographical coverage
- How the final output is calculated
This data will ultimately impact managers’ pay decisions. If they don’t trust the data, it is unlikely that you will be able to coach and influence them, rendering the whole process a wasted effort.
Defining Your Pay Philosophy
Your pay philosophy should guide the pay benchmarking process. Aligning external benchmarks with your principles allows for the creation of competitive, fair salaries that align with your budget and reflect your approach to pay.
The Steps To Salary Benchmarking
1. Gathering Data
Applicable to both current employees and new hires, salary surveys provide the basis of internal pay frameworks and budgeting of future salaries. You can choose between traditional and crowdsourced surveys but should be aware of the pros and cons of each.
2. Assessing The Numbers
HR professionals are used to being inundated with salary surveys and job ads. When looking at this information, it’s important to keep in mind that:
- Employees will inevitably present examples with the highest paid salaries.
- Job ads and recruitment data tend to show what companies are willing to pay, rather than what they are actually paying.
- Recruitment data is not robust and is often based on job titles rather than what the roles actually entails.
3. Job Levelling
Most salary surveys have a job levelling structure that presents a series of progressively senior roles distinguished by knowledge, skills and competencies.
If your organisation already has a job levelling framework, the next step is to establish a link between your organisational levels and the levels in the survey data you have chosen.
If you don’t, then the process becomes a bit more complex. To begin, you will need profiles and organisation charts for all the roles you are looking to benchmark, as we mentioned earlier.
4. Matching Job Categories
Once we’ve looked at the levels, step two is matching each role to the function, or job category. This is where you need to understand the broader skills or business area for the role so that you can find a similar match in the survey.
For example, a project management role would likely match with a project management function in the survey. However, a social media management role might fit best in the marketing function. Use your judgment to decide on the best fit based on the broader skills and requirements of each role.
5. Salary Benchmarking Report
Perhaps the simplest and most effective way to present your pay benchmark data is by showing the compa-ratio for each employee. Compa-ratio is the employee’s current salary divided by the current market rate for that role – as defined by the surveys you are using. Presenting reports in this way gives managers just the right amount of detail and helps them to make more informed pay decisions.
Best Practices for Effective Salary Benchmarking
To ensure your salary benchmarking process is as effective as possible, consider these best practices:
Train Your Managers
Run ‘what is salary benchmarking’ training sessions with your managers to give them an understanding of the data and the job evaluation process. This helps them make informed decisions based on the benchmarking results.
Regularly Update Your Data
The job market is constantly changing, so it’s important to update your salary benchmarking data regularly. Aim to conduct a full review annually, with smaller updates as needed throughout the year.
Consider Total Reward
While base salary is important, don’t forget to benchmark other aspects of pay and reward that you offer, including bonuses, benefits, and other perks. This gives a more complete picture of how your offerings compare to the market.
Communicate Transparently
Be open with your employees about your salary benchmarking process and how it influences pay decisions. This transparency can increase trust and job satisfaction, even if you’re not able to offer top-of-market salaries.
Conclusion
This process is critical for organisations looking to attract and retain top talent while managing costs effectively. By understanding what salary benchmarking is, why it’s important, and how to implement it effectively, you can create a fair and competitive pay structure that benefits both your employees and your organisation.
Remember, salary benchmarking is not a one-time event but an ongoing process. Regular reviews and updates will ensure your pay remains competitive in an ever-changing job market. With the right approach, you can position your organisation as an employer of choice and drive long-term success.