How to implement salary benchmarking in your organization: Basics
In today’s ever changing talent landscape, compensation benchmarking is critical to staying competitive in the market.
A key element to navigating “the war for talent” is to equip oneself with knowledge of compensation benchmarking.
Compensation benchmarking allows companies to assess how they are positioned relative to others in a specific market. It helps in making informed decisions on pay structures and individual rates of pay. It enables companies to make better pay decisions that enable them to attract and retain talent.
Benchmarking gives you a better idea of how much a job is worth in a certain industry, company size, and area. Plus, it also creates internal equity, facilitating a sense of fairness among employees by showing that colleagues in similar roles are being paid similar salaries. Whether hiring for a new position or performing salary reviews, salary comparisons help ensure that pay is both externally competitive and internally equitable.
So, where to start?
To begin with there are four key elements before diving into the steps for the benchmarking process.
Start with “WHY?”
The “why” behind your paying decisions is also known as your pay or compensation philosophy. A strong compensation philosophy statement aids in making pay decisions that are more aligned with business objectives. It helps ensure consistency in pay decisions. With changes in an organization’s priorities, business model, or local pay market conditions, the compensation philosophy may need an update.
Ensure transparency
After deciding what the compensation philosophy is, the next step is to tell the employees about it. The compensation philosophy is brought to life through the compensation strategy. An organization’s strategy may include tactics, programs, and tools that can change over time, even though the philosophy may remain the same. The compensation philosophy guides the roadmap for the compensation strategy, while the compensation strategy defines the compensation plan itself.
Define your competitors
The next step is to define competition: Who are they? Where are they? How big are they? By naming their competitors, businesses can figure out where they want to stand in the market compared to their rivals. It will determine how they pay their employees in comparison with the market.
Choose the right sources of information
The final component is the market data sources. There are a wide variety of sources, and their quality is variable. Because of this, it is always a good idea to use a variety of data sources, ideally including internal salary data, traditional salary surveys, and data from the crowd. This would enable companies to make smarter decisions about the value of a job.
However, it’s expensive to access all sources, and too much information can become confusing. So, it’s important to understand these sources, their advantages and disadvantages, and choose the one that best fits the company. In selecting data sources, it is also important to take into account how easily the analysis will be replicable in future years.
What’s next?
The next step is to proceed with the actual benchmarking steps:
- Inadequate job matching is a major cause of inaccuracies in the data collected by market analysis. Be as clear as possible about the job and the employee profile required for the job. Having a clear job description helps compare like with like.
- Look at the market midpoint or the median for the position from the data sources. Typically, benchmark jobs (these are standard jobs for which market data will likely be available) are used for comparisons in case of positions that are not available in the data source.
- Create a salary range based on the market position that you aim to occupy. Determine the width of the salary range, the minimum, midpoint, and maximum you would be willing to pay. Typically, higher-level positions have broader ranges while junior roles have a narrower range.
Let’s go with an example:
For a better understanding of how the entire process looks, consider this example:
A company “ABC Software” wants to offer more competitive compensation in order to attract new talent and retain their employees. The company is functioning in the IT sector and has an office in Barcelona with 500 employees. They have raised +20M€ and they want to compete with top employers hiring in Barcelona.
They are reviewing their salary structures for IT professionals. To simplify matters, let’s analyze a single position: “Software Developer”. Currently, they are paying 58k€ for a senior-level software developer with 5 years of experience.
Firstly, the competitors are defined using the following criteria:
- Location: Barcelona
- Company size: At least 500
- Sector: IT
- Funding received: +20M€
This would generate a list of companies hiring talent in Barcelona, functioning in the IT sector that received funding of +20M€ with a size of at least 500 employees. The market data is filtered to focus on these competitors. After applying the filtering criterion, the following salary data for a software developer in Barcelona is generated.
The company is currently offering 58k€ for a senior software developer with five years of experience at the company. It means they are paying in the 50th percentile.
As their aim is to become more attractive to employees, this translates into their compensation strategy, as they start offering more competitive compensation. They decide to compete with top employers and move into paying in the 90th percentile.
It means they would now offer 63k€ instead of 58k€ for the position of a senior software developer with five years of experience. Thanks to this information, the company is capable of making informed decisions, and it’s able both to hire faster, and to retain more talent as this information can be also used to update existing salaries within the company.
Don’t know where to start?
TalentUp Salary Platform can help you gather this information in record time. Using a salary benchmarking service gives you full visibility of what is happening in the market. Plus, it supports your conversations with the leadership team when it comes to defining the most beneficial compensation strategy for your company. Try our Salary Platform for free now!
Follow TalentUp on LinkedIn and subscribe to our newsletter to get our latest articles!
