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 offers a deeper understanding of a job’s worth within a particular industry, company size, and geographic location. Plus, it also creates internal equity, facilitating a sense of fairness among employees 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 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 helps make pay decisions that are more aligned with business objectives. It helps ensure consistency in pay decisions. With changes in an organization’s priorities or business model or local pay market conditions, the compensation philosophy may need an update.
After defining the compensation philosophy, the next step is articulating and communicating it to the employees. The compensation philosophy is brought to life through 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 compensation strategy while the compensation strategy defines the compensation plan itself.
Define your competitors
The next element is defining competition: Who they are? Where are they? How big are they? By defining competitors, companies can establish the market position they aim to occupy compared to the competition. It will determine how they pay their employees in comparison with the market.
Choose the right sources of information
The last element is the sources for market data. There is a wide variety of sources, and their quality is variable. For this reason, it is always a good idea to use multiple data sources, ideally ranging from internal salary data to traditional salary surveys to crowd-sourced data. 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 to choose the one that best fits the company. In selecting data sources it is also important to take into account how easily replicable the analysis will be in future years.
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?
Platforms such as talentup.io can help you to 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. There are plenty of free resources that you can use now to start taking data-driven decisions in your company. Check them out!
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