A Complete Guide To Understanding Salary Benchmarking

By Indeed Editorial Team

Published 16 August 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Determining how much to pay employees is an essential component of any successful and functioning business. One way that companies decide on their personnel's salaries is through benchmarking, a method that allows organisations to compare the pay rates of similar job roles to help them craft a final compensation package that is reasonable and appropriate for a specific position. Learning about this method ensures that you have the knowledge to begin using the process for your own business needs.

In this article, we discuss what salary benchmarking is, why it's important, its advantages and disadvantages and how to use it properly.

What is salary benchmarking?

Salary benchmarking, which is also called compensation benchmarking, is a process that companies use to set the salary for an internal position by comparing it to similar job postings and descriptions. They might also use other information like salary surveys and market pay assessments to help them finalise a salary or pay rate that is both fair and competitive. The result of benchmarking also provides a comprehensive and comparative look at the compensation package related to a specific role because basic salary data is not a complete depiction. This would include details like healthcare benefits, bonuses and paid holidays.

This process also helps companies to compare salaries and benefits for a specific industry. For example, after a successful benchmark, you might discover that employees at your company have a 20% lower salary than the employees of another company in your industry. Benchmarking helps organisations and companies gather relevant data so they make more informed business decisions about how to best compensate their employees.

Related: What Is an Annual Salary? (Plus How To Calculate It)

Why is it important to benchmark salaries?

One of the most important reasons to benchmark salaries is to preserve employee retention. If your competitor is providing their employees with a compensation package that has a higher salary and better benefits, then your employees may eventually feel undervalued and look for an employer that may pay them more for their skills and capabilities. By providing employees with a fair and competitive compensation package, they are likely to feel more valued in their work, which can also help to improve their productivity.

Benchmarking is especially important when trying to decide on a compensation package for a new role. This is because you can determine the scope of the position's responsibilities and necessary skill set compared to other competitors. For example, if a position requires fewer responsibilities to complete, then you may be able to offer a lower compensation package.

Related: How To Negotiate Your Salary (Steps and Tips)

Advantages of benchmarking salaries

Here are some of the advantages of benchmarking salaries:

Helps companies focus

Benchmarking salaries helps companies to prioritise and identify the differences between roles and industries. It allows organisations to focus on the value of specific elements of a compensation package, which can differ significantly between employers. When a company identifies which components of remuneration to solve, it makes the process of determining the compensation for employees more efficient and removes any confusion about what the benefits are. This increases how quickly a business can make a final decision so they can focus their efforts and resources on other operations.

Helps employees feel valued

There are certain elements in a compensation package that can make employees feel like their skills and contributions to the success of the company are valuable and appreciated. A salary that meets or exceeds the pay rates of other similar companies or roles can help employees feel as though their employer cares about providing them with a fair and competitive income. This provides personnel with greater financial security. There are other components of a compensation package that help increase an employee's self-value, such as providing them with paid holidays, comprehensive benefits, paid time off and bonuses for good work.

Related: How To Discuss Your Salary Expectations (With Example)

Improves employee retention rates

If a company has low employee retention rates, then benchmarking salaries can help reveal why that is. If there are other reasons, then at least you can eliminate that the issue is a financial concern. If the reason is an issue of low salaries, then a company can use the information they've collected to craft a new compensation package that pays their employees more.

Increasing their income can motivate employees to stay with their employer, improving retention rates. Positive retention rates are good for business because it allows companies to operate with minimal disruptions to the workflow.

Related: How To Provide Your Expected Salary (With Tips and Examples)

Helps companies make adjustments

As the job market and economic conditions change over time, employers eventually have to adjust their pay rates to keep up to date with what other companies are doing for their employees. With compensation benchmarking, an employer can make fairly quick adjustments to how much they should pay their employees and what kind of benefits to provide them. The quicker a company can adjust their compensation package to meet the standards and expectations of its employees, the sooner it can prioritise new work initiatives. Properly compensated employees are usually more eager to produce high-quality work.

Disadvantages of benchmarking salaries

Here are some of the disadvantages of benchmarking salaries:

Requires updated information

The compensation benchmarking process requires relevant and updated information for it to work successfully. If a company obtains outdated data, then they can potentially underpay their employers and provide them with a package that is not up to standard with other competitors. If this data is difficult for a company to obtain, then their results are likely to be limited and inaccurate.

Can be costly

Benchmarking salaries is not a free process and can be costly depending on the size of the company and the scope of the process. Conducting a comparison exercise requires professionals to find the data, collect it, interpret it and compile it in a form that is readable and easy to understand. Sometimes the cost of a compensation benchmarking initiative can't cover the minimal benefits that a company may gain from it.

It's not a perfect process

While compensation benchmarking is beneficial to many companies, it's not an all-in-one solution to settling employee compensation concerns. It doesn't completely replace other high-quality efforts and management strategies that help to improve a company's competitive advantage. Simply copying the package and pay rates of other competitors is not ideal since it can potentially hamper a company's ability to innovate and provide additional value to their employees.

How to use salary benchmarking in 4 steps

Here are four steps to help you use the salary benchmarking process:

1. Select your market data

Choosing the right market data for your benchmarking assessment is crucial in order to gather the information that is useful towards your specific goals. This process should first focus on engaging with the right businesses. It's important that you use the correct data sources for your benchmarking exercises to ensure that your results are credible for managers looking to set the salaries of their open positions. A proper compensation benchmarking initiative should articulate the data collection process and whether the data is up to date.

2. Collect and review recruitment salary data

It's important to be mindful of the wide range of job salaries advertised online for any given role or position. Instead of focusing on anecdotal data posted by high paying employees, collect and review data produced from in-depth market research initiatives. Additionally, consider that some recruitment data illustrates what an employer is willing to pay rather than what they are actually paying their employees. It's important to review all your data so that you can make a more informed decision.

3. Match your open position to the data

Sometimes it's best to benchmark all the roles if the business is small, while larger businesses may benchmark specific positions. Instead of focusing on job titles alone to produce your benchmarking results, consider other details like the competencies and skills that are necessary for a candidate to perform their job well.

4. Define your benchmark data

Once you collect all of your relevant data, it's important to define and present it in a format that is easy to understand. A benchmarking report defines an employee's current salary and divides it by the overall market rate for that specific job based on data gathered from salary surveys. Presenting the data in this manner provides managers with the proper information to help them make proper pay rate decisions.

Where can you find a salary benchmark?

One primary way to find a salary benchmark is by researching jobs and industries on salary platforms or by studying salary surveys. These platforms compile average salaries from a wide variety of sources, such as corporate data, anonymous employee salary submissions and current industry standards. You can then use this information to gain invaluable data about jobs, sectors, industries and career fields. You can even collect data from various salary websites to form a more comprehensive comparison. This way, you can make a more informed decision about the kind of salary package to provide to your employees.

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