A quick guide to salary benchmarking exercises

In a competitive job market, attracting and retaining top talent is crucial. One key aspect of this undertaking is ensuring the organisation offers fair and competitive compensation to all employees. And a proven, data-driven way to do this is by leveraging internal and external data to run a salary benchmarking exercise.

A salary benchmarking exercise can help an organisation understand its positioning in the market, analyse internal equity, respond to changes in the economy, and much more. Most importantly, it can help organisations build a strategy to remain competitive.

However, not all benchmarking exercises are equal. To be effective, it must be well-planned, sourced with high-quality data and supported within the organisation. This guide reviews the key steps involved in running a successful salary benchmarking exercise.

Set goals

Every salary benchmarking exercise must begin with setting goals to help direct efforts and secure buy-in. Before initiating the process of pulling and reviewing data, consider what the organisation is looking to accomplish.

Compensation strategy

When setting goals, consider the organisation’s current compensation strategy. This involves, at minimum, reviewing whether the organisation is leading, meeting or lagging the market. You may also consider other factors such as the strategy for specific job roles and the organisation’s approach to employee benefits.

If the organisation would like to establish a new compensation strategy or adjust the existing strategy, ensure that relevant stakeholders are consulted about the purpose of the exercise. Common stakeholders outside of HR include the chief financial officer, in-house lawyers and other senior leadership.

Job roles

In addition to understanding the goals of the salary benchmarking exercise, consider the breadth of the exercise. Will you benchmark all salaries in the organisation? Or, will you focus on a specific office location, business function or other group? Are you considering remote employees? Defining the breadth of the project will help you zero in on which job roles you’ll need to evaluate and inform from where you might source your data.

Other factors to consider

Though salary benchmarks are necessary to achieve the goals the organisation has set out, they may not be sufficient. Organisations often use salary benchmarks alongside a range of other internal and external factors to reach a decision about pay levels. Important internal and external factors include:

• Affordability and other demands on the organisation’s resources.
• Pay bargaining environment (particularly where trade unions are recognised).
• Prevailing rate of inflation.
• Fairness or otherwise of pay differentials within the organisation.

While planning for the salary benchmarking exercise, be sure to consider these additional factors and their impact on pay decisions.

Collect data

Once you’ve set goals and reviewed any other relevant factors, it’s time to begin the process of collecting salary data for the job roles you are benchmarking.

Collecting data is extremely important, and it can be the most challenging step of carrying out a salary benchmarking exercise. All of the following are potential sources of salary data:

• Custom surveys created by consultants.
• Data-sharing networks.
• HR publications.
• Salary surveys carried out by employers in the market.
• Benchmarking software.

Data sources must credible and well-sourced

To be successful, the salary data you use must be highly accurate and robust enough to provide you with relevant results. Without accurate data, an organisation runs the risk of making pay adjustments that don’t actually reflect its desired market position.

Analysing data

Once you have a good data source, the next step is to find salary benchmarks.

To get good results, you’ll need to ensure that the benchmark data matches the role or roles that you wish to benchmark. You’ll need to consider job roles, job families, tracks and levels within your own organisation and ensure that these can be matched to the salary benchmarking data.

Your benchmarking should also account for geographic location, and depending on the size of the organisation, you may need to consider multiple geographic locations.

What if I’m not finding the salary benchmarks I need?

You may find that you don’t have an exact match for a particular role or job level. If you’re not getting good results, consider setting the filters on your salary data wider to be more inclusive and flexible.

For example, you may take in a larger geographical area. You might also need to rerun the data tables in parallel so that the varying influences of location, company size or industry can be assessed separately and a judgment made about the appropriate level of pay to be offered.

Defining the market for the best results

You will also need to make important judgment calls to ensure that the “market” is defined widely enough. Employers often want to benchmark only against organisations that look like theirs. Unfortunately, this isn’t always possible. A more realistic approach is to benchmark against organisations that have employees that resemble yours.

A key question to ask is, “What are the characteristics of the organisations from which we recruit staff and to which we lose staff?” Organisations that have those characteristics are the real market. 

Benchmarking Positions

The final step in the salary benchmarking exercise is to benchmark the positions so that you can make pay adjustments, create new salary ranges or make any other changes that align with your organisation’s compensation strategy.

While benchmarking, consider the following questions:

• Within what percentile do we want to pay?
• How will we define our pay bands or pay ranges?
• How and when will pay adjustments be made?
• What impact will geographic location have on pay?
• How will we pay remote employees?

Next Steps

Salary benchmarking will likely lead to changes, some of which may increase the organisation’s total compensation costs. In some cases, employees may receive unwelcome news that their pay is decreasing. HR, in partnership with senior leadership, should prepare a communication strategy to ensure employees understand why and how any pay adjustments were made and who they can contact should they have any questions.

Since salary benchmarking inherently involves sensitive compensation information about the organisation, be sure to partner with your in-house lawyer to ensure compliance with relevant laws.