Employees want to be fairly compensated for their work. But determining a “fair” salary range can be a murky process. Multiple factors come into play, including your company’s own financial health and the state of the current job market. In a highly competitive market, too-low salary ranges could lead to the loss of some great hires, while too-high salary ranges could overextend your business’ budget.
With payroll as the budget’s number-one line item for organizations, it’s crucial for growing companies to understand if their employees are being underpaid or overpaid. To help your own organization gain this important insight, try salary benchmarking. Below, we explain the practice in more detail, including how to do salary benchmarking effectively, step-by-step.
What is salary benchmarking?
Salary benchmarking is the process of aligning your organization’s jobs to comparable benchmark jobs found in the labor market in order to obtain appropriate pay ranges. Benchmarking uses your organization’s size, industry, and location to align the market data to organizations of similar scope to your own. Using market data from comparable organizations helps to ensure your salary ranges are competitive in the talent marketplace.
Typically handled by an organization’s compensation analyst or HR business partner, the goal of salary benchmarking is to identify fair and accurate compensation for all job roles. Essentially, it’s about applying the “Goldilocks” standard to salary, so you don’t end up paying too much or too little, but that your salaries are just right.
Why is salary benchmarking important?
Overpaying your employees could put your business in financial jeopardy over the long term. But avoiding financial trouble isn’t the only good reason to benchmark. In fact, the benefits you’ll gain from establishing fair salaries across the board are many.
Benchmarking salaries helps organizations attract and retain talent.
When you know what similar companies in your industry and location are offering, you can offer competitive salary and compensation plans to your own people and prospective hires. In today’s competitive job market, that can make your company more attractive to potential employees, who often have multiple job offers on the table. Competitive salaries can also be a factor in retaining high-performing employees for the long term.
Benchmarking salaries ensures internal equity.
By comparing salaries for similar roles, HR teams can identify and fix discrepancies and imbalances in their organization’s compensation structure. This can prevent dissatisfaction among employees and help employers avoid potential legal issues related to pay disparities.
Benchmarking salaries contributes to employee motivation and engagement.
Employees who perceive that they are being fairly and competitively compensated are more likely to be engaged, motivated, and retained for longer in your workplace. Salary benchmarking can also help create a positive work environment by ensuring that high-performing employees are rewarded for their work.
How To Do Salary Benchmarking In 2023
Salary benchmarking processes vary depending on who makes the request for the benchmark. In this example, I’ll share as if a manager has requested a new or updated salary range for a specific job.
Step 1: Understand the responsibilities and scope of the job.
Ideally, you will have a current job description to use as a basis for the job evaluation. If you do not have a current or accurate job description on file, you’ll work with the job’s leader or manager to complete a job analysis questionnaire. Carefully document the following:
- A summary of role
- Key responsibilities of the role
- Minimum requirements for education, experience, and required skills
- Other pertinent information, including exemption status (if you don’t know a job’s exemption status, conduct an FLSA analysis)
- If this role is supervisory (has 2+ direct reports)
- Where the role will be located (especially if your organization utilizes geographic differentials)
- The role’s direct supervisor
I strongly recommend that an HR professional and manager work together in this process to ensure the job description accurately reflects the work being done by the job’s incumbents. Having both HR and management perspectives improves the accuracy of the analysis; managers may not understand what is required from a job description perspective, but HR professionals who work with job descriptions regularly will understand what’s necessary to include and the importance of the verbiage used in descriptions. If you don’t have a questionnaire template already, SHRM offers some that are easily adaptable.
As you go through the job analysis and documentation process, be sure to trackthe dates each step was taken. Most HRIS tools have the ability to either append job description files or add job description content to job records, and I highly recommend using a good data management system, so that in six months or a year (or when a manager requests updated data), you have a solid starting point.
2. Obtain market data.
After the job analysis and documentation process, your next move depends on whether or not you already have current salary survey market data. If your organization already has data, use it!
If your organization doesn’t have data or the data it has is outdated, you need to collect it. Here’s how to do salary market research: You can conduct research through industry reports, compensation surveys (like those from Radford and Mercer), and, if necessary, online resources such as salary comparison websites. You can also use algorithm-based data (like from Payfactors or ERI), which is derived from an algorithm vs. being a culmination of participant-submitted data.
Regardless of the data source you go with, you should not take the numbers at face value. Always consider how the resulting ranges fit within your organization’s pay practices, compensation philosophy, and budget. You may not be able to afford large market increases all in one year and that is perfectly fine. Don’t be afraid to reach out to the survey houses to question their results. Oftentimes, high-impact participants don’t participate every year so you may see unexpected jumps in the market data from year to year. If your organization has the budget for it, I recommend that you incorporate a couple of different sources of compensation market data and a couple years of the data, too. Make sure that, if you do incorporate last year’s data, you age it to be in line with the current year. For aging, I prefer to use the Structure Growth Percent published quarterly by the Economic Research Institute in their National Compensation Forecast Study.
3. Define the correct salary range using your organization’s compensation philosophy.
With the data you’ve gathered, set the midpoint of your salary range. Will you pay at the 50th percentile for this job? 40th? 60th? Can you quantify why?
Your company’s compensation philosophy is an important guide in this step. At MorganHR, we work with clients to set their target percentile for their salary ranges. When the ranges are set, we review whether any employees fall outside of the range for their job, so HR and leadership can address how they’ll approach these disparities.
If you don’t have a compensation philosophy, we can help. Some of our clients come to us with outdated or nonexistent compensation philosophies; we partner with them to develop philosophies that will help them set salaries that are reasonable yet still attract and retain qualified talent.
4. Compare this job to its peers.
Using salary benchmarking tools and data from Radford, Mercer, and other data sources, match your jobs to the data source’s benchmark jobs using your jobs’ job descriptions. As part of your comparison, consider the role’s:
- Key Responsibilities
- Knowledge requirements
- Complexity
- Requirements for problem solving
- Level of collaboration and interaction
- Level of risk in the event of a job-related error
When settling on a salary, I wouldn’t recommend straying too far from the market unless you have reasons to do so, like retention or attraction issues. Some organizations may not need to pay at the market if the total rewards packages are sufficient or if they are well-known organizations. At MorganHR, we prefer to incorporate two years of data into resulting ranges aged to the same date. This helps mitigate the effects of significant fluctuations in the market, large participating companies participating every other year, and other data that might skew results.
5. Adjust and communicate.
After you have obtained the appropriate market midpoint for your job, now you must create the range. Some organizations that use the 50th percentile for the midpoint like to use the 25th percentile for the minimum and the 75th percentile for the maximum. However, oftentimes the 25th and 75th percentiles are not equally spaced from the 50th percentile. Other organizations prefer to have cleaner ranges and use range spread calculations to create ranges where the midpoint is truly the midpoint of the range. You can also create a pay level chart that groups similar midpoint values into a single range. This can help address pay equity concerns as well as can help reduce the total number of ranges with which your HR team has to contend. If you would like to learn more about how we do that at MorganHR, please reach out!
Once you have benchmarked the job to the market and have your final resultant pay range, deliver the range back to the hiring manager or supervisor. Additionally, make necessary adjustments to compensation packages, if needed, and communicate any changes clearly to your employees if your organization focuses on transparency. Be sure to communicate in a way that the receiver can easily understand to avoid confusion. Finally, track this info in your HRIS or other system you’re using for data storage.
6. Review regularly.
Salary benchmarking shouldn’t be a one-time process. Conduct benchmarking regularly (and note the date of each exercise) to stay aligned with market trends and changes in your organization. Schedule annual or bi-annual reviews to ensure your compensation practices remain competitive.
Attract (and keep!) talented employees with salary benchmarking from MorganHR.
Salary benchmarking plays a crucial role in designing competitive compensation packages and ensuring fairness within organizations. In my work with clients, I’ve seen firsthand the positive impact salary benchmarking has on how employees feel about the fairness of their pay.
But it takes effort to get there—and most HR teams don’t have the time, resources, or experience to do salary benchmarking on their own. That’s where we come in.
If you’re struggling to figure out how to salary benchmark your jobs, contact us at MorganHR. Our team of experts will take on the compensation benchmarking process for you, relieving your team of the burdens of benchmarking all jobs, updating philosophies, and communicating the changes with everyone from the C-suite to new hires. We have 30 years of experience in compensation consulting, and we’d love to serve you next. Schedule a call with us to get started today.
