Salary benchmarking is a process where organizations compare the salaries of their employees to those of similar positions within the same industry or geographic area to ensure that they are competitive and fair.
What is salary benchmarking?
Salary benchmarking is a common practice among organizations to ensure that the salaries they offer to their employees are equitable. Through the process, organizations gain a better understanding of salary trends and market rates for different jobs, allowing them to make informed decisions about the salaries they offer to their employees.
Why is salary benchmarking important?
Also known as compensation benchmarking, the process offers value to both the company and its employees. The human resources team should allocate time to the salary benchmarking process for the following reasons.
Offer competitive salaries
Salary benchmarking helps organizations ensure that they are offering competitive salaries to their employees. Offering salaries that are below market salary rates make it difficult for organizations to attract and retain top talent. Additionally, it may lead to dissatisfaction among existing employees and potentially result in high levels of turnover.
By conducting salary benchmarking, organizations can identify any gaps between the salaries they offer and the market rates for similar positions and make adjustments accordingly.
Promote fairness and transparency
Salary benchmarking can promote fairness and transparency within an organization. By comparing internal salaries to competitors, organizations ensure that they offer an equitable compensation package to all employees. This contributes to a positive work environment and promotes trust and engagement among employees.
Budget and manage company costs
Conducting a salary survey helps organizations budget for and manage their compensation strategy more effectively. By understanding the market rate for a specific position, organizations can make more informed decisions about their pay rates and attract the talent they need without overspending.
How to do salary benchmarking
Implementing an effective salary benchmarking system involves the following steps, helping HR professionals determine competitive compensation.
Specify the job title
Identify specific positions to be included in the salary benchmarking process. This may include all positions within the organization or only those that are considered to be critical to the organization's success.
Determine the industry and geographic area
Identify the relevant industry or geographic area for the salary benchmarking process. This will typically be the industry or geographic area in which the organization operates and should include similar organizations in terms of company size, type, and other relevant characteristics.
Gather market data
Collect data on the salary range of similar jobs within the selected industry or geographic area. For example, conduct compensation surveys, use salary databases or other online resources, or consult with industry experts or recruiters.
Study the salary data
Analyze the collected data to identify any gaps between the salaries offered by the organization and the market rates for similar positions in the job market.
Address gaps in benchmarking data
Develop a plan to address any gaps in compensation and ensure that the organization's salaries are competitive and fair. Adjust the salaries of specific positions, implement salary ranges or other compensation structures, and consider other strategies, such as offering incentives, to ensure that the organization's salaries are aligned with market rates.
Refresh compensation data
Implement the plan and monitor the results to ensure that the organization's salaries remain competitive and fair. Make an effort to conduct periodic salary benchmarking to ensure that the organization's salaries consistently align with market rates.
Salary benchmarking tools
Salary benchmarking tools are software or online platforms that help organizations to collect, analyze, and compare data on the salaries of similar positions within a particular industry or geographic area.
Online tools to calculate pay structures and remuneration
Consider the following tools to help with the salary benchmarking process.
- Online salary databases or platforms provide access to salary data for a wide range of positions and industries.
- Salary surveys are conducted by industry associations or other organizations and provide detailed information on the salaries of specific positions within an industry or geographic location.
- Compensation software allows organizations to collect, analyze, and compare their own salary data with market rates.
- Consultants or industry experts provide advice and guidance on market rates and salary trends within a particular industry or geographic area.
- Internal salary data analysis tools allow organizations to compare the salaries of their own employees to those of similar positions within the organization.
How to calculate the average salary for a job role
If you prefer DIY methods for determining the ideal pay range, consider the following steps.
- Identify the relevant industry or geographic area for the job role.
- Collect data on the salaries of similar roles within the selected industry or geographic area from various data sources.
- Calculate the average salary for the job role by adding up all of the collected salaries and dividing by the total number of salaries.
- Adjust the average salary as needed to account for any factors that may affect the market rate for the job role, such as the level of experience or education level required, the location of the organization, or the specific responsibilities of the position.
- Use the calculated average salary as a benchmark to compare the salaries offered by the organization to those of similar positions within the industry or geographic area.
Benefits of salary benchmarking
If you’re concerned that salary benchmarking is a time-consuming process, then consider the following benefits.
- Ensure salaries are competitive and fair
- Promote fairness and transparency
- Manage labor costs more effectively
- Attract top talent and improve employee retention
- Promote a positive work environment and boost employee engagement
- Support the organization's financial sustainability and competitiveness in the long term