Retention 101: Benchmarking Employee Compensation
People power businesses and labor costs typically represent a company’s highest expenditure. It’s imperative that employers understand how their respective job roles are valued in the market and how that compares to their own compensation practices. Employers reach this understanding through the practice of compensation benchmarking. Also referred to as salary benchmarking, compensation benchmarking is the process of matching internal job descriptions to external jobs with similar requirements and responsibilities to identify the market rate.
Why is Compensation Benchmarking Important?
The process and output of compensation benchmarking helps to inform a company’s overall compensation strategy and ability to attract and retain the talent it needs to accomplish its business objectives. Specifically, it plays a vital role in areas such as:
– Determining the proper salary and compensation packaging for to-be-filled roles;
– Assessing the structure of current job classifications or levels;
– Identifying and addressing internal salary equity issues;
– Competing for top talent in tight labor markets and competitive arenas; and
– Reducing the costs associated with atypically high turnover and onboarding.
From a strategic perspective, if certain roles are critical to a company’s competitive advantage, those roles may need to be compensated at a higher rate as compared to market level than others. Conversely, some employers may conclude that simply maintaining pace with how competitors are compensating for the roles they employ is the right strategy for their business. Either way, employers need to be able to justify why they compensate employees the way that they do, both from a competitive standpoint and to be certain they satisfy the requirements of fair pay regulations.
When Should Compensation Benchmarking be Carried Out?
Depending on how you approach the process, compensation benchmarking can be a costly endeavor. Many organizations find that carrying it out annually for all roles isn’t practical or pragmatic and instead opt to undergo the exercise every two to three years. That’s not to say that compensation practices are ignored for those interim periods, however. Interim actions such as Cost of Living Adjustments (COLA) or individual role reviews may be warranted in the interim.
For example, if a company is posting for a new position that it hasn’t sought before, a partial benchmark that looks at just that role may be warranted. The same is true if a certain job family has changed in terms of its core characteristics, duties, or responsibilities. As we alluded to above, there may also be times when an individual employee is seeking an ad hoc salary increase for some reason. If the most recent benchmark for that job isn’t sufficient, the up-to-date data of a new benchmark may prove pivotal in resolving the issue to the satisfaction of all.
What Tools and Resources are Used for Compensation Benchmarking?
There are several approaches a company can take in performing compensation or salary benchmarking. Typically guided by the organization’s HR leader, these approaches may be combined and are dictated by what the HR leader and broader organization perceives is the best fit based on budget, bandwidth, and other factors. Specific avenues and approaches include:
– Using free or low-cost salary comparison tools from organizations like Indeed or Salary.com that blend employer-reported, employee-reported, and job-posting data
– Leveraging Bureau of Labor Statistics data from its National Compensation Survey and interactive tool
– Procuring compensation benchmarking software such as PayScale or similar modules within broader HR and talent management platforms
– Hiring external experts with specific knowledge and access to tools and data that can be applied for the specific needs of one’s business
In deciding which approach makes sense, it’s also important that companies again first consider their overall compensation strategy. If objectives like attracting and retaining top talent and protecting company culture are especially important, it wouldn’t make sense to rely solely on something like a free online wizard that isn’t comprehensive in nature. Evaluating your goals against the pros and cons of each approach or resource is critical to ensure you get the insight you need.
What Other Factors Should be Considered in Compensation Benchmarking?
Completeness and clarity of job descriptions is foundational to performing accurate and insightful compensation benchmarks. Take the time needed to ensure that all job descriptions are properly vetted and up to date so that good comparisons can be made. When inaccurate or incomplete job descriptions are benchmarked, organizations are at risk of applying the wrong salary ranges to a role or roles and inadvertently can worsen employee acquisition and retention challenges or foster discontent.
Nontraditional roles can also present challenges in benchmarking. In differentiating themselves from others or in seeking competitive advantage, some organizations may need to customize or combine certain roles to fit their unique needs. In these cases, there may not be a natural fit of another external role to benchmark against. To get salary benchmarks for jobs of this nature, one may need to blend information by breaking down data from multiple jobs to arrive at a meaningful salary range.
Communicating your compensation benchmarking practices to employees is also a key consideration. Employees feel valued and cultures are strengthened when organizations can demonstrate their commitment to making sure that individuals are fairly compensated. An organization’s compensation benchmarking practices are often communicated during annual review meetings and may include information on where an individual falls within the salary range for their role to give them a picture of their growth opportunities within that position. This transparency helps to build trust with employees and the belief that company is concerned about their well-being.
Compensation Benchmarking Conclusions
The primary point made at the outset of this post is worth repeating – Compensation benchmarking is vital for organizations that want to remain competitive and attract and keep the talent they need to achieve their business objectives. It’s also simply the right thing to do in that it helps companies ensure that every employee is paid a fair and equitable wage. Ask yourself and your team:
– How often is our organization conducting broad compensation benchmarking?
– How well are our compensation practices aligned to our broader compensation strategy?
– Do our employees understand why compensation benchmarking is important to us?
– Are we analyzing compensation from the perspective of different segments like gender, race, and similar factors to ensure equity?
– How well are we able to investigate and address individual compensation concerns at any time?
There is no doubt that time spent solidifying one’s compensation benchmarking practices is time well spent. Commit the resources needed for an objective assessment and address any shortcomings that are uncovered. Your employees and your business will thank you for it.
Have additional questions about what the right compensation benchmarking program looks like for your organization? Schedule a free 1:1 consultation with a compensation expert from vcfo today.