The ultimate guide to salary benchmarking in 2022
Salary benchmarking, also referred to as compensation benchmarking or pay benchmarking, enables companies to compare the salary they offer for each role against market rates for similar positions. To attract, hire, and retain the best talent, you need to offer a competitive salary and show your employees that you value them. Knowing what your competitors are offering for similar positions will help you define your compensation strategy, position yourself in the market, and find ways to stand out.In this article, we’ll talk about salary benchmarking: What it is, why it’s important, what its benefits are, and also how to do it right.
What is salary benchmarking?
Salary benchmarking is the practice of comparing salaries at your organization against market values for similar roles in your industry.
The purpose of benchmarking salaries is to ensure that your company is offering salaries that are competitive, and also to create a comprehensive compensation policy (or adjust your existing one). Since it can be difficult to know what a ‘competitive salary’ means without looking beyond your own company, pay benchmarking can help to give you a better idea of where you stand.
Then, if you define what is a competitive salary you can make informed decisions about how to set salary ranges for new job openings, and also how to compensate your employees adequately.
The data you can use for salary benchmarking can come from salary surveys, government statistics, job postings, or compensation and benefits specialists’ databases. A rise in compensation benchmarking tools is making it even easier to access the relevant data needed to do this.
Why is salary benchmarking so important today?
Compensation benchmarking is now more important than ever, with companies having access to a global talent pool, and also with more and more people aspiring to be location-independent or be able to relocate without losing their job.
In some industries, physical proximity is still necessary, such as in medical care, personal care, or leisure and travel, for example. In many others, however, remote work is slowly becoming more and more common, and, according to a FlexJobs survey, 58% of employees are hoping to work remotely, or continue to do so, while another 39% are interested in a hybrid work arrangement.
Companies that are willing to make the switch and hire most of their workforce remotely now have access to a much wider talent pool, as they’re no longer limited to a specific geographic area. This makes compensation benchmarking all the more important (and challenging): Organizations now need to look at global labor data and trends, and align their compensation policy with a remote working model.
If that’s your case, there are a number of important questions you must address:
- Are you looking to hire remote workers in your country only, or are you interested in hiring internationally?
- Are you looking to hire nearshore or offshore workers?
- Do you prefer hiring in specific locations, due to legal considerations, time zone compatibility, etc.?
- Will new hires be on your payroll or will you work with them as contractors?
- Will they work full time for you?
- Will you take into consideration their location or will you only concentrate on skills, experience, and qualifications?
- Will you have different salary ranges for HCOL and LCOL (high/low cost of living) areas? Why, or why not?
- What other benefits will you offer?
- Do you expect them to travel to meet you or come to the office? How often?
The answers to these questions will guide your pay benchmarking efforts and you’ll be able to decide what data you need to look into, and how to obtain it.
It’s very important to define your compensation policy before you start hiring remotely, in order to get sufficient clarity and be able to be transparent and congruent with your workers.
Why you need to measure your total compensation – and communicate it clearly to employees
An important component to benchmarking salaries is knowing exactly where you stand in terms of the compensation you’re offering. Even if your compensation package is quite substantial, your employees might not be aware of everything they’re getting or how to use it.
For this reason, you and your employees need to know what their total compensation actually is. This includes your employees’:
- Base salary
- Bonuses (for example, performance or tenure bonuses)
- Equity (stock options)
- Pension or retirement benefits
Many companies offer more than just a salary, especially in highly competitive industries or locations, but sometimes employees aren’t actually aware of the full scope of their compensation, and the information is often scattered or simply incomplete.
Employers should be able to measure compensation easily, ideally in real time and in one place, and make sure employees are fully aware of it and have all the details easily accessible – preferably in the same system. This is extremely important for two main reasons:
- You can only compare what you can measure: Without knowing your status quo you cannot compare yourself to the market rate salary – and any comparison should include both pay and additional benefits
- Employees won’t consider their total compensation if they’re unaware of it: If employees don’t know what they are getting (in terms of total compensation, not just cash), they are more likely to get swayed by recruiters throwing numbers at them
If the information is scattered across many systems (pay in payroll, options in Seedlegals, pension in a separate system, and so on), employees often won’t be aware of their total compensation and won’t appreciate its full value.
If employees’ total compensation is meaningfully higher than the cash compensation – for example, if their share options are appreciating over time or if they have private insurance and pension – you need to be aware of the risk that they actually forget about it when discussing job offers with recruiters.
Recruiters focus on the cash compensation because they are paid a percentage of it, so if your employees are only comparing salaries, this leaves you and them at a disadvantage.
In addition to that, companies that offer equity as a part of their compensation package should actually make sure their employees know exactly what this means for them, and educate them on the value and importance of the stock options they own.
Many employees do not understand what equity is but might be hesitant to admit that to their employer or coworkers. For this reason, you need to:
- Gather all the information in a single system, where both you and your employees can access it.
- Communicate your compensation plans to your employees
- Educate them about the different benefits they’re getting
Having everything in one place also helps you figure out your gender pay gap, not just in terms of cash but also in total compensation. Most tools are not able to measure pay gaps in total compensation because they simply don’t have all the data.
The benefits of salary benchmarking
Benchmarking salaries has a number of important benefits. It enables you to:
Recruit top talent
If you want to recruit top talent, you need to be able to offer competitive pay. Of course, both “top talent” and “competitive pay” will be up to you to define. For this, you need to ask yourself questions like:
- Are you looking for someone who has a specific number of years of experience in your industry?
- What’s the career path of the person you’d like to work with?
- Are you looking for someone who is fluent in different languages?
- Is your ideal candidate highly specialized in their niche, or are they a fast learner and a multipotentialite?
- What are the most important skills they need to have? What are some nice-to-have skills on which you’re willing to compromise?
- Are you open to hiring remotely? Will you take into account your employees’ location and their cost of living?
Retain your best employees and reduce employee attrition
Salary is an important element to employee retention, and because of this, you need to know the market value of each role at your organization.
This doesn’t mean that you should offer the same amount as the average salary in the industry and in your geographical area; after all, these are just averages. Rather, you should be aware of the differences, and be transparent.
People don’t leave simply because of a low salary: Often, the reason they leave is that they don’t feel valued or appreciated. Salary benchmarking will allow you to know where you stand and define your compensation policy. After that, you need to create a specific strategy to communicate the reasons why your salary is higher or lower than market value.
These reasons might include:
- The business’ early stage
- Pension, healthcare, and other benefits
- Your organizational culture
- Your values and mission
- The type of work they’ll be doing, among others.
A startup might be able to offer a less competitive salary than a well-established organization but provide more interesting work opportunities in the future, as well as equity and a solid benefits package.
Provide a positive employee experience
Employee experience, or how your employees feel about their work and your organization, is one of the most important contributing factors to the success of a business. Unsurprisingly, compensation is an important element of it.A good employee experience is not simply about salaries, but about feeling valued and empowered. To provide a positive employee experience and retain your employees, you need to be transparent about the reasoning behind your compensation policy, and also be clear about your long-term strategy. Some of the ways you can show your employees that you value them is by:
- Having a clear, well-defined compensation plan that you discuss with each staff member
- Implementing a unified workspace platform where employees can access all information relevant to their compensation and benefits, and make choices important to them in a seamless manner, such as selecting and switching benefits and pension savings, purchasing or selling options, and more
- Frequently asking them for feedback and taking meaningful steps to implement it into your processes.
All of this shows them that you’re transparent, honest, and respectful, and that you value their contributions, time, and energy, and that you’re open to constructive feedback.
Benchmarking salaries is key to this, as you need to have clear information on market value and be able to communicate your compensation strategy.
It also allows you to offer the right compensation to new hires: If you ever need to make a downward adjustment to salaries, this would have a profoundly negative impact on employee experience, satisfaction, and retention, and if an employee needs to be replaced, you’ll need to bear the associated turnover costs.
What data should you use for benchmarking salaries?
There are several approaches to salary benchmarking:
- Use salary surveys from employers or employees
- Use crowdsourced data
- Fetch data from job postings
- Use government labor market data
- Get advice from a compensation and benefits professional
Let’s look into each one.
One of the most common compensation benchmarking methods is to use salary surveys based on input data provided by companies or employees. Data is then aggregated and analyzed to provide average salary ranges based on:
- The role and its main responsibilities
- The industry
- The company’s size and brand reputation
- The geographical location
This data can be extremely helpful in understanding the salaries that other companies in your industry and location are offering, and can help you define your own salary ranges.
Many companies, including Google, Meta, and Twitter, still have location-based compensation policies for remote workers, both in the US and globally. Nevertheless, the market is still adjusting to the increasing prevalence of distributed work, and there isn’t a clear opinion on what’s right and whether workers’ compensation should continue to be adjusted for location.
Crowdsourced job benchmarking data via a salary benchmarking tool
Crowdsourced data is another important source of information and an emerging method for salary benchmarking. There are a few startups which collect crowdsourced data, like Figures , Pave, Ravio, Paysend, and Payscale.
Instead of doing salary surveys, they get real-time data from companies’ payroll systems, and in return provide participants with dynamic information about industry averages. This provides all participants with up-to-date data that can be used to benchmark salaries and plan compensation policies.
Figures, a powerful GDPR-compliant compensation app integrates with your HRIS to provide you with compensation benchmarks, gender equality audits, and gives you the industry insight you need to create an effective compensation strategy for your company. Figures is quickly expanding throughout the European market.
Pave, a compensation technology startup supported by Y Combinator, uses market and partner data to help companies benchmark salaries for their employees. Currently, they have over 220,000 employee records, and all data is consolidated, leveled, and anonymized, meaning that it can never be traced back to a person. Similarly,
Payscale aggregates salary surveys, crowdsourced data, and peer data from HR professionals, to give salary ranges for different positions based on location and seniority.
Salary benchmarking through job posts
Another popular method is to use job postings data collected from job boards, company websites, or other online sources. This is often a lengthy process, though, as many job ads do not feature salary information at all, or include too broad of a range, making it difficult to draw conclusions.
You should, however, be aware of the fact that your employees will see your competitors’ job postings and the salary ranges advertised in them.
Pay benchmarking with government labor data
Many countries collect detailed information on average salaries per industry, position, and geographic area, which is a particularly useful resource when assessing salaries.
In the US, the authority responsible for the collection of this data is the US Bureau of Labor Statistics, or BLS. On its website, you can find the Occupational outlook handbook, which gives you detailed information on different jobs, along with median pay for last year, job outlook, work environment, and more.
In the UK, the Office for National Statistics collects data on earnings and working hours.
Government labor data is often in a raw format, making it difficult to comb through, and in most cases only gives you national medians, with no specific information on seniority level or location, which can make a big difference for HCOL (high cost of living) areas, for example. It’s difficult to compare data from different countries, too.
Salary benchmarking data provided by compensation and benefits professionals
Compensation and benefits professionals have access to pay benchmarking tools and databases that you typically won’t have access to (or won’t have the time and energy to go through), and can quickly help you understand what the market is paying for similar roles in your industry and location, and for your company size.
This data is usually much more granular than salary surveys or government labor data, as it’s constantly updated to reflect the latest changes in the job market.
You might opt to work with a compensation and benefits professional on a project basis, to define your compensation policy and get help with salary benchmarking, or you might also set up a long-term partnership with them.
How to do a salary benchmarking exercise: a step-by-step guide
Now that we’ve looked at some of the main benefits of compensation benchmarking and the methods you can use, let’s put everything together and see how you can salary benchmark for your business.
1. Map out all job positions in the company
To begin, you need to map out all positions in your organization, together with the responsibilities of each role (which you can pull from the job descriptions), and, of course, all salaries.
This will enable you to see whether the duties of each role correspond to its job title and compare salaries with similar positions in the industry.
2. Understand the salary baseline by collecting salary benchmarking market data
Collect data from the sources we outlined above (salary surveys, databases, data provided by compensation professionals, and so on), to see where you stand, and also what lower- and higher-end salaries in your industry look like.
You’ll probably already have a good understanding of this from experience, but it’s important to compare your own ideas to the reality of the current job market.
3. Analyse the bigger picture by looking at industry pay benchmarking
With the data in hand, you’ll now be able to analyse the bigger picture and see where you stand. Think about questions like: Are you offering salaries that are higher or lower than the averages for your industry (and location)?
- Is this true for all roles at your company or just for some? Why?
- Where are your employees located?
- What other benefits and advantages are you able to offer?
- Do you struggle to recruit top talent? What role does compensation play in this?
- Are you currently experiencing any significant talent shortages?
4. Define (or update) your compensation policy
Next, you need to define or update your own compensation policy, based on the information you collected and on the analysis you performed. For this, you need to decide on:
- Your budget
- The salary range for each position at your organization
- What the salary range will depend on (work performance, experience, skills, time in the company, etc.)
- What bonuses you’ll offer, and what they’ll depend on
- What other benefits and perks you’re able to provide
- Your hiring and growth objectives
Additionally, you need to keep an eye on factors such as:
- The impact of salaries on your costs and ability to attract talent
- Compensation trends for your sector, industry, and geographical location
- Global compensation trends
- Competitors’ compensation schemes
Put all elements together to have a comprehensive compensation strategy for each role, and revisit it at least once a year to make sure it’s up to date.
5. Be transparent with your employees and applicants around salary expectations
Once you define your compensation strategy, you need to be transparent about it with your employees and job applicants. Explain clearly what you’re able to offer and why, and make sure you’re taking into consideration the feedback you receive.
And remember – you need to show your employees that you value them not only through monetary rewards. If you’re using bonuses and raises carelessly, you might achieve the opposite effect of what you’re expecting, and actually demotivate your employees, if you fail to always give them the amount they expect.
Instead, make sure you’re promoting transparency and communication, that you’re providing the right growth opportunities and work conditions to your employees, and that you know why you’re offering the salaries you’re offering.
FAQs about salary benchmarking
What does a competitive salary mean?
You’re not alone if you’re asking yourself what’s a competitive salary? A competitive salary means that the wage you are offering matches or exceeds the market average for the same role.
How do you define market rate salary and conduct a benchmarking exercise ?
Market rate salary refers to the average salary that other employers are paying their workers in comparable or similar positions. Taking the time to benchmark salaries is essential to understand and define what a competitive package actually looks like.
What salary benchmarking tool should I use?
As mentioned above, there are various crowdsourced salary benchmarking tools such as Figures , Pave, Ravio and Payscale. They provide invaluable data by linking to HRIS & payroll tools and are becoming an increasingly popular method of analysing pay benchmarks
Where can I find a salary benchmarking template?
There are lots of free salary benchmarking templates available. This pay benchmarking template from Occupop is a good one for teams of all sizes