Why is it important to implement salary benchmarking?

The job market is more competitive than ever, which is why understanding and implementing effective salary benchmarking is crucial for employers and employees alike. Salary benchmarking provides valuable insights into how compensation packages compare to industry standards, helping companies make informed decisions about pay structures and compensation bands, while helping employees make informed career and compensation decisions. 

Employers need to know why compensation benchmarking is essential, how to conduct it effectively, and how to achieve the best results. If you’ve been wondering, This guide will show you how to manage your salary benchmarking process and explain why it can be a game changer for your business.

What is salary benchmarking?

Salary benchmarking compares an organization's salary levels with those offered by similar companies in the same industry or region. The benchmarking process aims to ensure that an organization’s pay scales are competitive and equitable by gathering data on compensation for specific job roles and using this information to adjust salaries to align with industry standards.

Accurate salary data helps job seekers understand what to expect regarding compensation for their skills and experience, helping them set realistic salary expectations and negotiate better offers. Knowledge of competitive salary ranges can also influence career choices, helping individuals select roles that offer fair compensation based on their qualifications. 

Accurate salary data allows employers to craft competitive salary packages that attract and retain top talent. It also helps companies make informed decisions about pay adjustments and maintaining internal equity.

Ultimately, understanding salary benchmarks balances the process of negotiating compensation and benefits for both sides. Candidates have a realistic starting point when presented with salary benchmarking data, and employers have well-defined upper and lower salary limits.

Why is salary benchmarking important?

Implementing salary benchmarking is critical for several reasons, each of which benefits both employees and employers:

• Offering competitive salaries: Competitive pay is essential for attracting skilled candidates in a tight labor market. Benchmarking demonstrates that your organization cares that pay rates align with industry standards, making the company an attractive workplace.
• Retaining top talent: Fair compensation helps employee retention efforts, reducing the labor costs associated with turnover and recruitment. Employees who feel they are paid fairly are more likely to stay with the organization long-term. If they know they'll receive a similar salary from a competitor, they're less likely to assess their options.
• Ensuring fair compensation practices: Salary benchmarking helps maintain internal equity and ensures employees are compensated fairly for their roles and responsibilities. As new laws emerge regarding pay equity and workplace inclusivity, benchmarking helps adhere to legal standards related to equal pay and compensation fairness.
• Enhancing employee engagement: Fair pay recognizes employees’ skills and contributions, increasing job satisfaction. Competitive salaries can boost employee motivation and productivity, leading to better performance. 
• Informing compensation strategies: Benchmarking provides data-driven insights that inform compensation strategies and adjustments. As your organization grows, benchmarking helps with headcount planning and aligning pay practices with organizational goals.

When an organization puts forth the effort to conduct thorough benchmarking research, everyone wins. Organizations obtain and retain top talent, while employees have peace of mind knowing their employer prioritizes fair compensation.

How to conduct salary benchmarking: Step-by-step process

Conducting salary benchmarking involves a systematic approach to gathering and analyzing compensation data. Markets change, as do the objectives of an organization. Employers tend to revisit their benchmarking process on an annual basis to ensure that their data is current and their compensation packages remain competitive. 

The step-by-step process below provides a strong jumping-off point for building a benchmarking process within your organization.

 1. Define objectives

Identify the specific objectives of the benchmarking process, such as attracting talent, ensuring pay equity, or adjusting compensation structures. Then, decide which job roles or positions will be included in the benchmarking process. 

Most organizations begin with key roles and thoroughly benchmark core positions. Less crucial roles are often less important.

2. Collect salary data

Utilize tools and databases that provide industry salary data, such as salary surveys, compensation reports, and industry studies. Employees often leave reviews of their companies with salary ranges and information about benefits that are helpful sources of insight. Next, compile current salary data from within your organization for comparison.

3. Select relevant benchmarks

Match job roles in your organization with equivalent roles in other companies to ensure accurate comparisons. You should choose similar companies in size, industry, and geographic location to ensure relevant comparisons. If your company is located in a major city, using data from a rural area won't make sense because the cost of living can be significantly different. 

 4. Analyze data

Analyze and compare your collected salary data against industry benchmarks. Look for discrepancies between your organization's salaries and those offered by comparable companies. Consider benefits, work-life balance, and incentive compensation if your organization offers them. 

Still, remember that alternative forms of compensation can be valuable, but they can't completely bridge the gap in a significant salary discrepancy. 

5.  Develop and implement adjustments

Based on the analysis, set salary ranges and compensation packages to align with industry standards. Inform current employees of any changes to compensation structures and the reasons behind them. 

You’ll also want to adjust your job descriptions and train your HR department to use benchmarking data when recruiting, interviewing, and onboarding candidates. 

6. Monitor and review

Continuously monitor and review compensation data to ensure ongoing competitiveness and make periodic adjustments based on changes in market conditions or organizational needs. Most employees expect their salaries and compensation to keep up with inflation and the growth of your organization.

Salary benchmarking can be a lot of work, especially during the initial benchmarking process. Updating your benchmarking data each year can be significantly easier since you'll have the foundation of your initial research as a starting point. 

Tips for successful salary benchmarking

Creating a salary benchmarking report is a time consuming and complex process, but it's well worth the effort to achieve the results your organization needs. Below, discover necessary considerations for the benchmarking process and how to maximize the results of your efforts. 

1.  Utilize multiple sources

Use a variety of salary benchmarking tools and sources to gather comprehensive data and incorporate information from industry-specific reports to ensure relevance and accuracy. Websites that allow employees to review their employers are useful sources of information, especially when you're attempting to determine a company’s shortcomings. You should also consider using compensation management software, which often comes with salary benchmarking features. 

If employees feel undercompensated or like their benefits are lacking, they will likely express dissatisfaction.

2.  Ensure accuracy of data

Cross-check data for accuracy and reliability before making any decisions. Use data comparable to your region, and regularly update salary data to reflect current market trends and conditions. Average salaries change all the time, especially as industries experience fluctuations.

3.  Maintain consistency

Document the benchmarking process and criteria used for future reference and consistency. Use consistent methods for collecting and analyzing data to ensure reliable comparisons. 

4. Communicate transparently

Clearly communicate benchmarking results to foster transparency, explaining the rationale behind compensation adjustments to build trust and understanding. 

Communication and transparency are crucial because salary benchmarks don't always go up. When benchmarks go down—especially mid-recruitment—your HR team needs to be able to explain why. 

5. Consider broader compensation factors

Consider variations in job roles, responsibilities, and locations when benchmarking salaries. Two organizations often use the same job title to describe a role with vastly different responsibilities, and the role with more responsibility may be compensated at a higher rate. 

Additionally, it's key to look beyond base salary to include bonuses, benefits, and other forms of compensation. Just remember that alternative forms of compensation are often insufficient to fill a large gap between your organization's salary and the midpoint salary for a similar position.

Tracking benchmarking statistics is nearly a full-time job, especially in areas with volatile or inconsistent job markets. Routinely checking familiar sources for new data saves your HR team time on deep-dive research, as changes occur in real time. 

Key components of salary benchmarking

Effective salary benchmarking involves several essential elements that influence compensation. Industry, geography, responsibilities, education, special skills, and certifications all significantly impact benchmarking.

1. Job title and responsibilities

Ensure that job titles and responsibilities are accurately matched with similar roles in other organizations. Job titles are sometimes deceptive, especially across different industries and organizations of varying sizes, but you can use detailed job descriptions to facilitate accurate comparisons.

2. Industry and sector

Consider compensation trends within the specific industry or sector to ensure relevant benchmarking. Some industries are more competitive than others, and this skews salary benchmarks. Utilizing data specific to your industry and sector is crucial to avoid highballing or lowballing your salary averages.

3. Location

Account for geographic variations in compensation, as salaries can vary significantly based on location. Consider the cost of living in different locations when comparing salaries. After all, it's far more expensive to live in Seattle than it is to live in rural Nebraska. Your pay range is intended to be fair and competitive for the area in which the majority of your employees will live. 

 4. Experience and education

Factor in years of experience and education levels when comparing salaries for similar roles. Include specialized skills and certifications that may affect compensation. A candidate with several years of experience in a comparable position commands a higher salary than a candidate with a recently completed first internship.

5. Special skills and certifications

Consider the impact of specialized skills or certifications on compensation levels by assessing their market demand to understand their value. If an employee has a crucial and elusive skill necessary for your company's growth and innovation, they are essentially priceless. If you're seeking a specific, rare talent, your salary benchmarking is intended to reflect the demand and scarcity of niche skills.

An effectively tailored salary benchmarking salary makes the process of gathering and analyzing benchmarking data significantly easier. When searching for specific types of talent, keep in mind that the rarity of skills or scarcity of certain types of professionals can elevate your benchmarks. 

Set your salary benchmarks with confidence

Salary benchmarking is vital for ensuring competitive, fair, and effective compensation practices. By understanding what salary benchmarking entails and following a structured process, organizations can make informed decisions about pay bands, attract and retain top talent, and maintain internal equity.

The good news: you don’t have to gather pay data alone. Thanks to Rippling and its integrations with Carta, you can access the world’s largest private-market database of salary and equity benchmarks across more than 40,000 startups, helping companies set competitive and equitable pay bands no matter the job. 

And once you set your benchmarks, Rippling’s Compensation Bands tool lets you set and enforce different pay ranges for employees across different roles. From a single dashboard, recruiters, managers, executives, and finance teams can see an employee’s job family, seniority level, and all their different forms of compensation, including salary, equity compensation, and bonuses, ensuring everyone is aligned on how much they can pay new hires. 

Book a demo with Rippling to learn how our tools keep you organized, productive, and informed.

This blog is based on information available to Rippling as of August 15, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.