Pay Pacesetters: Mastering the Art of Salary Benchmarking

April 19, 2024

Dive into the nuts and bolts of salary benchmarking and discover how it can elevate your company's compensation strategy to new heights. 

Are you paying your employees their worth, too little, or tipping the scales toward a budget blowout?

Thankfully, salary benchmarking is here to help. Take the wild guesswork out of setting pay scales with the power of data-driven decision-making.

Salary benchmarking is more than just balancing the budget — it's about crafting compensation packages that attract and retain top talent without jeopardizing your fiscal health. In the dynamic marketplace for skills, paying too little might save costs initially but risks losing key talent, while overspending can strain your financial resources.

In this article, we’ll explore how to strategically plan for fair pay, ensuring your organization stands strong in the competitive arena.

Key Takeaways

  • Salary benchmarking aligns your compensation strategies with market standards, guaranteeing competitive pay that attracts and retains top talent.
  • Regular benchmarking adjusts for market shifts, helping to maintain budget accuracy and prevent over- or under-compensation.
  • Incorporating benchmarking into your HR practices promotes pay equity and compliance, safeguarding against potential legal issues.

What is Salary Benchmarking?

Salary benchmarking is the strategic process in which an organization analyzes its compensation structures against those of similar organizations and market trends.

Compensation benchmarking is used to ensure salaries are competitive enough to attract and retain top talent, while also aligning with the company’s budget and compensation philosophy. Wage benchmarking helps businesses maintain fairness and pay equity, which is crucial for fostering employee satisfaction and motivation.

In practice, salary benchmarking involves synthesizing role-specific information (e.g. responsibilities, skills, education, location, experience) with broader market data (e.g. salary surveys, industry reports, compensation databases). The result is an informed salary band that can guide hiring and promotion decisions.

Learn More: How to Build a Compensation Strategy that Pays Off 

Why is Salary Benchmarking Important?

Sure, setting salaries might seem simpler if you just ballparked a figure. But tread carefully — that approach can be risky. Here's why it pays to invest time in benchmarking your compensation offerings.

1. Attracts and Retains Talent

Insufficient compensation was the top reason employees left their jobs in 2023, according to Gallup.

It shouldn’t come as a surprise, then, that if you want to attract quality talent (and keep them on board), you’ll need to compensate them fairly.

By benchmarking your compensation against industry and regional standards, organizations can set salaries that align with or exceed those of their competitors. A competitive compensation package not only attracts top candidates, but also reinforces the company’s reputation as a desirable employer.

2. Optimizes Your Budget

Creating a budget without data is like navigating a dark room without a flashlight. Salary benchmarking illuminates the path ahead, shedding light on future compensation costs.

This practice prevents overestimation of salary needs, which can lead to unnecessary spending. It also helps prevent underestimation, which might hinder the ability to attract skilled talent.

Additionally, salary benchmarking helps control costs by preventing salary creep — the unintended, gradual rise in average salaries above market levels.

A study from the National Bureau of Economic Research found that when organizations use salary benchmarking data, they’re much less likely to under or overpay employees, and wages tend to converge toward the market rate. 

Learn More: The Truth About Pay Compression

3. Easier Compliance and Equity

Wage benchmarking helps organizations ensure that their compensation packages align with legal requirements around equal pay.

Federal laws, such as the Equal Pay Act and the Civil Rights Act, prohibit discrimination and unfair pay practices based on demographics, including gender, race, color, religion, and national origin. By regularly adjusting salaries based on unbiased external market data, organizations can proactively address and rectify any unfair pay disparities.

Additionally, many states have specific regulations that require organizations to report on their compensation practices to ensure fairness and non-discrimination. Salary benchmarking serves as documentation of how salaries are determined and adjusted in line with market trends.

How to Do Salary Benchmarking

Ready to ensure your salary structures hit the mark? Here's your step-by-step guide on how to effectively perform compensation benchmarking.

1. Define Your Roles

Before you start, clearly define each role and it's responsibilities. This process, also known as job leveling, serves as the foundational framework for your compensation benchmarking.

Go through each position at your organization, and define the responsibilities, competencies, experience required, and current salary ranges (high, middle, low, and average). You can manually create a matrix in a spreadsheet or use your HRIS software’s position management platform.

Paylocity’s position management functionality screenshot

Paylocity’s position management functionality makes it easy to build a database of all your positions based on their characteristics.

Depending on the size of your organization, gathering information about each role could be time consuming. If you want to get a quick start, begin with roles that are critical to your organization's success, have high turnover rates, or are difficult to fill. The right salary range for these positions can help overcome hiring challenges and retain essential talent.

2. Gather Market Data

Once you have a grasp on your current roles, collect salary data from reliable sources to understand the current market compensation trends.

There are a few avenues for gathering salary data:

  • Industry surveys: Independent agencies carry out comprehensive salary surveys and consolidate the findings into datasets for benchmarking purposes. These are generally regarded as some of the more reliable, but expensive means of acquiring unbiased salary data.
  • Online data sources: Websites such as Glassdoor offer a free alternative, but these may be less trustworthy. They often rely on employee-reported data and may be outdated.
  • Payroll companies: Your payroll provider may include market-level salary data. A sophisticated tool will allow you to sync your own employee data with third-party salary data for easy compensation comparisons.

Gathering data from multiple sources helps ensure breadth and accuracy of information, reflecting various sectors and geographical regions.

Paylocity’s Market Pay Insights Screenshot

Paylocity’s Market Pay Insights surfaces national and local salary data for easy compensation comparisons right in the platform.

3. Synthesize and Analyze

Once you have collected the data, the analysis phase begins.

Layer in the market-level data with your job leveling matrix and compare your current compensation packages against market averages. Examine compensation on a national and local level. Look for trends, identify positions where pay is below or above the market rate, and note any significant discrepancies.

Adjust the data to account for variances in job level, years of experience, education level, and size of the company. This adjustment ensures that you are making accurate comparisons that are specific to your organizational context.

4. Create Salary Bands

Based on your insights, create structured salary bands that reflect the competitive market rates yet align with your pay philosophy and financial boundaries.

The salary bands should include a minimum, midpoint, and maximum wage for each role. The midpoint is usually the average or market rate for a particular role.

These bands should provide a clear framework for compensation across different roles and seniority levels within your organization. Salary ranges should be flexible enough to allow for individual differences but structured enough to maintain internal equity.

5. Monitor and Update Regularly

Market conditions and industry standards are continually evolving, making it essential to regularly review and update your benchmarking data. Conduct this process at least annually or biannually to ensure your compensation practices remain relevant and competitive.

Adjust your compensation plans as needed based on these reviews to respond to new market data, changes in the industry, or strategic shifts within your organization.

Compensation Benchmarking Best Practices

Let's dive into the best practices for compensation benchmarking so your strategy is as effective and efficient as possible.

  • Look beyond the job title. Job titles and their responsibilities can vary widely between organizations. When comparing market data with your own workforce, look at the job description as well to get a more accurate comparison. This is especially important if you’ve combined two roles into one position.
  • Be proactive. Don’t only analyze compensation structures when you catch wind that your workforce is unhappy with their pay — some employees might already have one foot out the door. Regularly assess wages so you can course-correct before it’s too late.
  • Compare to analogous organizations. When looking for comparable data, proceed cautiously when choosing which companies you’ll compare your business to. If possible, they should be direct competitors in terms of size and industry.
  • See more than the salary. Potential hires will look at the total compensation package offered. You should be doing the same and including any bonuses, overtime pay, and other benefits in any evaluation of a role and what the employee should be compensated for.
  • Collaborate. Salary benchmarking isn’t something that should be conducted in a vacuum. While budget and external data may decide actual salary figures, collaboration with managers and department heads will help create accurate descriptions of each role and its responsibilities.
  • Use reputable data sources. When choosing external data sources, it’s not just a case of identifying similar businesses for comparison. As much of your data will come from third-party sources, you need to be sure that those sources are reliable and reputable.
  • Consider sharing salary information with employees. As pay transparency becomes less taboo (and a legal requirement in some states), consider lifting the veil and sharing salary ranges with your workforce. While it may shift employer-employee bargaining dynamics, it can also lead to increased trust, productivity, and improved recruiting efforts.

Ensure Fair, Competitive Pay With Paylocity’s Compensation Management Software

In the race for excellence, how you compensate your team can be just as crucial as the talents they bring to the table. Embrace salary benchmarking as a cornerstone of your HR strategy to remain adaptable, equitable, and successful.

With Paylocity, this process becomes even smoother. Our all-in-one HR and Payroll software, including Market Pay, offers real-time insights into compensation data across roles, industries, and regions. Simplify your salary benchmarking with features like:

  • Access market pay data in employees’ records for quick visibility into position and employee outliers you may want to adjust.
  • Browse market data like salaries and highest-demand locations to help define roles and compensation. 
  • Sync market data automatically to positions to simplify pay decisions when recruiting for the role in the future.

Want to streamline your salary decisions? Request a demo today!


Guarantee Fair Pay, Bonuses, and More

In today's labor market, employees expect fair, competitive wages. Our Compensation Management tool can make it happen. Dig into compensation analytics and insights to inform salaries, merit increases, bonuses, and more. With continual data collection, feel confident you're always paying your employees accurately and fairly, while staying in alignment with your company's budget goals.

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