Compensation benchmarking involves comparing your internal total rewards data with similar information from external sources, ensuring your compensation offering is fair, competitive, and aligned with your organizational values and overarching budget. In this blog post, we look at three fundamental steps you should take to successfully benchmark compensation in your business.

Before kickstarting your compensation benchmarking process, take time to assess your organization’s goals. Consider both your financial targets as well as overall outcomes that could be achieved with the data collected during the benchmarking process. Establish and work within a budget to help your team stay on track, and ensure that you’re complying with any local, state, and federal compensation laws. Additionally, have a plan for how you’ll communicate your benchmarking strategy with relevant stakeholders once you have your results.

Once you’ve outlined your budget, compliance, and communication strategies, you can proceed with your benchmarking exercise. Follow these steps to ensure your benchmarking process yields accurate results.

RELATED READING TO DOWNLOAD TODAY | 'Future of Compensation and Total Rewards 2024-25 Report'

Step 1) Categorize Every Position

Your first step is to establish your baseline data. If you don’t already have one, create a list of every role in your organization. Include all relevant data for each position, such as:

• Skills or experience needed to carry out each role’s job responsibilities
• Required level of education
• Salary ranges
• Fringe benefits like bonuses, retirement plans, healthcare and insurance options
• Any additional “perks” that make up a position’s total compensation package

As you categorize the roles in your organization, look at which employees are currently filling those positions. Including your current workers’ actual total compensation, education, and skills data will improve the accuracy of your baseline information. Analyzing non-salary information such as bonuses, performance incentives, and stock or equity grants will help you assess how your current total compensation offerings compare to market standards. A job audit also helps you identify (and rectify, if necessary) any discrepancies between certain employee groups.

Your compensation and talent management systems should provide the data necessary to accurately categorize your organization’s roles, allowing you to move forward with the benchmarking process.

MORE ON EMPLOYEE COMPENSATION | ‘5 Tips to Help You Manage Off-Cycle Compensation Changes’

Step 2) Create a Salary Database

Once you’ve established your internal baseline data, the next step is to create a salary database. This database will be your comparison tool as you determine how your current compensation practices stack up against the market. You can use a combination of free surveys, government-sponsored databases, and aggregated data from paid sources to create your database. In a recent survey, the majority of respondents (68%) said their organizations used consulting firms to conduct industry research. Free online surveys were the second-most popular resource at 58%, and 23% of respondents used payroll service companies to source their data. If your budget allows, gathering data from both free and paid resources can help you minimize bias and provide a more holistic view of market trends for various positions.

If your company is operating in the United States, consider leveraging data from the U.S. Bureau of Labor Statistics. This federal agency collects and analyzes data related to the U.S. economy, including labor market activity like:

• Current employment rates and anticipated workforce separations
• Wages, benefits, and payroll updates
• Price movements and inflation rates

For organizations in the European Union, Eurostat is a valuable resource. Similar to the U.S. Bureau of Labor Statistics, this statistical office collects and publishes labor market data across Europe. Wherever your organization is based or operates, be sure to source employment data from your local government agencies.

Resources like SHRM’s Compensation Data Center can also provide valuable market insights, but you may need to pay a fee to access the data.

There are also a range of informal resources you can tap into to understand current market trends and worker sentiments. In addition to publicly available data and paid resources, consider gathering total compensation and salary information from:

• Candidate interviews
• Industry networking events
• Competitors’ public job postings

GET MORE TIPS ON PAY STRATEGY | ‘3 Tips for Structuring a Successful Skills-Based Pay Strategy’

Step 3) Analyze the Data

Now it’s time to compare. Look at your internal data alongside your research, and assess whether or not you’re matching the market for each role at your company. This assessment should involve more than just comparing baseline salary information. Take a holistic approach to your data analysis. When you’re comparing a role in your organization to your available market data, ensure that you’re also comparing:

• Company sizes
• Education levels and acquired skills
• Industries

If you’re a public healthcare organization, your total compensation offerings probably aren’t going to be the same as those of a big tech company—and that’s okay! A marketing specialist at a public healthcare organization likely won’t earn the same salary as someone doing the same job at a private technology company. Although it’s important to see the overall market rate for each position, you also need to ensure that you’re maintaining standard compensation practices for your industry.

Also consider job descriptions when comparing your internal data to other organizations’ salary ranges. For example, the two marketing positions in the previous example might have the same job title, but the technology company might expect their marketing specialist to take on more tasks or responsibilities. As you assess whether you’re at, below, or meeting the market for salary ranges, remember that annual salaries are only one component of each person’s compensation plan.

HANDPICKED FOR YOU | ‘5 Ways Pay Transparency Benefits Your Organization’

Keep Reading: How to Use Compensation Benchmarking to Enhance Your Total Rewards Strategy

Compensation benchmarking is an essential part of creating a competitive and effective total rewards strategy for your organization. Keep learning about this important topic in our full ebook, “How to Use Compensation Benchmarking to Enhance Your Total Rewards Strategy”. Download the ebook and discover:

• Why salary ranges shouldn’t be your only data point
• Explanations of some of the most commonly-used job evaluation methods
• Which job evaluation methods will (and won’t) work best for your business

Download the ebook