Understanding the Salary Benchmarking Process: A Comprehensive Guide

It is not easy to attract quality talent within budget. Employers wish to hire the right candidate but need to maintain pay equity within the organization. They often do not know what the market pay range is. That’s where compensation benchmarking comes in to give an idea about the salaries that are fair and competitive. An organization decides how much to pay its employees using salary benchmarking. Salaries are usually weighed against benchmark or assessment tools to find out what the company’s competitors pay the staff. Essentially, it helps organizations stay within their budgets while retaining talented employees. In this article, we will be understanding what is salary benchmarking process and the disadvantages of salary benchmarking.

Salary Benchmarking Process
Salary Benchmarking Process

What is Salary Benchmarking?

Salary benchmarking is the process of determining fair compensation for employees based on comparison to different jobs at different companies. Since it prevents companies from paying internal employees more than outside companies pay, salary benchmarking does help companies offer competitive packages within budget.

The pay data helps the HR teams to have fair and competitive pay so that employees are paid at the same level as their friends from other places. Knowing what the salary is currently and eventually will be, HR helps the organization be productive and profitable.

Why Is Salary Benchmarking Important?

Salary benchmarking is crucial in establishing competitive salary benchmarks, which is the way businesses attract and retain talent. While pay may not be the primary motivator, everyone needs a fair check. Competitive compensation shows how much the company cares about its employees and their work. A competitive marketplace and an uncertain economy mean offering the right salary for hires and retention of top talent.

What is Salary Benchmarking Process

Below we have mentioned the steps if you are wondering how to benchmark salaries:

Collect Salary Data

  • Make your list of the jobs you will research. Instead of examining each role separately, group comparable jobs under a single job title.
  • Decide where to find salary data. You can use:
  • Employer surveys
  • Data-sharing agencies
  • Salary Software
  • Surveys designed by consultants
  • Professional networking sites
  • HR publications

Arrange them by location, then organization, and industry. Good to indicate where the data came from and how you collected it. This will help you obtain credible pay information for successful benchmarking.

Salary Benchmarking Process

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Salary Benchmarking Process

Develop a Compensation Strategy

After collecting the salary data from different places, create your compensation strategy based on your respective business objectives. Consider how big your company is, where it operates, and how many levels of employees within an organization might exist. Start by identifying, at minimum, the lowest-paid job or the highest-paid job to see what your salary range is.

Define the Salary Range

Find the Range: Observe the lowest and highest pay for a particular job. For example, if a customer service representative earns $10 an hour in one place and $15 an hour at another, your range is $10–$15.

Find the Midpoint: Determine the middle or 50th percentile. Using the above example, your midpoint is $12.50.

Determine the Pay for New Hires: On this range, you base how much you are going to pay new employees. You can even set a hiring maximum and have a policy where after a year of employment, the employee will get a raise; they will slowly inch their way up the salary range.

Document Your Results

Obtain Approval: If your pay plan needs approval from managers or other stakeholders, document various evidence that shows how you set salaries as evidence of commitment towards fair compensation. Define your Promotion and Raise Strategies: Explain how the promotion and resulting raise will be designed regarding pay increases. Discuss your Sources: Explain from where you gathered these salary data and why updating your pay structures with these increases will help you bring in and retain talented employees.

Disadvantages of Salary Benchmarking

  • 1. Lack of Accuracy

    Sometimes the data collected may not be accurate or reliable. It may be outdated, incomplete, or biased. For instance, some online salary calculators may give you data so old and even information that has been projected from various locations, industries, or even years of experience. This may lead to giving unreal comparisons that don't favor the current demands of the market or your business.

  • 2. Lack of Context

    Another disadvantage of salary benchmarking is that, at times, they do not provide enough context for salary data. In some cases, the surveys fail to provide critical information on the number of respondents and methods used. They also exclude overtime, sign-on bonuses, and others as forms of pay. Therefore, it could be difficult to compare salaries.

Strategies to Upskill Your Employees
Salary Benchmarking Process

  • 3. Lack of Flexibility

    It may not suit your individual needs or objectives. Generally, the benchmarks used are average values that are not reflective of the particular strengths or significant qualities of a worker related to a certain field, career aspiration, or personal needs. This could allow for very little flexibility and make you rely on numbers rather than skills and strengths.

  • 4. Lack of Trust

    A fourth drawback is that employers will not trust or may be unwilling to accept your salary data. Sources can be challenged, or you present comparisons they cannot agree on. Salary policies at your workplace might also be unique and different from those of the employer and thus may make negotiation hard. This can, at times create friction, a sense of conflict or sometimes even damage your relationship and reputation.

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