What it is

Pay benchmarking, in simple terms, eliminates the guess work by comparing your salaries with those paid elsewhere. It uses a common methodology so you know you are comparing like with like and gives you hard business data to assist in decision making. It’s an excellent way to start the proverbial ‘HR spring clean,’ but it can scare even the most ambitious HR practitioner off, with the prospect of collating job descriptions, accurate payroll information alongside other data elements that aren’t always readily available.

Nonetheless if you can put a positive spin on the initial data gathering process in accumulating the essential ingredients, it often sheds light on inconsistencies in the current management of pay systems in an organisation - this is not necessarily a bad thing.

What it isn’t

Sometimes benchmarking receives bad press, particularly around Executive pay, with some arguing that benchmarking salaries simply exacerbates pay rises. We believe that by and large, this is due to the misinterpretation of results that come from a pay benchmarking exercise, rather than the data itself. You have to understand that it isn’t a science and HR practitioners need to be realistic about what pay benchmarking can do for them. It is important to recognise that it’s only part of the solution to running an effective reward management system. It should always be seen as part of a wider process that helps to inform the decisions around pay management; a stick in the sand if you will. 

Step 1: Make a decision to do it

Don't shy away from the task because let's face it, it's just information. It's not a call to arms to uplift the salaries of your entire workforce. It simply serves to highlight how much money your company may be wasting in not adopting a more informed approach to pay decisions.

Step 2: Get the budget

My advice would be if you're going to do it then do it right! Convincing your company to part with the much needed cash to embark on a pay benchmarking exercise isn’t always the easiest of tasks, which is why as an HR practitioner you need to get your sums right.

A key part of that process is ensuring you have the right type of evidence to convince management that benchmarking salaries is a good idea. The most effective ways to highlight the potential benefits is to explore issues in monetary terms e.g.

• The extra money the company may be spending outside of a normal pay review - could this be managed more efficiently via a benchmarking exercise?
• The money spent on costly recruitment campaigns with poor ROI - could the business be wasting its time pitching jobs at the wrong market rate?
• What do your attrition rates look like? How confident are you that leavers are exiting the business because of reasons other than pay? How much money did you spend on training new recruits last year? Would a more informed picture on the pay landscape of your sector have helped at all?
• Loss of talent, are your top employees going elsewhere and is Reward a key factor in that?

All of this, presented well, can make a reasoned case that is very difficult for the business to ignore.

Step 3: Know why you’re doing it

Too often we see the results of a pay benchmarking exercise shape next steps in a reward re-alignment programme. But you shouldn’t wait for the outcome of the analysis to shape future decisions around the intended management of pay. Make your aims clear from the offset e.g.

• “We aim to be a median payer”
• “We accept we are not market leaders in base pay however we know our benefit package is first class”
• “We want to reward for performance and tracking the market is a key factor in achieving that”

Step 4: Know your data sources

Spending money on salary surveys isn't necessarily the top of any HR practitioners list when allocating budget for the year ahead. With a little bit of knowledge however, you can hone in on what is suitable and most worthy of investment.

• Don’t choose salary surveys because they are cheap or free. Companies often feel like they have their finger on the pulse of market data via various recruitment websites and readily available free salary information on the web. While this may be the only option due to budgetary constraints, it can prove more of a hindrance than a help as the data is so high level, often masking hidden salary elements.
• Choose salary surveys that provide data for roles with a robust matching methodology. Too often surveys publish ranges of salary data linked solely to job title and this can prove very misleading. The more reliable surveys use a proper matching system which allows companies to match the specifics of their role with that of the survey.
• Track down the survey that is best renowned for capturing market data in your sector and has well-known participant companies.

Remember a small amount of investment in a good salary survey reaps rewards in the long term. Credibility is a key success factor in communicating decisions around pay management and without a solid data foundation everything can be called into question.

Step 5: Practical advice

• The more information you have/know about the role, the more precise the benchmark
• Remember you benchmark the role, not the person
• Take a balanced view of the role across the whole year
• Where an exact match doesn’t exist, benchmarks can still be achieved using broad survey definitions and career levels
• Always cross check matches internally across departments
• Always use FTE salary
• Validate your matching decisions with the business

Step 6: Be open with your employees

As a consultant I have seen first-hand the measures of success associated with a solid reward management system, and one of the most critical factors is transparency. Employees often have distorted perceptions or unrealistic expectations as to what a pay benchmarking exercise might mean for them. It’s therefore important to manage this and be as honest as possible as to the aims of the company in embarking on this type of exercise.

• Like benchmarking other parts of the business, we also place high importance on benchmarking pay
• It isn't a measure of your job contribution or an automatic right to a pay increase
• It is information that forms part of a wider picture that a good employer will consider alongside many other variables

Benchmarking will always be only part of the jigsaw that forms the employee reward proposition, but it can be a bit of a minefield. By using an experienced, external partner to support you on this journey, you can be sure that you will get the most successful outcome. If you would like some help and advice on undertaking a pay benchmarking project, get in touch.

« Back to Insights