Pay benchmarking is increasingly being questioned. In a labour market characterised by skills shortages, changing employee expectations, hybrid working, inflationary pressures and rapid movement in certain specialist skills, traditional salary surveys can appear increasingly disconnected from the realities facing employers. There is a growing perception that benchmarking is too slow, too generic and too dependent on imperfect job matching.
In my opinion, the issue is not that pay benchmarking is broken. The issue is that benchmarking is sometimes being asked to answer questions it was never designed to answer. Used appropriately, external market data remains one of the most important tools available to reward professionals. The challenge is understanding its strengths and limitations.
Benchmarking provides evidence, not the answer
The fundamental purpose of pay benchmarking is straightforward: to provide an external reference point against which an organisation can assess its pay levels.
It can help answer questions such as:
- How competitive is our pay?
- How does our remuneration compare with relevant labour markets?
- Which roles appear to be materially above or below market?
- Where might we have attraction or retention risks?
- How does our pay positioning compare with our reward strategy?
What benchmarking cannot determine on its own is what an organisation should pay. At Innecto, when we work with clients on their pay benchmarking projects, our advice is to consider and include a much broader range of factors, including business strategy, affordability, internal relativities, organisational structure, talent strategy, employee value proposition, recruitment and retention experience, scarcity of skills, geographical considerations and the organisation's intended market position.
In my experience, benchmarking should therefore inform reward strategy, rather than become a substitute for it.
There is no single market rate
As a Reward Consultant I am often asked one of the most common misconceptions in reward: What is the market rate for this job?
There are, in fact, multiple markets and the appropriate comparator group depends on the organisation and the role being considered which, as reward specialists, we explore with our clients. For some jobs, sector may be the most relevant factor and for others, the organisation may compete for talent across sectors, meaning the relevant market is defined by skills, geography, organisation size or job complexity.
This is particularly important for specialist and senior roles. A Finance Director, HR Director or Technology Director may share the same title across several organisations while carrying significantly different levels of accountability, complexity and organisational impact.
Effective benchmarking therefore depends on robust job matching, not title matching, which is something that I consider essential in the process. The quality of the benchmark is fundamentally dependent on the quality of the comparison.
Job matching remains a professional discipline
Criticism of benchmarking often focuses on the imperfections of survey data. However, many apparent problems with benchmarking arise much earlier in the process through inappropriate job matching.
At Innecto we work closely with our clients to ensure that we have the closest and most appropriate information for the role so we consider the following factors:
- Scope
- Accountability
- Decision-making authority
- Organisational impact
- Financial responsibility
- People management responsibility
- Technical complexity
- Reporting relationships
- Required knowledge, skills and experience
This is why job evaluation and job matching remain important disciplines within reward.
A good benchmark is not necessarily the one with the largest sample size. It is the one that contains the most relevant comparator jobs.
The median is not a pay recommendation
Benchmark data is often misunderstood.
Consider a benchmark showing a median base salary of £75,000. Whilst useful, that figure does not automatically become the appropriate salary level.
The organisation may operate a market positioning policy of median minus 5%, median, or upper quartile. It may deliberately pay above market for hard-to-find skills. Alternatively, it may choose to compete through career opportunities, culture or other elements of the employee proposition.
Market data only becomes meaningful when interpreted through the lens of the organisation's reward philosophy.
In Reward we shouldn’t simply report that "the market median is £75,000" but explain where the organisation currently sits against the market, what the evidence suggests, and what action is appropriate given business circumstances and reward strategy.
The challenge of false precision
Benchmarking can create an illusion of accuracy. A salary figure of £74,500 may appear significantly more precise than £75,000, yet the underlying data does not necessarily support that level of certainty.
Survey results are influenced by:
- Sample size
- Job matching quality
- Market definition
- Timing of data collection
- Organisational composition
- Reporting practices
- Labour market volatility
I don’t believe that the answer is to abandon benchmarking, but to recognise both its value and its limitations. I encourage Reward professionals to be comfortable discussing ranges, positioning and trends rather than presenting market data as an exact answer because this is the one thing that it is not.
Looking beyond the numbers
Benchmarking is not an exact science. It relies on many factors and requires interpretation. The most valuable contribution benchmarking makes is not identifying a supposedly correct salary but provides context and helps organisations understand their position within relevant labour markets. The real challenge is what organisations do with that information once they have it.
In Part 2, we'll explore how organisations can combine benchmarking with internal data, workforce intelligence and business strategy to create more effective pay decisions.
