Posted by Amin Uddin on 01 November 2024
Pay Benchmarking: Best Practices and Strategies
In the modern business world organisations are striving to attract and retain top talent with competitive, fair and transparent compensation practices. One crucial building block in this is Pay Benchmarking, which provides insights and comparisons into industry standards and norms, and helps organisations make informed decisions.
Pay Benchmarking involves collecting pay and benefits data for equivalent jobs and comparable businesses or sectors to establish how an organisation's compensation compares with their competition. The process focuses on base salary, allowances, bonuses, pensions, maternity leave, recognition schemes, employer branding, and many other benefits and non-financial rewards.
Why does benchmarking matter?
Taking a market-driven approach to compensation decisions is crucial to ensuring your reward framework is competitive and backed up by solid data and reasoning.
A benchmarking exercise will help you:
- Attract talent – by enhancing your competitiveness in the marketplace
- Retain talent – by fostering a positive and inclusive workforce pay culture
- Move towards Transparency – by promoting fairness and equity in your compensation approach
- Practise what you preach – by aligning your salaries with your compensation philosophy
- Look after the bottom line – by improving efficiency and allocating resources more effectively
Ultimately, a compensation benchmarking exercise will help you make better, more informed decisions for your organisation.
The building blocks of a successful benchmarking exercise:
1. Benchmark the job, not the role-holder - step one in every successful benchmarking exercise is to ensure job descriptions are up-to-date and accurately reflect the responsibilities of the roles you’re benchmarking. Crucially, this will help you accurately level the roles against similar roles in the market.
- Define your comparator group - Your position in the marketplace is determined by your competition, so it is important to identify who your product competes against, and by extension which kinds of companies you might be recruiting from or losing talent to. It is also important here to consider geography in order to take into account regional differences in the labour market.
2. Defining your best data source - ultimately this will be defined by how well it meets key criteria and nuances:
- Market representation – as mentioned above, the data should be from peer organisations you typically recruit from or lose employees to, ideally in the same sector and of a similar size or budget range as yours. You can find how well represented your ideal comparators are from the participant lists, which are published alongside the surveys.
- Job scopes and functions – do they match yours? If your organisation has roles requiring industry-specific skills, you should choose the survey which best accounts for these more specific skillsets. These are provided in the job scopes and functions. Depending on the nuances of your organisation, you may need a blended approach combining a general survey and a customised industry survey.
- Timing / age of the survey – is it still up to date enough to be market relevant?
- Robust source and methodology - a robust and clearly defined methodology will allow you to answer difficult questions with confidence in the data. Salary surveys from large data houses provide more reliable data than crowd-sourcing platforms like Glassdoor.
At Innecto, we are independent of the data houses, but have extensive experience of working with them all, and so can guide our clients through identifying the best for them.
3. Compensation philosophy - your philosophy underpins the whole benchmarking process, because what you do with the data will be determined by your organisation’s context, ambitions and DNA. You typically have three choices:
- Lag policy – paying employees lower than the market average
- Pay market - paying employees the market rate for each role
- Lead policy - paying employees more than the market rate
You may find that a mix-and-match offering can work well: if you cannot afford to take a ‘lead policy’ stance on salary you could make up for that by offering above the market on benefits.
When to benchmark?
Pay benchmarking should be conducted regularly and not viewed as a ‘point-in-time’ exercise. Your business trajectory and the roles within your organisation will evolve, as will the pay environment around you, so we recommend scheduling a benchmarking review once per year.
The exact frequency will depend on each organisation, but an annual exercise will help you keep salaries in line with the market and your structures relevant and up to date as people move around or roles evolve within your organisation.
There are specific circumstances where a benchmarking exercise should be considered outside of this annual pattern:
- Organisational restructuring - when there is a change in the structure of your organisation, for example in a restructure, the scope and responsibilities of specific roles may change. If your organisation is a smaller subsidiary, and you are benchmarking against a different comparator group post-restructure, any previous benchmarking exercise might be out of date.
- Hiring or turnover issues - If you are experiencing a situation where roles are open for an extended period, or where turnover is high, your pay might have fallen out of alignment.
- Entering a new market – we have worked with clients who have entered a new country and wanted to build a new salary structure in a market that was new to them. In this case, a benchmarking process forms the foundation of any new salary structure and future-proofs their growth within that new market
PayLab: Visualise and Communicate your benchmarking exercise
Having benchmarked your organisation against your comparators, the next challenge is to communicate those results with the Senior Management Team and your employees.
With a combined mass of experience as in-house compensation professionals, our consultants know how spreadsheets can act as a roadblock in this communication process.
This is where a platform like PayLab can revolutionise things by both enabling the benchmarking process and then bringing your outcomes to life, presenting them in a dynamic and intuitive way that is easy for people to absorb.
With PayLab you can view your benchmarking outcomes at an organisational, departmental or individual level, or by identity groups within your workforce, further strengthening any move towards Pay Transparency.
By following these best practices and strategies, and combining them with the available tech tools, organisations can make their pay competitive, fair and transparent, helping to attract and retain the workers they need to achieve organisational success.
