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Salary Benchmarking Compensation the Right Way

Salary Benchmarking Ensures That Pay Doesn’t Hinder an Organization’s Ability to Attract and Retain Talent

As employers strive to attract and retain talent in this highly competitive job market, it is more important than ever to know if you are paying competitively with your peers, especially when trying to fill open positions. Some employers are finding out the hard way that their first offer may be the only offer they get the chance to make because an offer below market may result in the candidate moving on to another opportunity without the chance to counter. While it may be tempting to have HR or the hiring managers contact counterparts at other organizations or take an informal poll about what competitors are offering to help inform decisions around compensation, antitrust laws make it clear that this is illegal. The information, however, is vital, leaving employers to implement a sound process for salary benchmarking through other means.

Similar to how retailers consider competitors' rates when setting prices for their products, salary benchmarking is the process of comparing pay rates within the organization to market pay data to understand the position's value relative to the market. A typical approach to market benchmarking includes the following steps:

  1. Identify reputable compensation data sources.

    You should only consider surveys administered by a trusted 3rd party vendor that adheres to all of the antitrust rules for collecting and reporting pay information. Make sure that the surveys you select contain data that is submitted directly by the organization and not by employees themselves. Remember, data between surveys may vary significantly based on who participated, as well as the data cut options available in each survey. For that reason, using a composite of two (or more) surveys will best reflect the various market factors for your jobs.

  2. Accurately match your jobs to the survey benchmarks.

    Before you can compare jobs to a survey, you must have accurate job descriptions which outline the responsibilities, scope, skills and education for the position. While the job title is essential, remember that not all titles are comparable, so look carefully at the job description to make a good match.

  3. Collect data.

    Determine what data would be helpful. For example, collecting the 25th, 50th, and 75th percentile data will allow you to understand the market across a wide range. You may also want to look at incentive or bonus data for the positions.

  4. Age the data.

    In today's changing and tight economic climate, applying an aging factor is crucial to keep pace with rapid changes in the marketplace. Aging the data will allow you to ensure that based on when the survey was published, the data is current and competitive.

  5. Make recommendations.

    Once your analysis is complete, you'll want to make recommendations based on your findings. There may be some jobs that fit perfectly into your established ranges and others that fall outside of your ranges and pay strategy. Paying close attention and taking action to rectify these variances will be vital for attracting and retaining talent.

Creating a schedule to review a portion of jobs each year will help you stay aligned with the market to attract and retain in this challenging job market. In addition, you may wish to consider "off cycle" actions should you run into hiring challenges, add a new position or change your compensation philosophy.

Benchmarking is one piece of the pay puzzle; for more information about the benefits of outsourcing your payroll, visit our recent blog: 5 Considerations for Outsourcing Payroll Management.

Inflation and Compensation

In times of inflation and with the current talk of a recession, the use and importance of salary benchmarking can confuse employers, making them question the validity of the information and how inflation correlates to compensation. Employers are asking, “if inflation is up 8%, should salaries be increased to the same percentage?”

  • While there is some relationship between the inflation rate and wage increases, the actual levels are not directly correlated.
  • Last month, the U.S. Labor Department reported the annual inflation rate for the United States at 8.5%. However, WorldatWork's recent data indicated that the average salary increase for 2022 is 4.1%.
  • That same study reported the planned average salary increase for 2023 also at 4.1%.
  • Overall, the expectation is that salary increases in the aggregate will be about half of inflation.