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The Cost of Compensation Benchmarking

Posted on March 27, 2014
Amy DozierWritten by Amy Dozier | Email author

At Helios, we are often approached by current and prospective clients to conduct compensation benchmarking.  First, you may ask yourself, what exactly is benchmarking and why can’t we do it in-house?  So let’s start with the first part of the question.

What is Compensation Benchmarking?

Compensation Benchmarking is the comparison of internal jobs to the market.  We take your job descriptions and match them to similar jobs found in multiple compensation surveys to identify the external worth or market rate.  In other words, you will know what other companies in your industry, geographic location and size category are paying their employees for similar jobs.  Along with the knowledge, you have about the internal worth of your organization’s positions, the external market data will help you ensure you are paying your employees competitively.

So now you know what it is, is it something you can do internally?

The Cost of Compensation Benchmarking with Internal Resources

Purchasing Salary Surveys:

If you do the benchmarking internally, you will have to purchase the resources; I would recommend purchasing at least three salary surveys to ensure you are matching your jobs to the right benchmark jobs in the surveys, confirming the accuracy of your analysis.  The cost of salary surveys vary greatly; it can cost anywhere from a couple hundred dollars to tens of thousands of dollars.  For more information on the cost of salary surveys, check out my colleague’s article on the topic.

Lack of Expertise:

In addition to the direct cost of the surveys, you will have an indirect cost of actually doing the work.  As a compensation professional who does benchmarking on a regular basis and someone who is familiar with the surveys I am using, I usually budget about 15-30 minutes per job.  For someone new to benchmarking, I would allow for more time than that.  The other and probably more costly indirect cost is the cost of not getting it right.  Compensation is a little bit of science and a lot of art.  Knowing when to eliminate data points, how to age data, and when to adjust and weight the data is critical.  If your final analysis is off, you could end up leading the market when you don’t intend to or lagging the market and have trouble attracting key talent.  The cost of losing competitiveness is something I cannot begin to put a price on for you.

If you have the tools and the expertise in house, there is no reason to call a third party.

The Cost of Compensation Benchmarking using a Third Party Consultant

Survey Library and Compensation Tools:

A third party offering compensation services will most likely have an extensive library of reliable, well-established surveys covering a number of industries, geographic locations, and revenue sizes in addition to tools that help accurately analyze the data.  Our other compensation tools easily allow us to compile the data from multiple sources and focus on the benchmarking and analysis instead of the formulas in an excel spreadsheet that often times lead to errors in the analysis.

Lack of Organizational Knowledge:

Now the con to using a third party to do your benchmarking is that, as someone external to your organization, I do not know what your employees really do and how they interact with each other.  I would rely on the job descriptions you provide me, an org chart, and other information you give me to conduct the benchmarking.  No matter how good our tools are if we don’t know what the job really entails we cannot accurately benchmark your jobs.  I usually ask my clients to approve the survey matches before I finalize the analysis.  I want my clients to be comfortable with the way we match their jobs so they are sure the end product, what they are paying for, is useful.  So make sure your job descriptions are up to date before engaging a third party to do the benchmarking.  Of course, if you need help with your job descriptions, third parties, like Helios, can help with that too.

Compensation Specialists:

As a consultant, I have found that most small to medium sized organizations do not have compensation specialists in house.  They have HR Generalists who have broad HR experience with little to no compensation experience.  In fact, I have some colleagues who have put their foot down and said “no thank you!” to compensation.  So first, when you use a third party, you will be working with compensation specialists who do benchmarking as a hobby…ok, well maybe not as a hobby, but you get my point.

Finally, once you have the market data, a third party can help you determine what to do with it.  We can help with the employee analysis identifying which employees are below or above market and what it would cost to bring them to market.  We can also give recommendations and guidance on next steps and how to effectively communicate changes to your employees. Whether you decide to do this project in house or work with a compensation expert from a third party, like Helios HR, make sure you are putting the resources toward the project to ensure the individual can be successful.  A benchmarking and analysis done well can help you control costs, mitigate legal risks by providing structure to ensure internal equity and maintain market competitiveness, and enable your organization to attract, motivate, and retain talent.

2 Comments

  1. by Tejaswini on February 2, 2015 at 10:46 pm

    Very very helpful! Thank you

  2. by Alex Trodder on March 4, 2016 at 3:57 pm

    Having adequate compensation for your employees is essential to retaining your talent pool. You make a great point about how their are several factors that can influence compensation like geographic location, market growth, and market size for your industry. Having a benchmark from a professional, third party compensation consultant can help to reduce turnover, training costs, and improve employee satisfaction. Thanks for your post.

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