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By: Joanna Anderson on July 11th, 2013

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What are Compensation Benchmarking Best Practices?

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Maybe you’ve heard of compensation benchmarking, but you really don’t understand what it is or why it’s important to an organization.  I promise you are not alone! As a compensation consultant, I often talk with executives before starting an employee compensation benchmarking project who think they need help with reviewing their salaries but aren’t entirely clear on the process. I hope this post will help you get a big picture overview of what benchmarking is, why organizations need it, and the implementation involved.

What is compensation benchmarking?

Compensation benchmarking is the process of using internal job descriptions to match to established salary survey jobs in order to identify the external market rate for each benchmark position.

Why is compensation benchmarking important as a "best practice"?

Establishing market rates for core positions within an organization is important for a variety of reasons.  First and foremost, it guides pay decision-making including hiring, promotions, internal equity salary adjustments, and general compensation budget planning.  Because labor costs are the largest cost to any organization, a solid understanding of the external value of each position allows an organization to develop an approach for setting overall total rewards philosophy, or the level at which the organization will set salary levels. 

The ability to balance the needs to attracting and retaining talent with fiscal responsibility of the organization is a key priority for executives. Compensation benchmarking provides the information leaders need to define the costs associated with salaries and other compensation components such as profit sharing or bonuses.

How to Do Compensation Benchmarking

If you decide to conduct a compensation benchmarking project internally vs. using third-party compensation consultants, it is still very important to use reputable salary survey companies so that the matches made to the specific labor market are as accurate as possible.  In addition, reputable salary survey companies employ compensation analytical professionals trained to compile, analyze, and publish data in a confidential and robust manner, ensuring a true representation of pay levels in the market. This is much different than the free salary sources found online, which are typically not as reliable. 

Additionally, regulatory guidelines such as the Sherman Anti-Trust Act set forth requirements for the way in which salary information is collected and shared, in an effort to ensure price fixing of salary levels is not occurring. In order to complete a compensation benchmarking project, current job descriptions and identified salary surveys which include similar jobs in comparable industries and similar size companies are essential.

Benchmarking In-House Vs. Partnering with a Compensation Consultant

Compensation benchmarking can be done internally by HR professionals working with managers to ensure accurate job description content. There are also third-party compensation consultants (like us at Helios HR) who can provide compensation services to ensure all positions are documented and benchmarked with the external market accurately. When you work with a compensation consulting firm, you reduce your costs of purchasing the salary surveys yourselves as most consulting firms already have a robust database of surveys and tools already.

Here are some other details to consider when implementing this project internally versus working with a third-party consultant.  However you accomplish the goal of compensation benchmarking, doing so will provide you with important information to help drive the goals of your organization and ensure market competitive and fair pay practices.

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