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By: Joanna Anderson on March 1st, 2021

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What are Compensation Benchmarking Best Practices?

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Maybe you’ve heard of compensation benchmarking, also known as salary benchmarking, but you really don’t understand what it is or why it’s important to an employer.  I promise you are not alone!

As a compensation consultant, I often have conversations with executives and HR professionals before starting an employee compensation benchmarking project.  Typically, they feel like they need help with reviewing their salaries, but aren’t entirely clear on how to go about the process.

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That's where I step in and try to make sense of what a compensation strategy is, where to find accurate salary data, how merit increases are typically performed, the different approaches between employee compensation vs. executive compensation, and more. 

I hope this post will help you get a big picture overview of what salary benchmarking is, why employers 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 labor market rates for core internal job titles is important for a variety of reasons.  First and foremost, it guides compensation decision-making including areas such as hiring, promotions, internal equity salary adjustments, and general compensation budget planning. 

Related reading: What Makes Up a Great Total Rewards Package?

Because labor costs are the largest cost to any employer, a solid understanding of the external value of each job position allows executives and HR professionals to develop an approach for setting an overall compensation philosophy, the level at which the organization will set salary levels. 

The ability to balance the needs of attracting and retaining talent with fiscal responsibility is a key priority for executives. Compensation benchmarking provides the data executives 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 salary benchmarking project internally, it is very important to use reputable salary surveys. You want to ensure that the matches made to the specific labor market are as accurate as possible so that you can feel confident of the compensation data you are getting

In addition, reputable salary survey companies employ compensation professionals trained to compile, analyze, and publish salary data in a confidential and robust manner, ensuring a true representation of pay levels in the market.

Do take note that 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 pay 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 employers, are essential.

Benchmarking In-House Vs. Partnering with a Compensation Consultant

Salary benchmarking can be done internally by Human Resources professionals working with managers to ensure accurate job description content. There are also third-party compensation consulting firms (like us at Helios HR) that can provide compensation services to ensure all positions are documented and benchmarked with the external labor market accurately.

When you work with a compensation consultant, you reduce your costs of purchasing the salary surveys yourselves as most consulting firms already have a robust database of compensation surveys and tools available. Here are some other details to consider when implementing this project internally versus working with a third-party compensation consultant.  

However you accomplish the goal of compensation benchmarking, doing so will provide you with important market data and information to help drive the goals of your organization. Many of our clients conduct a benchmarking project to have a competitive advantage with their compensation strategy and ensure they have fair and equitable pay practices.Book a call with Helios HR