Why Use Compensation Benchmarking Data

dollar-signsHow do you know if you are currently paying your employees at competitive levels? And what merit increases are warranted for each position? Are you utilizing the appropriate mix of base and variable compensation based on the type of position?

These are common questions we are asked when clients engage us on a compensation project. They know they need help with compensation, but they aren’t entirely clear on where to start and we believe that benchmarking your positions against industry compensation studies is the best place to begin.

So what is compensation benchmarking? Basically, it is the process of using internal job functions to match to established industry salary survey job descriptions in order to identify the market rate for each position.

Why should you use compensation benchmarking data? Because your people costs are the largest expense to your organization, a solid understanding of the value of each position allows you to develop an approach for setting an overall compensation philosophy. Your ability to balance the needs of attracting and retaining top talent with the overall fiscal responsibility of your firm should be a key priority.

Compensation benchmarking provides you with important information including:

  • Recruitment: what does the market pay for your firm’s positions? It’s not uncommon for us to see clients who have overpaid for a position because they were just guessing on what the compensation should be.
  • Retention: are your current salaries still competitive (especially for your tenured employees)? In our consulting work, we regularly see long-tenured employees underpaid for their position because the annual merit increases have not kept up with the industry compensation increases. You don’t want to lose your long-tenured employees or cause resentment because your new hires are being brought in at higher salary levels.
  • Review: is your compensation philosophy still in line with your chosen market level? If your compensation philosophy is to pay market rates competitively at the 50th percentile for behavior that meets expectations and at the 75th percentile for behavior that exceeds expectations, then a current compensation benchmark exercise will validate whether or not your compensation philosophy is still in line with those levels.
  • Growth: is your compensation structured well enough to stimulate the growth of your firm? We often see firms who pay more than generous base salaries and incentives for business development positions but they aren’t getting the new business results they were expecting. Firms should feel confident they have structured the appropriate mix of base salary and incentive compensation to drive the results they are seeking.

When benchmarking with the job function in mind, you will most likely find that you have several hybrid positions in your firm (employees who are doing multiple jobs) so make sure you are accounting for the time they spend in each role and benchmark accordingly.

Compensation benchmarking can be done internally by your firm’s HR manager or you may want to consider hiring a third-party expert who can provide unbiased compensation benchmarking services to ensure all positions are benchmarked with the external market accurately. However you accomplish the goal of compensation benchmarking, doing so will provide you with important information to help drive the goals of your firm and ensure market competitive and fair pay practices.

Contact us if you need compensation benchmarking assistance.

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