Understanding the salary benchmarking process

In today’s competitive labor market, pay remains a key variable in helping you attract and retain talent. But to offer competitive pay, you need fresh, relevant benchmarks to guide your compensation decisions. Otherwise, you can end up underpaying or overpaying employees, eroding employee morale, your budget, or both.

To ensure you realize the many benefits of compensation benchmarking, you’ll need to understand and follow each of the four steps of the salary benchmarking process.

What Is Salary Benchmarking?

Salary benchmarking is a method used to understand how other organizations pay their employees compared to yours. Salary benchmarking goes deeper than a simple compilation of comp data from other sources. It offers opportunities to gather data and match pay according to your geography, industry, funding stage, and the skills and experience levels associated with each job position.

According to the Pew Research Center, pay was one of the top reasons employees left their jobs in 2021. When you conduct careful compensation benchmarking, you can gain insights that will help you offer pay that attracts candidates and keeps existing employees engaged.

By building your understanding of how similar companies pay their people, salary benchmarking helps you:

• Attract talent with competitive comp packages.
  
• Retain existing employees by offering the right pay mixes and levels.
  
• Make comp decisions that help you manage equity dilution and cash burn.
  
• Identify and address pay inequities in line with your diversity, equity, and inclusion (DEI) strategy.
  

Steps in the Salary Benchmarking Process

Most companies agree that paying competitively is a key goal. However, setting a goal for competitive employee pay doesn’t always translate to competitive pay practices. In a recent World at Work survey, 77 percent of companies said they aimed for employee base pay at the 50th percentile, but only 63 percent achieved that goal.

Although many factors impact your ability to pay employees competitively, one critical factor is your compensation benchmarking process. Following a solid benchmarking process enables you to develop an accurate picture of where the 50th percentile falls for each position so you can make well-informed compensation decisions.

Follow these steps of the salary benchmarking process to enable more data-driven pay decisions in your company:

Step 1: Select your market data provider.

Before digging in to begin any market data analysis, you need to ensure the data is of acceptable quality and accuracy. In essence, the data must come from a reliable source.

Although it’s easy to get free salary data from the internet, you can’t be sure if the data is valid. Moreover, free salary benchmarks can come from unverified sources, including employees who have exaggerated their compensation or left out key components.

To determine if you have the right market data provider, look for the following characteristics:

• Relevance to your market, industry, and size: For example, if you’re an early-stage, pre-IPO company, you don’t necessarily want market data from large public companies.
• Accurate, fresh data: Given regular changes in the market, you should ensure your market data is updated regularly and is no more than a calendar quarter old.
• Compensation data pulled from employer tools: Salary benchmarks based on manual employee inputs may not be accurate or complete.
  
• Validation by compensation professionals: Qualified comp professionals can view and validate compensation benchmarks through the lens of the external landscape and the needs of growing companies like yours.
  

Step 2: Identify which segments of the data to use.

The universe of salary benchmarking data is vast. To make the most of the data, you will need to determine the best talent market from which to draw comparisons. For example, you can examine data cuts based on any of the following factors:

• Industry
• Funding stage
• Employee skill level and years of experience
• Geography

Ideally, you want to use a salary benchmarking tool that allows you to consider the data segments that make sense for your company rather than a massive data dump that is difficult to analyze.

Step 3: Align your internal employee data to the market data.

When comparing market data, it’s not enough to make comparisons by job title because the same title can mean different things in another company. For example, a “sales manager” in an early-stage company may describe an individual who manages the entire sales function while also managing their own book of business. But in a larger, more mature organization, a “sales manager” might be anyone in a sales role, including individual contributors.

To generate the most accurate compensation benchmarks, you’ll need to define and assign employees to a function, a family, a job, and a level. In doing so, you create a common language to compare jobs.

Step 4: Map the established compensation ranges to the appropriate jobs.

Once you have an organized way to define company positions, you can begin making comparisons and determining your target pay percentile. One of the most efficient ways of accomplishing this step in the compensation benchmarking process is to use a dynamic, data-rich compensation tool.

With the help of a compensation intelligence platform designed specifically for growing companies, you can quickly see how your company positions compare to the market. From there, you can take concrete steps to build competitive pay packages, such as creating pay ranges and dividing your equity pool with greater precision.

Best Practices for Salary Benchmarking

In a recent Deloitte survey, 69 percent of respondents said the changing nature of compensation expectations and strategies are important to their company’s success, but only 9 percent say they are ready to address these changes.

To further refine your company’s comp program and position your company to navigate the ever-changing world of employee pay, incorporate the following benchmarking best practices:

• Refine pay practices to meet your unique needs: When drawing market comparisons and determining employee pay, consider your company’s goals, finances, and culture.
  
• Avoid a one-size-fits-all data cut: Carefully determine which data set makes sense for the positions in your company, industry, and growth profile.
  
• Align benchmarks with your compensation philosophy: Remember that salary benchmarking is the first step in building a great comp program. Benchmarking provides the data you need to craft and communicate your compensation philosophy.
• Use the right compensation analysis software: Select a compensation tool that not only provides market data, but also offers insights and analysis to help you model comp packages, identify pay inequities, and forecast hiring scenarios and their related comp costs.
  
• Reevaluate benchmarks routinely: Benchmark your company’s positions regularly to keep up with market changes.
  

Fuel Company Growth with Insightful Compensation Benchmarking

Compensation benchmarking data from a reliable source provides the insights you need to attract and retain talent. Instead of relying on outdated or inaccurate data from the internet, you can access compensation intelligence that helps you achieve more accepted offers and keep your best people motivated to perform at their best. Furthermore, when you have access to benchmarking data that reflects the competitive market for growing organizations like yours, you are better positioned to make pay decisions that help you scale.

To see how OpenComp’s compensation benchmarking tool meets the unique needs of pre-IPO companies like yours, request a demo or sign up for free today.

Julia Dow is VP Services at OpenComp and has held compensation roles at VISA and Connery Consulting. She also writes about topics including compensation philosophy and executive compensation. Connect with her on LinkedIn here.