Salary benchmarking – interpreting and using market data
How do you pay your employees compared with the market? Above, below or in line with the market median? A key aspect of the work of the Human Resources department is to keep track of market levels of pay for the various roles. Market data provide a good basis for salary reviews, recruitment processes, creating new roles and for setting the right salary level for specialist skills.
Some of the factors that affect salaries are the sector, geographic location, company size, supply and demand for the specific skill, and the value of the position (responsibilities, leadership, complexity, impact on financial results, etc.). Individual performance must also be weighed in when deciding on the level of compensation for an employee. Good insight into pay levels in the market brings further certainty to the salary-setting process and ensures that the company can attract and retain the right employees.
Relevant peer group
There are a number of different firms that provide market data on compensation and benefits. These include for example consultancy firms like Aon, Mercer and Willis Towers Watson. They all have different strengths and the quality of the data can vary depending on the role, industry, etc. being looked at.
It can be necessary at times to use different providers for different professional categories within the organization. Industry-specific data may be required for roles that are typical to the industry. When it comes to jobs in support functions, HR, finance and administration, cross-industry data can provide a more detailed picture of the market and a more robust statistical base.
To obtain a relevant and sufficiently large comparison group, it can be useful to compare specialist positions with several similar and closely-related positions. It is also sometimes beneficial to use market data from multiple providers and weight the data on the basis of quality.
Market data provide guidance
Market data provide a good basis for discussion and decisions on levels of pay. However, it is important to be aware that salary data is collected at a certain time and from a limited number of companies. Data should therefore be seen as guidance and not be treated as the complete truth. When analyzing data, you should use a range (e.g. +/- 20%) of the market median for the position to allow for individual and performance-related pay setting.
In addition, it is important to interpret the results in relation to the company’s current and aspirational position in the market. Market practices are not always best for the company. Is it easy for the company to attract key employees? What are employee turnover rates like? Does the company compete for critical talent with strong employer brands? Obviously, individual performance should also be taken into account when deciding on a level of compensation for an employee.
RewardSmarter’s Compensation Benchmarking tool helps you obtain a full analysis of the company’s job positions in comparison with relevant market data.