Pay and reward schemes remain a highly emotive area, with employers generally faced with the challenge of keeping wage costs as low as possible without compromising talent retention and attraction.
If wages are being reviewed, or salary levels for new roles are being set, it’s important that these levels are considered in the wider context of the market and what is being offered by competitors. Salary benchmarking can provide critical data to help employers make commercially-informed pay decisions.
What is salary benchmarking?
Salary benchmarking is the process of gathering information from outside an organisation in relation to benefits and pay and using this data to compare with remuneration and reward packages offered by others in the market for the same role. This information can then be used to determine the average salary for particular roles within an organisation.
Salary benchmarking is an essential exercise for employers because it aims to help them set their own pay rates at an appropriate level without paying more than is necessary. Employers can offer a competitive and fair salary to both prospective and current employees, which is vital for attracting and retaining skilled talent.
Benefits of salary benchmarking
One of the principal goals when setting the level of pay for a role is to match it to the ‘market rate’. This means paying enough to attract new employees and retain existing staff, while not paying more than is necessary, which would have a detrimental and inflationary effect on budgets.
To determine the rate for a job, businesses can benchmark jobs against data from other industries and organisations, comparing the rates of pay offered for similar roles.
In the private sector, roles are often valued using a market pricing approach, with employees being compensated in relation to the market value of their job, regardless of their level within the company.
Benefits include rationalising pay (paying only what is necessary for the role), improving employee retention, ensuring your business remains competitive and targeting pay fairly.
Salary benchmarking process
The salary benchmarking process is typically made up of five stages:
Stage One: Evaluate
From the outset of any salary benchmarking exercise, it is useful to think about your reasons for carrying out salary benchmarking and what you ultimately want to achieve. Essentially, what is the purpose of the exercise?
Do you aim to cut costs within a specific service? Are you struggling to recruit suitable candidates for a particular role? Or perhaps you are experiencing retention issues. Is this process a one-off review or an annual sense check, for example? No matter what your reasons are, they will naturally affect the way you approach the process. Setting yourself objectives can also help you concentrate on your areas of priority.
It is also helpful to be clear about how many resources you have available to you to carry out the salary benchmarking process. Accessing data can often be expensive and more in-depth benchmarking is frequently time-consuming. If you do have limited resources, then you need to be realistic about the level of accuracy and detail you will be able to achieve.
You should really try to strike a balance between achieving sufficient accuracy and detail whilst minimising the costs and time burdens involved. To summarise, you should: understand your purpose, define your objectives, and identify available resources. This will help you ensure your salary benchmarking exercise gives you the best outcomes for the lowest possible outlay.
Job evaluation is a method of determining, on a standardised basis, the relative value of different jobs. This is an important aspect of organisations meeting their responsibilities under equal pay legislation and helps to promote coherence in an employer’s grading structure. Under the Equality Act 2010, male and female employees are entitled to receive equal pay for equal amounts of work. This includes pension contributions and variable pay, in addition to basic salary.
The question salary benchmarking needs to answer is: “is the salary range for this role in line with external market rates?” Put more succinctly, are you paying enough compared to other employers to ensure that you can recruit and retain staff for the role in question?
Job evaluation has an internal focus because it ranks jobs and their relative value within a business, whereas the main focus of market pricing is external because it aims to compare the rate of pay for a business’s jobs with those in the wider labour market. The issue here is that it is not always possible to accurately compare roles with employers that do not use the same, or indeed any, job evaluation scheme.
By the end of the first stage, you should have achieved these outcomes: defined your purpose and objective, identified resources, clearly planned and scoped your salary benchmarking project, and understood the role of job evaluation within your project.
Stage Two: Classify
The easiest way to compare roles is via job title, however this can be prone to error because job titles vary so much in their meaning. And calls into question the true compatibility of the roles being compared. Comparing by job classification has all the advantages of comparing by job title, simplicity and availability of data, but it is not as prone to error as comparing by job title. Using job evaluation is the best way to make sure that you are comparing roles that are sufficiently alike to expect similar rates of pay. Care should be taken when comparing across different job evaluation schemes as this may bring in a degree of error that using job evaluation was supposed to avoid.
Employers should also remember that no matter how systematic their approach to job evaluation and salary benchmarking, it is still only indicative of market rates. There is no simple solution for setting pay at a sensible rate even when using accurate and up to date comparisons are made with similar employers. This is principally because each employee is different, and therefore, the package of rewards that appeals to one may not appeal to another.
In these circumstances, it may be advisable to have two approaches to salary benchmarking. First, based on job classification, which enables swift and cheap comparisons to pay rates. Second, by employing a more systematic approach involving a hybrid job evaluation and job profile.
Employers also need to decide how they will classify the rewards they wish to compare: e.g. basic salary, total earnings, including bonuses etc, or the wider package encompassing elements such as pension provision or non-pay benefits. Available data on wider packages tends to be variable in quality and coverage and generally has greater levels of error; often classing things as being alike when they are not. For example, a parking space in the centre of a city is worth more than a parking space in a rural setting.
Data on earnings is often of better quality and is more readily available. However, there may be issues with compatibility because some additional elements that may be captured in the data are either additional pay based on increased hours (overtime) or one-off payments (golden handshake) that could skew annual figures.
It is therefore recommended that salary benchmarking focuses on basic pay for the comparison stage.
Stage Three: Compare
There are many different types of pay data sources, which can be grouped into three main categories:
- Off-the-peg published data from pay surveys and similar organisations that give some indication of the going rate for particular roles. These are likely to only contain job classifications but can be useful for providing episodic checks against current rates.
- Benchmarking clubs of employer groups who regularly exchange information on pay rates. Only participants will have access to the information because only similar employers in close proximity are likely to be involved.
- Consultancy and ad hoc surveys which are funded by individual organisations from specialist pay consultancies. Many businesses who are involved in job evaluation are likely to maintain a database of pay information against job evaluation scores and profiles. These will probably be more accurate than other sources, but they can be expensive and complex.
After identifying your source of data, you need to think about the criteria for comparison: on what basis is an organisation similar to another and how will this data be interpreted?
You will need to decide where you are going to position your pay level in relation to the market. For example, whether you will set it above, below, or equal to the median level of pay in the external labour market.
Once you have determined the organisations you wish to salary benchmark against, the sources of relevant data, and the detail you need to collect, then you will need to carry out the actual comparison. This amounts to gap analysis, where each relevant field of data from your company is compared with the same data from other companies. The gap analysis is broken down into three steps:
- Measure current rates of pay, including all relevant rates and levels of details as determined earlier in your salary benchmarking process, e.g. seniority, occupation.
- Measure other organisation’s pay rates, including organisations you have identified as being within similar labour markets.
- Use the two sets of data to identify differences, or gaps, between your pay rates and that of your comparator organisations.
Stage Four: Adjust
Once you have identified any differences between what you are currently paying and what the comparable market rates are paying, you will need to decide on any adjustments you are going to make to ensure your pay is targeted at the correct market rate. This can be a real thorny area for employers because they need to balance the desire to pay employees at the going market rate with the requirement that pay should be equivalent between roles of equal internal value.
The easiest to measure is basic pay. This is usually agreed as an annual salary rate, although it can be an hourly, sessional or daily rate. It is important for employers to understand and take account of how additional rewards affect basic rates of pay. Many employers have moved away from the more traditional approach that compensation (pay) is the only motivator of a workforce and it is now becoming increasingly common for employers to embrace a concept of ‘total reward’ incorporating a range of other factors within their package offered to employees.
Categories of reward fall into four main categories: Compensation comprising basic pay and overtime payments; non-taxable benefits such as luncheon vouchers, free/subsidised childcare, free parking, job-related living accommodation or moving expenses; work/life balance, including paid and unpaid leave; workplace flexibility – this category is harder to define but has an important impact on the attractiveness on a position, particularly for those with children; recognition and development covers efforts employers can make to ensure their employees feel motivated, valued and have opportunities to improve their skills and develop their potential.
Stage Five: Monitor
Salary benchmarking should not be considered as a one-off exercise. If pay is to keep pace with market forces, it will naturally need to be adjusted according to economic circumstances and local labour market changes. It may also be useful to monitor the overall effects on pay rates of the benchmarking process by assessing the extent the benchmarking process has been successful in achieving its aims and objectives.
By the end of this stage of the salary benchmarking process, you should have implemented monitoring processes and have tested the success of the benchmarking itself. It can be useful for employers to produce total reward statements which provides employees with a personalised document that details the overall value of their financial rewards, such as incentives, basic pay, and employee benefits. Total reward statements can also be used to reinforce the provision of less tangible benefits, such as work/life programmes, flexible work arrangements and learning and development programmes.
DavidsonMorris’ HR specialists have extensive experience advising employers on remuneration and reward and in particular, providing guidance on the use of salary benchmarking to determine and justify pay levels. For advice for your organisation, contact us.
Salary benchmarking FAQs
How do you benchmark an employee's salary?
Salary benchmarking involves researching from outsourced benchmarking data resources and tools according to location and levels of experience. For generic information on pay, employers should consider checking recruitment sites.
Why do we do salary benchmarking?
Salary benchmarking provides employers with justification for their market rates of pay. It also keeps their stakeholders up to date with the latest salary trends within their business sector or industry.
Last updated: 21 February 2022