How to Successfully Perform Salary Benchmarking

June 18, 2024
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How to Successfully Perform Salary Benchmarking

Employees want pay transparency — and 68% of them will switch jobs if you can’t provide it. 

This means companies need to find effective ways to drive transparency, and fast. And a salary benchmark strategy is one of the best ways to achieve this goal. 

Benchmarking salaries helps HR leaders make data-driven compensation decisions rather than relying on unfair and outdated practices. These outdated practices include asking new employees for their previous salary or setting salaries based on the gut feel and intuition of different managers (neither of which helps drive pay equity, by the way). 

But getting started with salary benchmarking can feel overwhelming — there’s a lot to achieve after all. 

That’s why we’ve gathered all the information you need in one place.

From why salary benchmarking matters to how it can help you meet regulations like the EU Pay Transparency Directive and how to implement this compensation strategy successfully, here’s everything you need to know. 

What Is Salary Benchmarking?

Salary benchmarking involves comparing a company’s compensation practices to those offered by competitors in the same industry or location. 

This process helps companies make informed decisions when setting competitive and fair salaries that align with market and industry standards.

This process helps drive business growth by ensuring your salary bands are competitive enough to attract the top talent within your region and industry. 

Benchmarking has become a key strategy within the compensation policies of forward-thinking companies. That’s because it helps drive pay transparency and internal equity — identified as two of the key HR trends for 2024 and beyond. 

Salary benchmarking also helps attract and retain top talent by:

  • Aligning your salary ranges with market standards
  • Showcasing a company culture that prioritises fairness and equity
  • Retaining skilled employees by ensuring they’re compensated fairly
  • Enhancing your employer brand, making your company more attractive to job seekers
  • Meeting employee expectations for compensation and benefits

Now you know what salary benchmarking is — let’s take a closer look at why it matters. 

Why Salary Benchmarking Matters

From attracting top talent to ensuring pay equity and maintaining market competitiveness, salary benchmarking can help drive business success. Here’s how. 

Attracting and retaining top talent 

Your first challenge is attracting top talent, and the second is retaining them. Salary benchmarking helps companies achieve both of these objectives.

By setting competitive yet realistic salaries and advertising these openly, candidates are more likely to apply, while you can maximise your budget by deciding where on the market to position your salaries.

Once an employee is in post, salary benchmarking can also help show them how their pay will progress over time. Creating a clear roadmap in this way makes it easier for employees to envision how their careers can develop within the company rather than feeling like they need to leave if they want a pay raise. 

Salary benchmarking also helps when negotiating counteroffers from employees. This is an increasingly popular retention tactic, with data from the UK showing that 40% of employers have used counteroffers in the past year.  

But to create an effective counteroffer, it’s crucial to have the right data. If you offer too low, your employee won’t accept but if you offer too high, you’ll spend more than you need to.

 

Ensuring pay equity 

Pay equity is becoming a crucial way for companies to stand out from the crowd.

More than ever before, employees are open about discussing their pay. And research shows that 77% would start looking for another job if they found out there was a significant gender pay gap at their company.

That’s totally understandable — because no one wants to discover they’re being paid less than someone else in exactly the same role. Salary benchmarking can help companies ensure pay equity by highlighting any employees being paid less than their peers. 

Maintaining market competitiveness 

Some markets change pretty fast, and it’s important to adjust your salaries to reflect that.

Salary benchmarking allows companies to compare their compensation packages to competitors in the same industry or location. By assessing if your salary ranges broadly align with market rates, it’s easier to create informed salary bands for your own company.  

Driving data-driven compensation decisions 

Relying on a candidate’s previous salary history or using your intuition to set salaries for new and existing employees isn’t good enough anymore. 

Practices like this reinforce gender pay gaps and disparities because they’re not backed by reliable data. In contrast, using a salary benchmarking tool helps you make informed, data-driven decisions.

Implications of the New European Directive

The EU Pay Transparency Directive is changing the way we think about pay.

The key points of the directive include a range of measures designed to drive pay equity and transparency. For companies, these include:

  • Providing salary information within job descriptions or before interviews take place.
  • Restricting their ability to ask candidates about their pay history.

In addition to the above, companies with 100 or more employees also need to:

  • Publish details about gender pay gaps.
  • Revise the pay of any employees affected by a pay gap of more than 5% (unless an acceptable justification can be provided).

This directive doesn’t just impact companies but also grants specific rights to employees, including:

  • The ability to ask questions about the salaries of other employees.
  • Compensation if they’re affected by a gender pay gap (this may include back pay and bonuses).

While the requirements for meeting this directive might seem overwhelming at first — they’re not hard to comply with once you have the right strategy in place. 

And compliance isn’t optional — it’s essential. The directive also grants EU Member States the ability to impose penalties, fines, or sanctions. 

Want to know more? Read our full guide to the EU Pay Transparency Directive

Benefits and Best Practices of Salary Benchmarking

When implemented correctly, salary benchmarking offers some impressive benefits. Here’s what you need to know about benchmarking best practices and the advantages this process can unlock. 

Salary benchmarking best practices

  • Use a salary benchmarking tool: Using the most up-to-date, accurate data is the best way to ensure your benchmarks are fair, equitable, and informed by market rates. 
  • Communicate with your employees: Any new policies that affect employee pay can be emotive. Make sure to communicate your intention to complete salary benchmarking well in advance. Creating designated points of contact for all employees can also help ease any concerns and make sure all questions get answered. 
  • Update your data regularly: As the market changes, so should your benchmarking values. Conducting annual reviews of any benchmarks is the best way to ensure your salaries are realistic for current conditions. 

Benefits of salary benchmarking

  • Helps to attract and retain top talent: Candidates are more likely to apply to companies with advertised salaries, and more likely to stay when they know their pay is determined by data, not opinions. 
  • Drives internal equity: It’s very demoralising for employees to discover they’re being paid less than their colleagues in the same role. Adjusting salaries where necessary helps to close pay gaps and demonstrate your commitment to equitable pay practices. 
  • Ensures market competitiveness: Knowing the range of salaries for your specific industry and location allows companies to set competitive salaries while maximising their budget. 
  • Drives engagement and motivation: When employees know their pay is determined fairly, they’re more likely to feel engaged and motivated, which in turn helps boost performance. 

Navigating Data Privacy and Legal Considerations

Pay transparency is now non-negotiable — but so is protecting your employees’ privacy. Here’s how to navigate data privacy while still meeting your legal reporting obligations under the directive.

Follow regional data protection laws

Whatever your location, you’ll need to abide by any relevant data protection laws. In Europe, this is the General Data Protection Regulation (GDPR) but in other locations, different regulations will apply.

HR teams need to make sure that employee data is stored according to these regional regulations, with employee consent gathered when necessary. 

Ex-employees may ask for the “right to be forgotten”, and if their request is granted, you’ll need to erase their data. 

Consult legal experts when necessary

If you’re unsure of your legal obligations or how to comply with data privacy laws, meet with an expert who can provide tailored advice for your company’s specific requirements. 

Create effective security measures

Implementing strong security measures that protect your employees' data is a crucial aspect of salary benchmarking. Your chosen strategies might include things like encryption, controlled access, and regular security scans. These should always be discussed with a security professional to create a plan that’s tailored to the needs of your company and the type of data you’re collecting.

 

Consider how to protect your employee’s identity

Many companies choose not to publish the salaries of individual employees, instead aggregating and anonymising data to protect the identity of individual employees. 

Keep lines of communication open

Pay transparency is important to employees, but so is knowing their details are going to be handled conscientiously. By creating a compensation communication plan, you can lay out exactly what data will be collected, what it will be used for, and how it will be stored. 

Complete regular compliance audits

During annual salary benchmarking updates, it’s a good idea to complete a compliance audit at the same time. Review any changes to relevant laws and regulations, and ensure your policies and processes are compliant. 

Implementing Effective Benchmarking Strategies

Now you know all the nitty-gritty details of salary benchmarking — it’s time to look at how to create and implement an effective salary benchmarking strategy. 

Here are the four steps you need to know. 

#1 Define your benchmarking goals 

It’s important to define what are you hoping to achieve during the benchmarking process. Maybe you’re looking to attract top talent within a specific geographic location. Perhaps you’re hoping to identify and then resolve any pay gaps between employees with the same roles and responsibilities. 

Whatever your goal, defining it at the start will help create a focus for the rest of the process. If you’re working towards multiple goals — that’s okay too! Just make sure to prioritise them and work on achieving one before moving on to the next. 

#2 Choose a salary benchmarking method 

To benchmark a salary used to be an incredibly labour-intensive process. For every role, HR teams would need to trawl review sites like Glassdoor, sift through job adverts from competitors (in the hope they’ve listed a salary), or rely on outdated statistics from compensation surveys or government labour statistics. 

Luckily these days, there’s a simpler way. 

Using a salary benchmarking tool — like Figures — supercharges your processes by giving you access to real-time, accurate data tailored to your specific goals. 

We recommend choosing a tool that offers:

  • Real-time market data
  • Location filters, so you can filter salary benchmarking to the UK, France, or any other country you choose.   
  • Large dataset
  • Data from relevant geographic regions 

It’s also important to choose a tool that complies with all the relevant data security regulations that apply within your region. In Europe, the main things to look for are GDPR and SOC2 compliance. 

#3 Gather internal data 

Now you’ve defined your goals and chosen your benchmarking tool — it’s time for the data collection phase. We recommend gathering:

  • Job descriptions for each role at the company, including the skills, qualifications, and experience needed for each one.
  • Salary data for each role.
  • Total compensation data from each role.
  • Data on company structure, including managerial responsibilities.
  • Any career development pathways, if used. 

#4 Data analysis 

During this stage, you’re looking to identify any outliers — data that sits significantly higher or lower than the market rates provided by your benchmarking tool. 

These need to be resolved so that all employees are compensated fairly. The most equitable way to achieve that is to create salary bands for each role. 

Salary bands define the minimum and maximum compensation for each role, normally using the market average as your mid-point. Many compensation benchmarking tools also offer features that help you define these bands based on your company’s specific requirements. 

Once you’ve created these bands and obtained leadership approval, it’s time to communicate any changes to your employees. 

Communication and Change Management

Discussion around the salary benchmarking process shouldn’t be reserved for the HR and leadership teams — it’s crucial to involve employees at all levels of the company too. 

Creating a compensation communication plan can help HR professionals effectively communicate any changes relating to salary benchmarking, consistently. 

In addition to outlining your overarching compensation philosophy, this plan can include details about the salary benchmarking process and how it’s used to drive equitable pay. 

Every company will likely have to deal with some employees who feel like they’re not being paid fairly. But a communication plan helps frame these discussions in a positive light. 

By openly sharing the processes that underpin salary decisions, employees feel involved and informed. And even if they’re not happy with the decision, they understand the logic and data behind it. 

Driving pay transparency with salary benchmarking

Forward-thinking companies understand the importance of salary benchmarking as an important strategy for driving pay equity.

Don't get left behind — get in touch and find out how Figures can help you start your salary benchmarking journey.

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