Why Managers Should Care About Salary Benchmarking
At Figures, we talk a lot about how salary benchmarking can benefit HR teams. And you don’t need to be an expert to see that fair, competitive salaries are a big advantage for employees too.
But there’s one important group that’s been missing from the conversation so far: managers.
Managers are vital in putting an organisation’s compensation philosophy and strategy into action. But they’re often not fully clued up on the benchmarking data they’re supposed to be using — or why that data is important in the first place.
After all, most managers have a pretty decent understanding of what their reports should be paid — or think they do. Doesn’t salary benchmarking just mean extra work, energy and conflict?
In this article, we’ll share seven key reasons why managers should care about salary benchmarking data, as well as some best practices for using it the right way.
First, a quick definition:
What is salary benchmarking?
Salary benchmarking is the process of evaluating your internal salaries compared to the external market. It allows companies to ensure their salaries are competitive and fair by aligning them with their peers.
In the past, salary benchmarking was a long, manual process that involved gathering or paying for market data, and then figuring out how to analyse it. But these days user-friendly tools like Figures make it a much more intuitive (and faster) process.
Why (some) managers object to salary benchmarking
So, why are managers wary of salary benchmarking tools? For one thing, setting compensation rates is already a lot of work. And some managers worry that having to incorporate benchmarking data from HR will just complicate things.
Plus, most managers have a solid understanding of the market they work in — that’s why they’re managers, after all. So they might wonder if they really need salary benchmarking tools to make the right decisions. Aren’t internal salary bands and performance adjustments enough?
There’s another problem too: managers are used to using their discretion to respond to negotiations from new and existing employees. This means they occasionally end up paying above the market rate, simply because that’s sometimes what it takes to attract and retain top talent.
Some managers worry that salary benchmarking will take away this flexibility — which could lead to them losing their best candidates and employees.
7 reasons managers should care about salary benchmarking
We get it: if you’re not used to using salary benchmarking in your compensation processes, you might wonder if it’s really worth it. We think it is, of course — but then, we would.
As a manager, you’re busy. And when you’re being asked to add an extra step to your processes, it’s only natural to ask, ‘What’s in it for me?’.
Well, we’re here to answer that question — here are seven benefits of salary benchmarking for managers.
1. Attracts top talent
Salary is the top consideration for 66% of employees in Europe, according to a survey by Randstad. And that makes sense: of course candidates want to know that they’ll be paid fairly for their expertise. Isn’t that what we all want?
But without benchmarking data, you can never be sure if the salaries you’re offering are truly competitive. Even if you think they are, that’s a pretty big risk to take. The best candidates might be responding to multiple offers at the same time — and if you get it wrong, you could end up losing your top candidate to another employer who took the time to do their research.
2. Boosts staff retention
If employees think they’re not being paid fairly, it’s pretty safe to assume that they’ll eventually move on. And this can have a big impact on a business: according to Glassdoor, the average cost of replacing an employee in the UK is £3,000.
But losing an employee also creates a lot of extra work for you as a manager. You’ll have to find ways of spreading their work out across the rest of your team — which can cause stress and resentment. And that’s not to mention the huge task of recruiting and shortlisting candidates to find a replacement.
On the other hand, when you use benchmarking data to determine your salaries, your employees will know they’re being paid (at least) as much as they’d likely get elsewhere. That’s the whole point of benchmarking, after all.
Now, we’re not saying this means none of your reports will ever leave. But it could make a big difference: a recent survey found that 49% of employees who had recently quit their jobs did so because their salary was too low.
3. Drives pay transparency
As we’ve discussed before, using a salary benchmarking tool is a big factor in driving transparency around your organisation’s compensation structure and processes. But as a manager, why should you care?
Well, part of the reason comes back to retention: a recent survey found that 60% of employees would actively switch employees to another company if it offered better pay transparency.
Pay transparency also promotes trust in your organisation — and by extension, you. This can have a big impact on your team: research by Slack has found that employees at transparent organisations are 1.8x more productive and 2.3x more focused at work.
4. Helps you manage your budget
Managers have to work within a certain budget — and making it go as far as possible is one of the things that keeps them up at night.
Using benchmarking data to determine salaries does one important thing: it arms you with information. That means you can more easily balance setting the competitive compensation you need to attract and retain top talent, with using your budget wisely.
5. Improves engagement, morale and productivity
Using salary benchmarking data is the only way to be 100% sure that the salaries your reports receive are fair. And you don’t need us to tell you that’s the right thing to do.
But ensuring your employees are (actually) paid fairly can also have a big impact on you as a manager. According to a recent survey by Indeed, when employees are paid fairly, 82% are more engaged and fulfilled by their work, and 81% are more productive.
If that doesn’t make your life easier, we don’t know what will.
6. Makes salary discussions easier
If you’re anything like most managers, you probably don’t enjoy discussing salary decisions with your employees — especially when you have bad news to deliver.
But when your organisation uses salary benchmarking to drive the decision-making process, you’ll be able to go into these conversations with confidence. That’s because every decision will be backed up by real-time, reliable market data.
Even if your employees don’t like the result of a decision, they’ll understand that there’s a process and a logic behind it — which makes things a lot easier on you as a manager.
7. Promotes internal equity
Salary benchmarking promotes internal equity by helping organisations ensure that employees are paid the same for the same work, regardless of their race, gender, or other demographic characteristics.
But why should you care about this? Well, apart from it being the morally right position, ensuring internal equity can also help you hold on to your team for longer. According to a recent survey, three out of four employees would consider looking for another job if they discovered a gender pay gap at their workplace.
Plus, the fact is that due to increased appetites for pay transparency and equity, this is no longer just a nice-to-have. Once the EU pay transparency directive comes into force, employers will have to take certain measures to ensure their pay practices are equitable — and salary benchmarking will be a key part of this.
How to get salary benchmarking right: best practices for managers
Ready to supercharge your compensation strategy with the power of salary benchmarking? Here are our top tips for managers on how to get it right.
- Get familiar with your compensation philosophy: Whatever tools you use to set compensation, your decisions should always come back to your compensation philosophy. This is a broad statement of your company’s core beliefs about pay, and why you hold them. And if your organisation doesn’t have a formal compensation philosophy? It could be time to pressure your leadership into putting one together.
- Communicate clearly and use data to back up decisions: Salary benchmarking allows managers to be more confident in their pay decisions because they’re backed up by real-time, reliable data. When communicating with your reports about pay, you should always be clear about this. That way, they’ll understand the reasoning behind any decisions, even if they don’t like the results.
- Use manual adjustments wisely and sparingly: Many organisations that use salary benchmarking still allow managers to manually adjust employee salaries above their desired market positioning. And while this can help attract and retain top talent, you should be careful not to do it too often. Misaligning too many salaries from the market could undermine the whole salary benchmarking exercise.
Want to learn more about salary benchmarking? Check out these articles from our archive: