Salary benchmarking: A guide for employers

Research from Totaljobs shows how heavily living costs and salary concerns are weighing on UK workers. 32% report cutting back on essential spending, while 29% have used savings, loans or credit cards to cover everyday costs. 

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From an employer’s perspective, this highlights how crucial competitive pay is, not only for attracting and retaining talent, but for keeping employees engaged and motivated. In this guide, we’ll explore the role salary benchmarking plays in achieving this.

What is salary benchmarking?

Sometimes known as compensation benchmarking, salary benchmarking is the process of gathering, analysing and comparing market salary data. It allows employers to assess their compensation packages against industry standards, ensuring they remain competitive in their efforts to attract and retain talent.

What’s included in salary benchmarking?

While it can be tempting to focus purely on base pay for simplicity, an effective salary benchmarking process evaluates the full compensation package. This includes: 

1. Shares: Equity or stock options offered as part of long-term incentives.
2. Benefits: Perks such as health insurance, pension contributions and gym memberships.
3. Bonuses: Performance-based incentives or annual rewards. 

By accounting for all these elements, employers gain a more accurate understanding of their market position and can design reward packages that align with employee expectations and recruitment goals. 

Who is responsible for salary benchmarking?

The salary benchmarking process is generally handled by HR professionals or reward specialists, as it requires deep understanding of: 

• Compensation structures
• Market trends
• Internal organisational needs 

Employers may also choose to work with third-party compensation consultants to support the process. These specialists offer access to broader datasets, expert insight and an objective perspective, helping to ensure accuracy and impartiality. 

Whether it’s handled entirely in-house or with external support, salary benchmarking requires meticulous coordination to ensure the process aligns with organisational:

• Goals
• Budget
• Timelines 

Why is salary benchmarking important?

All employees expect compensation that reflects the value they bring to an organisation. While our latest research shows that 78% of employees are satisfied with their current salary, over half (51%) looking to change jobs are motivated by a higher salary.

Salary benchmarking enables employers to compare pay structures against market standards, ensuring compensation remains competitive and fair. This not only supports recruitment but also reassures existing employees that their contributions are recognised and fairly rewarded, improving:

• Engagement
• Satisfaction
• Performance
• Retention 

For business leaders, salary benchmarking provides a data-driven foundation for compensation decisions. By leveraging insights from market trends, employers can justify their reward packages and make informed decisions around budget allocation and long-term planning. 

Tip: Always benchmark against relevant roles, industries and geographic locations to ensure accuracy.

The benefits of benchmarking salaries

Effective salary benchmarking provides a range of desirable benefits for employers. Let’s take a look at some of the most significant.

Appealing to top talent

Competitive salaries are key to attracting top talent. By leveraging salary benchmarking, organisations gain a clear understanding of market trends and can position themselves to offer compensation that stands out. This data-driven approach ensures pay ranges are not only aligned with industry standards but also tailored to attract the most skilled and sought-after candidates.

A data-driven approach through salary benchmarking ensures pay ranges are not only aligned with industry standards, but are also tailored to attract the most-skilled and sought after candidates, giving employers a competitive advantage in the search for talent.

Boosting job satisfaction

Compensation is crucial to ensuring employees feel supported by their employer.

However, with our research showing 53% have cut leisure and social spending and 29% are using savings, loans and credit cards to cover everyday costs, many organisations may experience a dip in employee motivation and performance. 

Salary benchmarking helps employers ensure their compensation packages align with cost-of-living requirements. As a result, organisations that use this process to meet employee expectations where possible are more likely to foster a satisfied, loyal and engaged workforce.

Improved employee retention

Salary is crucial to employee retention, with 80% of employees citing salary as the most important factor when choosing a job. As a result, aligning compensation packages with market standards and worker expectations can help employers enhance employee retention. 

This can lead to a host of additional benefits, such as: 

• Reduced recruitment costs
• Stronger team cohesion
• A more positive workplace culture 

Enhanced employer branding

Benchmarking is a powerful tool for strengthening an employer’s brand. By offering packages that align with or exceed market standards, you can position your organisation as an employer of choice, enhancing your reputation and differentiating you from competitors.

A strong employer brand goes beyond simply paying well. It also requires transparent communication. Clearly defined salary bands and detailed job descriptions, informed by benchmarking data, demonstrate to candidates and employees that your organisation values fairness and equity.

Commitment to Equal Opportunity

Salary benchmarking demonstrates an employer’s commitment to fostering diversity, equity, and inclusion (DEI) within the workplace. By using standardised and impartial data to establish pay bands, the process ensures that compensation decisions are free from bias, supporting fair treatment across all roles and demographics.

Transparent communication about how salaries are benchmarked further reinforces this commitment. When employees and candidates understand that pay structures are based on objective market data rather than subjective factors, it builds trust and signals that the organisation values equality.

Tip: When communicating benchmarking findings, emphasise how standardised data ensures pay bands are equitable to reinforce a commitment to diversity and inclusion.

How to conduct salary benchmarking

Salary benchmarking can be complex, requiring care data collection and detailed analysis. Below we’ve outlined a step-by-step guide to help you navigate the process.

Step 1: Define aims and parameters

The first step in salary benchmarking is defining the project’s aims and scope.

Start by identifying why the process is necessary to help shape and focus the benchmarking exercise. Common reasons include:

• Addressing equal pay concerns
• Reducing talent loss to competitors
• Tackling high employee turnover rates 

Once a purpose has been established, you can set a timeline, determine the scope and allocate a budget. If external parties are involved, costs may increase, but remember, their expertise often leads to more accurate analysis and access to broader datasets that can provide deeper insights.

At this stage, it’s also essential to decide whether the benchmarking will cover the entire organisation or focus on specific departments, job levels, or roles. This decision will significantly impact the duration and complexity of the project and ensure the process aligns with organisational goals and resources.

Step 2: Identify and collect data

The next step of the benchmarking process involves identifying and collecting the required data. 

A straightforward comparison of job titles and salaries can often be misleading, as titles may vary significantly across organisations even when roles have similar responsibilities. To ensure consistency roles should instead be classified based on standardised criteria, a process known as job evaluation, which provides a reliable framework for assessing roles objectively within an organisation. 

Criteria can include:

Equally important is gathering external data to compare salaries against internal benchmarks. This data should reflect salaries within the same industry, region and job functions to provide an accurate picture of market trends. 

This can be sourced through salary surveys, salary benchmarking tools, or data-sharing networks, and may involve purchasing reports or contributing your organisation’s salary data in exchange for access to a database. 

Tip: Ensuring that the data is current, credible and relevant is critical to achieving accurate benchmarking results.

Step 3: Create salary ranges and reward packages

Next, establishing salary ranges requires a thorough analysis of internal and external factors to determine fair and competitive market rates. 

External influences, such as the current state of the labour market and economic trends like inflation, play a significant role in setting benchmarks. Internally, elements such as the structure of roles within the organisation, recruitment and retention rates, as well as individual factors like an employee’s experience and performance, can affect the placement of salaries within a range. 

Once the data is analysed, salary bands are typically created for each job grade. These bands should allow some flexibility, accommodating situations such as competing offers from other employers or rewarding exceptional performance. 

Salary banding also supports structured adjustments, such as annual pay increases aligned with inflation or performance evaluations. To maintain fairness, it is essential to implement clear reward policies to guide these decisions. 

Step 4: Make salary adjustments and document the results

Once the benchmarking itself has been undertaken, the next stage is to make any necessary salary adjustments based on the findings. 

If discrepancies are identified between pay and market benchmarks, these gaps should be addressed to ensure competitiveness and fairness. Adjustments may involve: 

• Increasing salaries for specific roles or departments
• Revising pay bands
• Enhancing benefits packages to balance compensation 

After implementing these changes, it’s critical to document the rationale behind the adjustments. This involves outlining evidence supporting decisions, including the sources of salary information and the methodology used. This level of detail not only provides accountability but also helps build a solid foundation for future evaluations. 

Finally, open and transparent communication with employees about the process is essential. Staff may have questions or concerns about how pay changes were determined. Providing clear explanations and inviting dialogue fosters trust and reassures employees that decisions are made with fairness and objectivity in mind. 

Transparent communication also strengthens their confidence in the organisation’s commitment to equitable and competitive pay practices. 

Step 5: Re-evaluate salary rates when necessary

Salary benchmarking is not a one-off task. It’s an ongoing process that needs to be revisited regularly to ensure compensation packages remain competitive in a changing market. 

The frequency of these reviews should be guided by factors such as market dynamics, inflation rates, budgetary constraints, and the cost of conducting salary benchmarking. For most organisations, annual or bi-annual reviews strike an effective balance, enabling employers to respond to: 

• Shifts in economic conditions
• Talent demands
• Organisational goals 

Regular benchmarking also plays a crucial role in individual salary reviews, ensuring that adjustments for promotions, performance or retention align with market data and organisational policies. This consistency fosters fairness and supports an equitable approach to pay.

Tip: By committing to routine re-evaluations, organisations can build a resilient and data-driven strategy that ensures pay structures are competitive and support talent attraction and retention efforts.

Salary benchmarking as a strategic advantage

Salary benchmarking is most effective when viewed as an ongoing, strategic process rather than a purely reactive exercise. By consistently reviewing market data, aligning pay with organisational goals and communication openly with their workforce, employers can build trust, strengthen overall engagement and remain competitive in a challenging landscape.

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