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Ellie Green
9 min read

Salary benchmarking: A guide for employers

Benchmarking salaries is vital for organisations to remain competitive in the hiring landscape. Learn how to ensure your pay keeps pace with the market.

A turbulent economic landscape has put significant pressure on UK workers, with our research showing 57% are worried about their salary due to the cost-of-living crisis. As a result, many are looking for salaries that keep up with inflation, with a quarter saying they would change jobs for a 6-10% pay increase.

For employers, this makes the implementation of fair and competitive compensation packages crucial to the attraction and retention of top talent. That’s where salary benchmarking can help.

In this guide, we look at what salary benchmarking is, why it’s so important to employers, and outline how your organisation can start effectively benchmarking salaries.

What is salary benchmarking?

Salary benchmarking, also known as compensation benchmarking, is the process of compiling, collating and analysing external market data on salaries. The findings of this analysis can then be compared with an organisation’s current compensation packages, allowing them to adjust their offering to remain competitive within the market.

While comparing basic pay alone helps to simplify the salary benchmarking process, it will often consider the overall compensation package, taking into account additional rewards, such as:

Who is responsible for salary benchmarking?

HR and employee reward specialists are typically responsible for salary benchmarking. The process requires the management of a considerable amount of internal and external data sources, with employers often relying on a third-party compensation professional service for support.

Why is salary benchmarking important?

While employee wants to receive compensation that aligns with the value they bring to an organisation, our research shows that over a third of UK workers are unhappy with their current salary. However, by benchmarking salaries, employers can ensure their offering is competitive with the wider market and reflects an employee’s contribution to organisational goals and objectives.

Furthermore, salary benchmarking provides business leaders with an impartial, data-back justification for the reward packages they offer. The data gathered as part of the process can also detect salary trends, allowing employers to make informed decisions around budget planning.

The benefits of benchmarking salaries

Aside from helping employers objectively set salary ranges and better understand the market, there are several other key benefits that come as a result of effective salary benchmarking. Let’s take a look at some of the most significant.

Appeal to top talent

As the rising cost of living leaves many UK workers seeking a salary increase, 62% admit they are likely to bypass a job advert that doesn’t disclose the salary or pay ranges on offer. With 85% also in favour of salary transparency, employers risk missing out on talented candidates who self-screen themselves out of the recruitment process before it’s begun.

By helping to ensure a competitive salary that matches the job description, salary benchmarking means employers can be confident that the rates shown on their job ads are competitive and therefore attractive to jobseekers.

Boost job satisfaction

Employees should feel confident that their salary can support their lifestyle. However, our research shows that:

  • 4 in 10 UK adults struggle to pay their energy bills
  • 12% of workers struggle to afford essential living expenses

Salary benchmarking can offer reassurance to staff and prospective candidates that the market rate has been considered when establishing pay bands. Furthermore, with 71% of workers saying a higher salary increases job satisfaction, employers with a comprehensive compensation strategy can benefit from a motivated workforce more likely to perform at high levels.

Improve employee retention

According to our research, 73% of jobseekers cite salary as the biggest influence on their decision to apply for a new role. However, 69% say a higher salary would make them more loyal to their employer.

This shows that by offering competitive salaries informed by salary benchmarking, employers can avoid losing talent. In addition to this, by providing an offering that goes above the average salary for an employee’s job title, employers can foster a loyal workforce committed to their long-term goals.

Act as a commitment to Equal Opportunity

Transparent and honest communication around the decision to benchmark salaries allows employers to showcase their commitment to diversity, equity and inclusion. This is because the pay bands on offer following the benchmarking process are determined by collecting data in a standardised and anonymous fashion.

How to conduct salary benchmarking

Conducting successful salary benchmarking isn’t always straightforward, as it requires organisations to gather data from various sources and undertake thorough evaluations. The below steps outline how employers can begin to implement comprehensive salary benchmarking that helps them remain competitive.

1. Define aims and parameters

Accurately scoping out a salary benchmarking project provides a clear plan of action aligned with the organisation objectives. The first step is outlining why the process is necessary. There may be multiple reasons for this, such as:

  • Equal Pay concerns
  • Losing out on talent
  • Higher employee turnover

From there, employers can establish a timeline for the project, its scope and budget. If an external party is involved the costs can become higher but the analysis is more likely to be accurate. External parties may also have greater access to data.

Whether this is a organisation-wide benchmarking exercise or specific to certain seniorities or departments will also play a significant role in the length of the project.

2. Identify and collect the data

The next stage is identifying the data required and collecting it. Looking solely at job titles and corresponding salaries won’t provide a standardised way of analysing each package. Often, job titles are deceiving and vary widely across the market even when the scope of a role is the same.

Instead, the below information can act as a basis for classifying roles internally:

  • Job level
  • Department
  • Salary
  • Geographic location

This is known as job evaluation, which helps to objectively classify every job in an organisation.

It’s also crucial to gather external salary data to compare with internal data. This is likely to include salary information from within the same industry, location and job functions. This data can be found through:

  • Salary surveys
  • Salary benchmarking tools
  • Data-sharing networks

Usually, employers will either need to pay for external data or provide their salary information in exchange for access to a database.

3. Create salary ranges and reward packages

To establish market rates, various internal and external factors need to be considered, such as:

  • The state of the labour market
  • Wider economic factors like inflation

Internal factors related to the way jobs are structured in the organisation, recruitment and retention rates, as well as personal factors including experience and performance will change the rate of pay within a given salary band. Other forms of reward will also need to be considered at this stage.

Typically for each job grade, there is a salary band allocated which allows some wiggle room, such as if a new hire has a competing offer on the table. Salary banding also gives an employer room for annual pay rises in line with performance and/or inflation. To keep salaries fair, reward policies should be established so an objective process is followed in these cases.

If it’s not realistic to match the market rate of pay, consider how other parts of the compensation package can make it more appealing. This can include:

  • Additional annual leave
  • Higher pension contributions
  • Paid-for qualifications
  • Flexible hours

4. Make salary adjustments and document the results

Once complete, benchmarking findings should be shared with the appropriate stakeholders. Pay adjustments may then be in order as a result of this analysis.

Employers should be mindful of detailing the evidence behind any decisions that have been made, as well as outlining where the information was sourced from.

The workforce may have questions about the process too, so communication needs to be open to build trust with staff so they can be confident in the results.

5. Re-evaluate salary rates when necessary

Once the structure of salary evaluation and benchmarking is in place, the process should be followed regularly to keep compensation packages competitive. This may be reviewed once or twice a year and can also be relied upon to guide individual salary reviews.

Factors that influence how often an employer decides to review salaries can include market conditions, inflation, associated budgets and the cost of the salary benchmarking process.