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Ellie Green
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How to benchmark salaries in 2023: An employer’s guide

Salary benchmarking is an important process that helps businesses stay competitive. However, analysing and comparing pay with the wider market can be time-intensive and complex. That's why this guide lays out the key steps your business can take to ensure your pay keeps pace with the market - and can help win over the talent you need.

With the UK feeling the pressure of the financial squeeze, employees need salaries that can keep pace with inflation and evolving job markets. For many workers, this isn’t the case, with recent ONS data outlining how pay is falling in real terms.

Salary benchmarking is an arduous process, but it’s worth it – not just to attract talent but to retain it. Almost three fifths (57%) of the people looking for a new job are looking for increased pay packages, according to Totaljobs’ Q4 2022 Hiring Trends Index.

Unfortunately, salary benchmarking isn’t as straightforward as upping remuneration at the request of staff. Businesses must understand the importance of this process while considering what is feasible for their budget – especially with inflation posing a challenge in meeting salary expectations.

As a first step, this guide gives an overview of how to benchmark salary.

What is salary benchmarking?

Salary or compensation benchmarking is a process that involves gathering data surrounding the responsibilities of each job within a company and the corresponding pay. This is then compared to job roles within the external market, helping businesses keep their salaries competitive.

Often, pay benchmarking also considers the overall compensation package of each job type, keeping track of additional rewards like bonuses and shares. But comparing basic pay alone helps to simplify the process.

HR and employee reward specialists are typically responsible for the task of salary benchmarking. The process requires the management of a considerable amount of internal and external data, so businesses often rely on tools or a third party compensation professional or service.

Why is salary benchmarking important?

Every employee wants to receive competitive compensation that aligns with what they bring to a business. Salary benchmarking is important because it means employers can attract and retain staff with a competitive offering that is fair and valuable in the context of the wider market.

It also gives business leaders an impartial, data-backed justification for the reward packages they offer. The data gathered as part of benchmarking can also detect trends, enabling employers to make informed decisions surrounding budget planning.

Benefits of salary benchmarking

Putting in the time and effort required for effective benchmarking brings multiple benefits to your business and the people in it.

Salary benchmarking can:

1. Secure top talent

62% of people are more likely to bypass a job advert that doesn’t disclose a salary, according to Totaljobs research. During a cost of living crisis, many jobseekers can’t afford to take the time to apply for roles without knowing what the approximate salary is. It’s one way people self-screen themselves out of a recruitment process before it’s begun. By benchmarking salaries, businesses can be confident that the rates shown on their job ads are competitive.

2. Boost job satisfaction

Especially in a cost of living crisis, employees need to feel confident that their salary can support their livelihoods. Salary benchmarking can offer reassurance to staff that the market rate has been taken into account when establishing pay bands. Ultimately, people who feel they’re getting paid fairly are happier in their job.

3. Improve retention

If staff are getting itchy feet and are considering looking for a new job, a higher salary could encourage them to stick around. Totaljobs research shows over half (54%) of UK workers would be encouraged to remain with their employer if a pay rise was on the table.

By benchmarking compensation, your business is less likely to be in this scenario – because the pay is already considered competitive (and could even overtake the average salary on offer from similar companies if they haven’t benchmarked their remuneration packages).

4. Act as a commitment to Equal Opportunity

Transparent communication about the decision to benchmark salaries can showcase commitment to diversity, equity and inclusion because pay bands are determined by anonymised and standardised data. Businesses need to engage with their staff about the process of benchmarking for this reason.

How to benchmark salaries: essential tips

There are various steps organisations should follow for successful and accurate salary benchmarking.

Regardless of whether an internal representative, a consultancy, or an external compensation professional is carrying out the work, the overarching process will look similar.

1. Define benchmarking aims and parameters

Accurately scoping out a salary benchmarking project will mean that you have a clear plan of action  aligned with the business’s overarching aims.

First of all, evaluate why there is a need to carry out the process. There may be multiple reasons, such as:

  • Pay gaps
  • Equal Pay concerns
  • Missing out on or losing talent because of low salaries

From there, you can establish a timeline for the project, its scope and budget. If you’re involving an external party, the costs will become higher – but the analysis you get in return is more likely to be accurate. External parties may also have greater access to data sources that will enrich their recommendations. Your decision may be dictated by budget, so you need to agree with stakeholders on what an appropriate level of detail or accuracy looks like.

Whether this is a business-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 right data

Identify the data you need and begin collecting it. Looking solely at job titles and corresponding salaries won’t give you a standardised way of analysing each package. Often, job titles are deceiving, can be allocated inconsistently, or 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
  • Job family/department
  • Salary
  • Location

This is known as job evaluation. It helps you to objectively classify every job in the business.

You’ll also need to gather external salary data to compare with your internal data. This is likely to include salary information from within the same industry, location and job functions. You can find this data through:

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

Usually, you will either need to pay for external data or provide your business’ 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. This may include the state of the labour market (e.g. if it’s candidate or employer led), and wider economic factors like inflation. Internal factors related to the way jobs are structured in the business, 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 the business 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 for the business to match the market rate of pay, consider how other parts of the compensation package can make it more appealing. This can include more annual leave, higher pension contributions, paid-for qualifications, or flexible hours.

4. Make salary adjustments and document the results

Share your benchmarking findings with the appropriate stakeholders. Pay adjustments may be in order as a result of your evaluation and analysis.

Be mindful of detailing the evidence behind your decisions, as well as outlining where the information was sourced from.

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

5. Re-evaluate salary rates when necessary

Once you have the structure of salary evaluation and benchmarking 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 on to guide individual salary reviews.

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