Salary benchmarking: A guide for employers

Amid rising living costs, salary concerns weigh heavily on UK workers. Our research shows that 3 in 5 are concerned about their financial situation, while 28% will look for a new job if they don’t receive their desired pay rise this year.

For employers, this means that competitive pay structures are crucial in talent attraction and retention efforts. Salary benchmarking offers a data-driven approach that helps ensure salary ranges are aligned with market trends and candidate expectations.

In this guide, we explore what salary benchmarking is, why it matters, and how your organisation can implement it effectively.

Unlock industry-specific salary insights to fine-tune your compensation strategy

Salary benchmarking, also known as compensation benchmarking, is the process of gathering, analysing, and comparing market salary data. This process enables organisations to assess their current compensation packages against industry standards, ensuring they remain competitive in their efforts to attract and retain talent.

While it can be tempting to focus solely on basic pay for simplicity, effective salary benchmarking typically evaluates the entire compensation package, including:

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

By taking these additional components into account, employers gain a comprehensive understanding of their market position that enables them to create packages that align with employee expectations while supporting retention and recruitment goals.

Salary benchmarking is generally managed by HR professionals and employee reward specialists, as it requires a deep understanding of compensation structures, market trends, and internal organisational needs. These professionals are tasked with gathering and analysing extensive data from both internal and external sources to ensure pay structures are competitive and fair.

Employers can also turn to third-party compensation consultants or professional services to assist with the process. These external experts bring specialised knowledge, access to broader market data, and an objective perspective, which can be particularly valuable for ensuring impartial and accurate results.

Whether handled in-house or with external support, salary benchmarking requires meticulous coordination to ensure the process aligns with the organisation’s goals, budget, and timeline.

Why is salary benchmarking important?

Employees expect compensation that reflects the value they bring to an organisation. However, our research reveals that over a third of UK workers are dissatisfied with their current salary.

Salary benchmarking enables employers to compare their pay structures with industry standards, ensuring their offerings remain competitive. This not only helps attract top talent but also reassures current employees that their contributions are being fairly rewarded. Feeling valued is critical for maintaining employee engagement and satisfaction, which directly impacts performance and retention.

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

This evidence-based approach helps align salaries with both organisational goals and employee expectations, fostering trust and transparency across the workforce.

Effective salary benchmarking offers more than just the ability to set salary ranges that are fair and competitive, providing organisations with a deeper understanding of their position within the market.

Let’s explore some of the most impactful benefits of salary benchmarking in detail.

Appeal to top talent

Salary benchmarking provides reassurance to both current employees and prospective hires that compensation packages have been designed with market rates in mind. This consideration fosters trust and demonstrates a commitment to employee well-being.

Organisations with robust and competitive pay strategies benefit from a more motivated and engaged workforce. Satisfied employees are not only more likely to perform at their best but also to contribute positively to organisational goals.

Improve employee retention

Act as a commitment to Equal Opportunity

Conducting effective salary benchmarking can be complex, requiring careful data collection followed by detailed analysis.

Below we’ve created a step-by-step guide to help you navigate the process and make the most of your benchmarking efforts.

Step 1: Define aims and parameters

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 5: Re-evaluate salary rates when necessary