Whether you’re new to salary benchmarking or have been doing it for ages, it’s always interesting to poke around in someone else’s process.
That’s what we’re going to do today: let you poke around in our salary benchmarking method.
It took us a little while to refine our process, but we’re going to show you how we got there.
Our Salary Benchmarking Process
There’s nothing super-original about what we do, but our process is methodical and we stay on top of it. Here’s a step-by-step breakdown of what it looks like.
1. Refresh job descriptions
An inaccurate job description makes benchmarking impossible. Roles evolve constantly. Take a tech startup, for instance. In the first year, the company might need a software developer to write and test code, debug applications, and develop core product features.
Once the product is up and running, the software developer position might evolve into more of a full-stack dev role. Think tasks like designing user interfaces, developing front- and back-end product components, and reviewing code.
After another couple of years, the position might morph into a more complex, DevOps engineer role. The employee would focus their energy and skills on:
- Implementing continuous integration/continuous delivery (CI/CD) pipelines—AKA, setting up systems that automatically check and integrate new code, test it, and prepare it for release
- Monitoring system performance
- Collaborating with other teams to improve product deployment processes
Now, let’s say the company wants to benchmark salaries for the first time. Company life has moved quickly—so much so that the managers haven’t had time to update job descriptions.
Including the one they used to hire their software developer, who is now performing the work of a DevOps engineer.
But updating job descriptions takes too much time, so the managers decide to skip that step. They end up benchmarking pay based on the role the DevOps engineer was hired for: basic software development.
Turns out software developers make less than DevOps engineers. The company feels justified in lowering their DevOps engineer’s salary so it “aligns” with the data.
Big ouch. Big violation of employee trust. Big mistake.
This is why keeping job descriptions up-to-date is crucial.
Your job descriptions (JDs) must align with the work the people in the role are actually doing. If things are evolving constantly and no one’s updating the JDs, then you’re benchmarking pay against skills and roles that don’t match up with people’s actual work.
How can you solve this problem?
By meeting with employees and managers at least once a year to discuss the accuracy of job descriptions. If your company moves at breakneck speed, consider updating them even more frequently.
You can also send out surveys to ask employees and managers to validate or give feedback on the JDs relevant to them.
Whatever you do, just make sure your employees have a chance to review and give feedback on their own job descriptions, as they’re the ones who know what their work actually entails.
2. Define Your Compensation Philosophy
A compensation philosophy is the guiding light behind every pay decision you make.
You can really only pick from three general directions for your compensation philosophy:
- Lead the market: Pay more than your competitors do
- Meet the market: Pay exactly the same as your competitors do
- Lag the market: Pay less than your competitors do
We recommend either meeting or leading the market. This is what will get you the most devoted employees.
For a study published in a 2019 edition of the International Journal of Contemporary Hospitality Management, researchers surveyed 27 luxury hotel managers from four different countries: Greece, the USA, the UK, and Australia.
Their goal? To learn the secrets of retaining top talent.
They discovered that talent retention relies on these 5 factors:
- Creating a “friendly, family-oriented, open-access company culture”
- Emphasizing teamwork
- Providing satisfactory compensation
- Succession planning
- Ongoing training and development
Yep, that’s right. Compensation is third on that list. When employees are well-compensated, they’re more likely to feel engaged with your organization and the work they do there.
For many business owners and managers, the decision to lead the market comes with another question: how can you make sure you always lead the market? Not just in cash compensation but also indirect comp, like benefits and perks?
It’s easier than you think. All you have to do is set a benchmark location like New York City, Honolulu, or Los Angeles. Somewhere with a high cost of living. Use publicly available cost-of-living calculators to understand the salary benchmarks for high-cost locations. We like MIT’s Living Wage calculator for a well-rounded snapshot.
Even if you live in Middle of Nowhere, U.S.A, you should use a city like this as your benchmark. This also means you won’t have to worry about cost-of-living adjustments (COLAs). You can rest easy knowing you’re already paying what someone in the highest cost-of-living areas would.
Make sure you write down your compensation philosophy and define how it will affect your pay decisions. Share the document with your team and invite feedback from your employees. This helps create a culture of pay transparency.
3. Conduct Market Research
Market research is the part of salary benchmarking where you actually go and look for data on what competitors are paying.
You can do this in three ways:
- Use Compensation Benchmarking Tools: Tools like Payscale, Salary.com, and Glassdoor gather and interpret compensation data for you. The data comes from HR reports, surveys, and employee-reported data. It isn’t always 100% reliable, but it can give you a good idea of what your pay range should be.
- Buy Surveys: If you or someone on your team has the skills needed to digest and analyze complex datasets, you can buy surveys directly from trusted firms like Mercer, Culpepper, and WTW (formerly Willis Towers Watson).
- Hire a Consultant: Don’t have an HR team with compensation benchmarking experience? Don’t want to go through the learning curve of using Payscale or Salary.com? Hiring a consultant is a great choice, too. Consultants have a deep well of experience and resources for compensation benchmarking. You won’t have to lift a finger.
- Free Resources: If you’re looking for a scrappier way to get the info you need, try visiting sites like the U.S. Bureau of Labor Statistics (BLS) or job postings on sites like Indeed, LinkedIn, and Glassdoor. It can be a little harder to cobble together an average range, but it’s doable.
You might be wondering about the costs of using these tools. We can’t give you a straight number because the expense varies based on the number of roles you need to benchmark. But here’s a quick overview:
- Compensation Benchmarking Tools: Anywhere from $3.5k to $13k to benchmark 15 roles, based on our experience using Salary.com and Payscale for our company.
- Surveys: Varies widely. Usually at least $1k for a single survey.
- Consultants: Varies widely. Some charge an hourly fee. Others charge per project. Some own surveys or subscriptions, but others buy them to do the benchmarking you need—and you’re the one who’ll pay for them.
Don’t be afraid to rely on more than one method. Salary benchmarking helps you pay people what they’re worth, which is invaluable. Using more than one benchmarking tool can give you a well-rounded view of what a role pays.
That’s what we do, and it’s part of why we tried both Salary.com and Payscale, side by side, for an entire year.
3 Salary Benchmarking Errors We Made
All right, time to get to the ugly stuff. We’re going to share our benchmarking mistakes with you so you don’t end up making the same ones.
1. Not Benchmarking Salaries Early Enough
We made the mistake of not benchmarking salaries right after we started our company.
If you’re staring uncomfortably at your screen because you’re in a similar situation, I get it. New companies don’t have someone that is keeping job descriptions tight and staying on top of compensation management. But this causes problems down the line.
Putting off your first round of benchmarking can mean:
- Eventually underpaying employees, which can lead to turnover—or overpaying them, which can lead to budget strain
- Paying uneven, unfair amounts—like starting new employees off on a higher salary than your longer-term team members in similar roles
- Unclear compensation practices that erode employee trust
- Pay equity issues and the legal consequences that come with them
The easiest way to avoid falling behind like we did? Designate someone to tackle the benchmarking as part of their job description. Do it by year 3 or employee 30, whichever comes first.
2. Fixating On Total Comp
Your employees care about direct compensation, the cash that is in their bank account every payday. They don’t care that you pay $1,000 a month or whatever on their health insurance premiums. They don’t want to know how much it costs you to keep that office Keurig stocked up.
In other words, they don’t care about total compensation. But a lot of salary tools totally fixate on a total compensation number that assigns a dollar amount to benefits and perks.
Sure, this number’s important to employers. But it has nothing to do with “what I make,” which is what employees care about. You can budget internally for total compensation in minutes with our free payroll budget template.
When you’re benchmarking salaries, ignore the total comp number and figure out the actual pay number that will attract and keep employees.
3. Following Benchmarking Data Like It’s the Gospel Truth
Salary benchmarking is literally the process of comparing what you pay, or plan to pay, to what other companies are paying for similar roles. Not the process of using someone else’s salary figures to offer the exact same salary to your employees.
The data you get can help you make salary decisions, but only you know the ins and outs of a particular role and candidate.
Use benchmarking data alongside other factors, including:
- Years and scope of experience
- Education and training
- Cost of living, if you’re not benchmarking against a high-cost-of-living city
- How you’d feel about a specific salary range if you were in the employee’s shoes
- What your budget can allow
If you have the time and resources, consider asking people who work in similar roles to share thoughts on their salary. Create an informal, anonymous survey and post it to LinkedIn, Reddit, or a similar forum. Instead of looking for numbers, you’re looking for how the employees feel about their pay—and why.
This subjective, qualitative data can help you get a fuller picture of the appropriate salary.
Say, for example, you’re a nonprofit organization that provides quality childcare services to low-income families. You want to hire certified educators and caregivers, but the pay you can offer is $20-25/hour.
Compared with the same role in other states, this is a definite lagging-the-market situation. But you offer full benefits, some flexibility, and plenty of other perks.
A survey of preschool educators at nonprofits around the country can give you a better sense of whether your salary would be offputting or understandable, given the limited funds you’re working with.
These opinions aren’t the gospel truth either, but they can make all the difference in how you make final pay decisions.
