What is the purpose of salary benchmarking?
So, what is the purpose of salary benchmarking? Salary benchmarking helps businesses to make informed, data-driven decisions about employee compensation packages. By comparing salaries across similar roles and levels within the industry, HR departments gain valuable insights into market trends and competitor offerings. This process supports the creation of competitive and attractive compensation strategies, enhancing a company’s ability to recruit top talent and retain existing employees. Ultimately, salary benchmarking helps companies maintain a competitive edge in the job market and foster long-term employee satisfaction.
How does salary benchmarking work?
Salary benchmarking works by collecting and comparing salary data for existing roles within a business. To conduct salary benchmarking effectively, companies typically leverage third-party tools, databases or consulting services, like Paydata. These external resources specialise in aggregating reliable compensation data, saving businesses time and ensuring that the analysis provided is accurate, up-to-date and free from internal bias.
Why is salary benchmarking important?
If a company is paying significantly less for a specific role than its main competitor, it risks facing challenges in both recruitment and employee retention. For this reason, a salary benchmarking tool becomes an essential piece of kit when it comes to building teams and incentivising employees. Salary benchmarking plays a crucial role in the decision-making process around compensation, forming a vital piece of the puzzle for fair and competitive pay.
Effective pay decisions are fundamental for organisations aiming to attract, motivate, and retain the talent they need to succeed. By leveraging salary benchmarking, employers can confidently demonstrate that their compensation practices are both thorough and transparent, ensuring employees receive fair and equitable salaries.
Overall, conducting a comprehensive salary benchmarking exercise provides invaluable insights to HR and finance teams. It aids in budget planning and allows organisations to model the potential impact of any changes, enabling more strategic and informed decision-making.
How is salary benchmarking done?
If you’ve ever wondered how salary benchmarking works, you are not alone, but don’t worry as Paydata has got you covered. Fortunately the process is straightforward and can help you adjust and align your compensation strategy.
Gather and compare market data
Start by using third-party tools and platforms to collect salary data specific to industry and region. Once you have this information, compare it to your current salaries. This step will reveal whether you are paying above, below or in line with market averages. Look out for patterns or trends that can inform smarter compensation decisions.
Adjust your compensation packages
Using your analysis, review and revise your compensation structure. This might involve increasing pay for certain roles, enhancing bonuses or even overhauling benefits. Aim to strike a balance between internal equity, market competitiveness and affordability.
Communicate changes clearly
After adjustments are made, transparency is crucial. Communicate updates to employees and explain the rationale behind them. This fosters trust, reduces uncertainty and reinforces your commitment to fair and competitive pay.
How is salary benchmarking data collected and analysed at Paydata?
Salary benchmarking data is primarily gathered through annual salary surveys or an ad hoc benchmarking exercise. Participating organisations provide their data either by completing a structured survey template or by submitting a simple payroll download. In both cases, we work with you to match employee roles to standardised roles and levels to ensure consistency and comparability across organisations.
Once the benchmark data is collected and matched, it is then analysed and presented in a format that reflects current market practice and delivers meaningful insights to employers. All data is stored securely according to GDPR and Data Protection regulations and importantly, all data is anonymised - our report format ensures confidentiality by making it impossible to identify individual data submissions.
What are the benefits of conducting a salary benchmarking exercise?
If you know what the average salary is across your industry for certain roles, you can make sure that your employees are fairly compensated on a like-for-like basis. However, if there is a degree of ‘transition’ within your industry, where you are in danger of losing some of your best people, then being able to benchmark salary expectations becomes a powerful tool in your armoury; enabling you to offer a suitable improved remuneration package and demonstrate your commitment to them.
How often should organisations update their salary benchmarking data?
Most employers conduct UK salary benchmarking annually, typically ahead of their annual pay review. This helps them stay informed about how market rates are evolving for each role. However, for positions with high employee turnover or those with a limited talent pool, it’s advisable to benchmark salaries more frequently to remain competitive and attract top talent. The rolling nature of our data collection means the Paydata pay database is kept updated all year round, enabling employers to access the most up-to-date pay data whenever needed.
Benchmarking salaries on at least an annual basis is essential best practice. It ensures your organisation can plan budgets effectively and respond to market fluctuations.
What are the different types of salary benchmarking approaches?
The two main approaches to salary benchmarking utilise job evaluation and job matching.
Job evaluation is a more thorough and accurate approach, but can be time-consuming and more costly. It involves collecting job descriptions from the client and evaluating each role using our structured PayGrade job methodology framework. These evaluations are then reviewed collaboratively with the client to determine a final set of job levels. Once finalised, these levels are used to benchmark the roles against market pay data.
Job evaluation offers the highest level of confidence in the results. It is considered best practice, particularly in situations where decisions may be scrutinised – such as challenges from employees or trade unions.
Job matching is quicker and more cost-effective. When doing job matching, we would suggest levels and market data to use against each job. The client reviews these suggestions and provides feedback or adjustments. Once agreed upon, the roles are then compared with market data.
Can salary benchmarking be used for all types of roles and industries?
From our perspective, yes it is possible. If we hold sufficient data, then it can be used to benchmark any role and salary. We work extensively with (though not limited to) housing associations, utilities, professional associations, healthcare, construction and engineering employers.
How can organisations ensure the accuracy and reliability of salary benchmarking data?
Organisations can ensure accuracy and reliability by conducting thorough job evaluation and job matching processes, both of which involve close collaboration with the client. The results are carefully reviewed and report production follows an iterative approach to refine the outcomes. Most importantly, Paydata is completely transparent in our salary benchmarking methodology, providing clear and detailed explanations in the final reports.
What are the common challenges in conducting salary benchmarking?
Salary benchmarking can be complex, particularly when dealing with specialised sectors or niche roles. One of the most common challenges is the lack of readily available market data for unique or highly specialised positions. In such cases, conventional salary surveys may not provide sufficient insight, so we would work with an employer to access the information required via a bespoke benchmarking piece.
Effective salary benchmarking requires active engagement from the HR function, along with clear and consistent communication across departments. HR professionals must fully understand the scope and responsibilities of each role to ensure that job comparisons are accurate and relevant. Without this internal clarity, benchmarks may be misaligned with actual job content, leading to ineffective or misleading results, so we work with employers to ensure they get the outcome they need.
Additionally, clients don’t always have a clear picture of what they are looking for or well-defined requirements. For bespoke benchmarking projects, we work closely with them to clarify their needs and ensure the final output is aligned with their objectives.
How does salary benchmarking impact employee retention and attraction?
Ultimately, salary benchmarking is one of the most important tools an organisation can use to plan and structure its employee reward and retention plans. A benchmark salary report allows an employer to understand average pay rates across a specific market sector, as well as bonus and benefits provisions – enabling them to create an attractive reward proposition for employees.
Get in touch
Contact us if you have more questions about how a structured approach to salary benchmarking could benefit your organisation.
