Why Salary Benchmarking is Not Enough
The increase in pay transparency legislation in an increasingly competitive talent landscape is leading many employers to conduct a market analysis of how their salaries compare to their peers. Turnover is often attributed to unsatisfactory pay, so organizations will look to understand how to pay “competitively”, in an attempt to address a broader problem. While this external information is intended to drive pay decisions and provide transparency, market data alone is not enough to transform an organization’s approach to compensation in a sustainable way.
At Exude Human Capital, there are 4 common themes we see in how salary benchmarking alone may not provide the right information to shape how we pay our employees.
- Benchmarking may only be a title comparison
- Market studies only provide a single data set
- There are multiple factors to compensation decisions
- Doesn’t solve for consistency
1. Benchmarking may only be a title comparison:
Depending on the approach, reviewing job titles and descriptions of comparable roles in salary surveys may not return appropriate results. A Manager role in one organization may be more comparable to a Coordinator position in a salary survey. A Program Manager in a salary survey may be largely administrative when the same role in an organization is primarily focused on relationship management. Many organizations may also have hybrid roles with singular titles – a Finance Administrator position might be a combination of financial support, contract management, and office operations. It is also not uncommon for market data to undervalue critical organizational roles, especially service positions. A comprehensive, deconstructed understanding of each role in the organization is the best approach to ensuring the validity of market data.
2. Market studies only provide a single data set:
A market analysis only provides point-in-time data to represent the current labor market. It does not include additional context for how those salaries came to represent the market. When the market moves, how does the organization plan to respond? Suppose the market decreases the value of a critical organizational role. How will the organization reconcile the need for the contributions of that function, in comparison to what the market data reveals?
3. There are multiple factors to compensation decisions:
Once market data has been obtained, the organization needs to determine how it will inform compensation decisions. Market data does not often account for tenure, scope of role, span of control, authority, or how to compare the value of each employee’s experience in making individual salary decisions, relative to other incumbents. When solving for talent challenges, all of these factors contribute to an employee’s perception of whether salaries are considered equitable.
4. Doesn’t solve for consistency:
Just because market data is available, doesn’t mean that all employees should be paid the market rate. In pay-for-performance organizations, variable contributions need to be considered. Market data may also return equivalent salaries for positions at different levels in an organization. With consideration for growth opportunities, how should that market data be used? Consistency in using market data is paramount to equitable compensation decisions.
Market data should be one of many tools used in designing or revising a compensation model. A compensation strategy should include a desired external market position, and a well-defined plan for how market data supports, but not shapes, the ongoing administration of a compensation program.
At Exude Human Capital, we understand the challenges that businesses face, particularly when designing compensation strategies and executing those plans. Our highly experienced compensation team will share best practices as we work with your team to review and design compensation programs that support your talent strategy. We believe that compensation is both an art and a science, and we work closely with you to find the appropriate balance to create a competitive compensation strategy.
For more information on Exude Human Capital Consulting and to schedule a complementary 30-minute consultation with one of our experienced professionals CONTACT US.