5 Reasons for Compensation Benchmarking

Compensation Benchmarking

Compensation benchmarking helps businesses understand where they stand when it comes to employee pay rates. In this blog, we look at what compensation benchmarking is and five reasons why your company needs it.

Managing people is a difficult process. It comes with nearly infinite variability – every person is different and requires unique motivators. Perhaps the most important motivator, compensation, has become the most complicated – especially in our current economy.

Right now, the competition for top talent is stiff. Employers are trying anything and everything to attract and retain hardworking, reliable employees. This has made compensation a strategic differentiator – but only for those that figure out how to manage it properly across the enterprise.

Before we go any further, let’s talk about compensation management.

What Is Compensation Management?

Compensation management is simply the process of ensuring that an organization’s salaries and bonuses remain competitive, appropriate, and equitable. It also involves managing company benefit programs to make sure they meet the needs of the current workforce.

Compensation management plays a large role in human resources (HR) since it can impact employee retention, the hiring process, company performance, and team engagement. It helps keep a company competitive in the labor market.

How Compensation Benchmarking Fits In

Compensation benchmarking is a process that matches internal jobs with market pay data or a salary survey to identify the market rate for each position. It’s also referred to as salary benchmarking and uses internal job descriptions to match established salary survey jobs to identify the external market rate for each benchmark position.

The aim is to understand how an organization’s pay rates compare to market rates to set individual salaries at an appropriate level and further structure compensation systems.

The first step to compensation benchmarking is identifying all the key attributes of a position. You’ll want to explore going rates for that job description from reputable sources like HR-reported aggregate market data or survey data.

The content of the role’s duties matters much more than the title when coming up with a benchmark for a position’s compensation. Multiple sourcing for compensation benchmarking leads to more accurate results.

Factors that influence salary benchmarks include industry, geographic region, organization size, education levels, and cost of living.

Most companies target the middle of a salary range when benchmarking.

Why Is Compensation Benchmarking Important?

Performing regular compensation benchmarking ensures that salaries remain fair and are updated with current market trends, which helps retain employees. And good compensation benchmarking reduces costs by retaining employees at competitive rates. After all, each time a company hires an employee, there are expenses involved, including training, materials, supplies and hiring tools.

Not only does compensation benchmarking make sure you’re offering fair, or competitive market rates, but it makes you a more competitive employer in the journey for top-notch talent.

Compensation benchmarking can also help keep your employees happy and satisfied in their jobs. It’s a hard pill to swallow when you learn about someone with the same job title earning more money.

And because compensation benchmarking keeps pay transparent and more equal, employees tend to appreciate it. That holds doubly true if it applies to promotions, too.

What Are the Top 5 Reasons for Compensation Benchmarking?

1. Recruiting the Best Candidates

Today’s job market is more competitive than ever. Compensation is a major player in attracting the highest caliber employees. Choosing a proper pay scale that is aligned, or superior to your competition gives you an edge to convince the desired employee to join your organization. Compensation benchmarking can provide you with salary and benefit comparisons across job positions, so you can create the appropriate pay grades, ranges and scales, along with indirect compensation packages.

2. Retaining Top-Tier Talent

You obviously want to retain the top talent you secured for your organization. To do so, you need to be aware of the compensation market through ongoing compensation benchmarking. A compensation survey doesn’t follow a “one and done” strategy. You’ll want to conduct it periodically, especially in times of volatile job markets. Employees expect to be paid the prevailing market salary rate, and if you fail to do so they may very well jump ship.

3. Avoiding Wage Fixing

Federal law prohibits employers to fix wages and agree to not hire each other’s workers to keep wages low. Compensation benchmarking provides you with credible market data on salaries and benefits to justify the compensation you offer to potential employees and pay to current employees. It adds a layer of protection against accusations of wage fixing.

4. Creating a Budget

Obtaining benchmark compensation data is helpful to know the appropriate ranges for similar positions in your industry. Surveying the market and having salary survey software data on hand can assist you in creating a well-supported budget that also allows for adjustments throughout the year.

5. Improving Employee Morale and Job Satisfaction

When you conduct a compensation survey, it’s wise to inform your employees of the results and adjust salaries accordingly. You show your employees that you care about fairness and their financial wellbeing. All things considered, happier employees are more productive, which benefits you in the long term.

Incorporate Benchmarking into Your Strategy

When a company fails in basic compensation planning, it risks losing talent and dissuades potential hires. Up to 52 percent of candidates in one survey said that competitive compensation is the most attractive element of a job offer. Designing effective compensation plans can be a challenge when organizations still rely on legacy compensation management solutions.

It’s essential for companies to use and be transparent about benchmarking data–whether it’s external market data or established internal ranges–to help guide managers as they make compensation decisions that align with the organization’s compensation strategies. And with the ever-changing labor market, market adjustments are more important than ever.

In some competitive industries, compensation teams are looking at market adjustment information more frequently. They also review market adjustments and other types of incremental increases more regularly throughout the year to keep up. This is especially true where retention is a potential problem.


In today’s competitive job market, companies have to work smarter to attract and retain employees. Compensation benchmarking is an essential first step into that process. With it, you can recruit the best candidates, retain top talent, prevent wage fixing, create a budget and improve employee morale. And when your employees win, your company wins.

HRSofts compensation management software, COMPview, makes it easy to budget for and administer market adjustments. See how it works by requesting a demo today.