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Compensation Benchmarking: What You Need to Know

Topics: Comp Strategy

Anyone remotely involved in hiring or retention is acutely aware that we’re in an employee’s market. Workers have access to more information than ever before – often with just a few clicks. In this digital economy, opportunities abound. Employees, particularly those with in-demand skills, can easily land increasingly appealing gigs with confidence. If you’re not compensating your employees appropriately, you run the risk of losing key talent. 

The best way to win the war for talent is equip yourself with knowledge of useful tools like compensation benchmarking. Here is an overview of some points that can help you with that. 

The Three Steps to Establish Compensation Benchmarking

Establishing your compensation benchmarking plan is easier than you might think. There are three basic steps you will need to follow in order to establish your compensation benchmarking. These steps will help guide your way. We’ll help guide you along the way. 

1. CHOOSE DATA SOURCES THAT ALIGN WITH YOUR BUSINESS

First, you’ll need to choose the right sources for market salary data. Take into consideration your industry, geographical locations, size and type of organization. Ideally, you should be able to benchmark 75 to 80 percent of your positions. Thus, the data must also cover a variety of skill sets, experience levels and educational backgrounds.

2. APPLY YOUR COMPENSATION STRATEGY TO THE DATA

Next, you’ll apply your organization’s compensation strategy to the data. Your compensation strategy defines your comp plan and should align with the organization’s business strategy. This will help answer questions such as: 

  • How do we define the competition?
  • How do we want to position ourselves relative to the competition?
  • What are the goals of our comp program?

3. CREATE SALARY RANGES

A range contains a minimum (the least you need to pay to get a qualified person to accept the offer), a midpoint (the 50th percentile of the range), and a maximum (your ceiling for what you’d be willing to pay / can afford for a position). These are the steps to creating a range.

Determine the Range Midpoint

Look at the market midpoint for each position from your external salary survey. The market midpoint is the median value of the aged, weighted market data for the position. However, ultimately, you can decide how competitive you want your range to be. 

Determine the Width of a Salary Range

Typically, higher level positions have wider ranges. This is because these employees usually have more longevity or a unique set of skills. For executive roles, the range can be up to 60 percent. 

For more junior roles, the ranges can be more narrow, starting at 30 percent, for example. This provides a motivation to quickly master skills and move on to the next stepping stones.  

Create Guidelines for Each Compensation Scenario

Once you have the ranges set, you’ll want to develop guidelines for different situations, including:

  • Where new employees enter ranges
  • How and how quickly current employees move within ranges
  • What happens when an employee is promoted
  • How much discretion managers have to move someone through the range

Dealing With Potential Barriers

None of us works in a vacuum. Establishing the benchmark is one thing. However, you may find that you need to sell the idea to your colleagues. So, what do you do when you have a hiring manager that doesn’t trust your data?

In this competitive market, hiring managers may be tempted to bypass or ignore guidelines from their compensation team when they want to hire someone badly enough. This is not a good idea. Instead it would be for the two parties to meet and then confirm the job description so the role can be re-benchmarked.

SHARE INFORMATION 

Comp pros undoubtedly have access to a great deal of information. However, each part of the hiring triumvirate – the compensation professional, the hiring manager, and the recruiter each have different roles and thus potentially different pieces of information. In order to achieve the best results, it’s important for everyone involved to share the information they have. 

ASK CLARIFYING QUESTIONS

Particularly with unique or niche roles, it’s important to ask clarifying questions. In these situations, the compensation team and the hiring manager should be absolutely clear on the skills/experiences  needed for the position. This will help yield the best result. 

Non-Standard or Hybrid Roles

At times, you may run into a situation where you have a non-standard or hybrid role. This is more common among smaller or nascent organizations where employees are expected to wear multiple hats. In fact, one in eight job postings are considered to be a hybridized role, combining skill sets that were previously not found in the same role. 

Essentially, there are four ways to price hybrid roles:

  • The Blending Method – This method starts by benchmarking each job separately then blending the market data to create a composite. 
  • Highest Level Role Method – Sometime, it makes sense to match this role to the higher level of responsibility when choosing a title.
  • Internal Equity Method – This method aligns well for those organizations which value internal equity.
  • Premiums & Discounts – When you have a strong sense of the market and you understand the values of certain skills, applying a premium can accommodate for any skills.

Read more about the four approaches to pricing hybrid roles here

Read More

For more detailed information, dive into our more comprehensive whitepaper, How to Perform Compensation Benchmarking and Set Salary Ranges

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Conrado Tapado
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