The Basics Of Salary Benchmarking And 5 Ways In Which It Can Be Used To Create More Value

Vaibhav Agarwal

Salary along with other benefits is the medium through which employees are compensated for their services in companies around the world. It is one of the most critical factors in the people strategy of any organization, and something that HR leaders across organizations focus on getting right. 

  • Studies have shown a mere 5% underpayment is sufficient to push your high performers to consider moving to a competitor company but will not necessarily push the average employees to do so.
  • As businesses evolve and embrace newer ways of operating, setting up a new function or team in the company is common. But HR leaders are unsure about market salaries for relevant skills required in these new roles.
  • Salary often emerges as a key reason for a high turnover during exit interviews in companies.

Market Value of Talent

There are many issues that can be effectively handled by a well-planned compensation and salary structure. Employee costs are one of the biggest expenditure heads for companies, and that is why it is important for companies to know the market value of job roles present in their organization. A slightly lower pay makes people look out, while high salaries will hurt budgets and profitability. But how do you know the true and current worth of your employees? From a purely economic view, the market value of a certain employee will be a function of 2 things:

  • How critical is the employee’s role in the business (demand)
  • How easily is talent with the specific skill set available in the market (supply)

Why is Salary Benchmarking important

Salary benchmarking (aka compensation benchmarking) helps in determining the market value of talent in a scientific way. It is a process that tells you where your organization stands in terms of compensation and benefits in the market. It is a process through which HR leaders identify the market rate of internal job roles by matching their job descriptions, requirements, and responsibilities to that in the external market. This is an important part of the overall talent strategy to attract the right talent that will help the company meet its business goals. 

Companies conduct salary benchmarking at different instances:

  • A fixed frequency varying between 1 year and 3 years
  • When a new role or function has come up for which the company does not have market data
  • Understand labor costs when entering a new geography
  • Solving for high turnover if salary is leading to an exodus of employees

How do companies benchmark salaries

Salary data can be obtained from multiple sources, and which source to use will depend on the objective of the salary benchmarking exercise. Some free sources such as Indeed, salary.com, etc will give ballpark estimates for various designations. But if you are looking at a more comprehensive benchmarking exercise that aligns compensation strategy to attract and retain talent, depending on a free source might not be a good idea. Here you will need data and insights that can be useful in your specific context.

Here are 5 ways in which you can get more value from a salary benchmarking exercise

1. Find talent in other industries

Today, companies have to work harder than ever to attract and retain talent. Beyond direct competition, organizations in other industries and sectors are also attracting top talent. As an HR leader if you find yourself in a tight talent market, start looking for relevant talent in other industries. This will require mapping specific skills and competencies to the job roles but will be especially advantageous if your competition has spoilt the market by offering unreasonably high employee salaries.

2. Highlight work-life balance

While salary remains a major factor for employees, there is an increase in preference for work-life balance too. You can use salary benchmarking data to present insights on working hours at competitor companies and compare the work-life balance associated with salaries.

3. Bring a mean shift in team performance

Beyond fixed salaries, compensation benchmarking also gives insights into other variable components such as incentives, commissions, bonuses, profit sharing, and stock options. Studying these carefully for your competition can reveal insights into the structures and quantum of variable pay that will lead to a mean shift in the team’s performance.

4. Improve communication during internal appraisals

External salary benchmarks can equip managers with insights needed to arrive at the right salary increases and have more transparent conversations during annual appraisal discussions. According to studies, only 30% of all employees are completely satisfied with the communication related to salary increase. By being more transparent about how the decision was made, companies can improve the retention of top talent.

5. Deciding on a new location

As organizations grow geographically, it is important to carefully consider locations while opening new offices. Using salary benchmarking, companies can evaluate talent availability and cost. This can be an important input in workforce planning and budgeting exercise. HR leaders should look at locations where labor costs and availability will balance the talent strategy of the company with profitability.

Conclusion

Salary benchmarking is a critical tool that can make or break your talent strategy. In a survey, around 80% of HR leaders reported that their organisation spends some money on salary benchmarking at least once every 2 years. Companies spend this money because the benefits of this exercise far exceed the cost involved. The cost would be a tiny fraction of their total employee costs, but it can give insights that could have far-reaching and long term implications on the talent strategy of the company. If you are looking at salary benchmarking data for any manufacturing industry in India, you can consider the Catenon India report titled Manufacturing in India: Insights into Locations and Human Capital 2020.

Happy to Help