What is salary benchmarking
Salary benchmarking is a tool to identify the market value of talent in a scientific way. Companies use it to determine their relative positioning in terms of compensation and benefits in the market. It is a process that tells you where your organization stands in terms of compensation and benefits in the market. It involves matching job descriptions, requirements, and responsibilities of internal roles to that in the external market. For most companies, this is a critical component of the overall talent strategy to attract and retain the best talent.
Why is salary benchmarking important?
Dissatisfaction with current salary often surfaces as a key driver for high turnover during exit interviews in organisations.
In our survey of 780 employees across industries and work levels, 42% people said that unsatisfactory compensation is the most probable reason for them to quit their jobs.
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 HR does not have market data
- To estimate manpower costs when entering a new geography
- To tackle high attrition if salary is leading to an exodus of employees
Economic Costs of Improper Salary Decisions
Many companies adopt a ‘good paymaster’ strategy, often pegging their salary levels across roles at around 75th percentile of the market. This approach has multiple flaws:
- Can lead to an overall high manpower cost – Many roles in organisations are easily available in the market. Hence, adopting a blanket 75th percentile approach can be detrimental to manpower costs. For instance, if you are a technology company, you probably need the best engineering talent out there. So, it might make sense to target the 75th percentile position for that function. However, you could easily do well with a mean or 50th percentile positioning for certain non-critical support functions.
To quantify the effect of such a strategy, if an organization ends up with just a 1% higher salary level at an organization-wide level, it could mean millions of rupees at stake.
- Assuming an average salary of INR 10 lakhs for a 10000-member organization, this 1% additional cost translates to 10,00,000*10000*0.01 = INR 10 Cr.
- Can lead to high attrition of roles which are underpaid or high in demand – The other problem with adopting a blanket approach for all roles is that roles which are in high demand in the market and comparably underpaid see very high attrition rates. The biggest damage comes from the fact that it is almost always the top performers and the talent in high demand that quits. Our study also revealed that a mere 5% underpayment can flip the top performers to competitor companies, while not pushing the average folks to do so. To quantify the economic impact of this, let’s look at the following numbers:
Cost of unproductive time
- Average attrition rate in the Information Technology industry in India = 13%
- Assuming the attrition of top talent and roles which are in high demand is 50% higher than overall average, the attrition rate for such talent pool = 19.5%
- Percentage of attrition attributable to unsatisfactory salary = 42/100*19.5 = 8.2%
- Assuming the unproductive time is 75% of the typical 12-week notice period for quitting employees, the cost of unproductive time attributable to higher attrition = 10,00,000*9/52 = INR 1,73,077
- For a 10000-member strong organization, this translates to 10000*0.082*1,73,077 = INR 14.19 Cr.
Opportunity cost of lost revenue
- Assuming a ratio of average revenue per employee to average salary = 4 for the IT industry, the opportunity cost attributable to the additional attrition of top talent = 10000*0.082*1,73,077*4 = INR 56.76 Cr.
Hence there is a cost of INR 70.95 Cr. associated with increased attrition of top talent. This still does not take into account other costs such as training, payroll, etc. and larger business impact on morale and reputation of the organisation. Much of this attrition can be avoided if the organisation adopts a laser sharp approach to salary benchmarking based on role criticality and market value of talent.
Pitfalls of a traditional salary benchmarking exercise
There are some other pitfalls adopting a traditional salary benchmarking exercise:
- Averages of averages – Most salary surveys present the ‘average of averages’ in their report. While this gives a very high-level view of the salary for certain roles, it is far from being reliable as you may require a unique combination of skills, knowledge and experience depending on the organization’s context. For example, a company may need a sales leader with expert technical knowledge to sell specific technology products or services.
- Age of data – Salary data that is a few months old might not accurately represent current trends in the industry as the market is changing more rapidly than ever. Traditional surveys that are conducted annually might not give the correct picture if used a few months down the line.
- ‘Similar’ job roles – Traditional salary surveys force you to extract insights from the pre-existing bank of data. This makes it impossible to tailor the study to the specific context of the organization seeking salary benchmarking. In a bespoke study, the following criteria can be frozen in advance to ensure the results give insights as per the exact needs of the organization:
- Job profiles along with skills, knowledge and years of experience
|Traditional salary surveys||Bespoke salary study|
|Granularity||Only publish average of averages||Present granular data based on unique requirements of the organization|
|Age of data||Done at same time once every year||Done instantaneously at the request of the organization|
|Job roles||Need to extract and adjust data from existing data bank||Only exact matches of job profiles considered in the study|
|Span||Done only for existing large industries||Can be done for a niche and relatively small sub-sector or industry|
Bonus – How are companies using salary benchmarking in unique ways
- Finding talent in other industries – As companies have to work harder than ever to retain talent, those in a tight talent market have started looking for relevant talent in other industries. This requires mapping specific skills and competencies to the job roles but is especially advantageous if competition in your industry has inflated salaries. Only a bespoke study can help in such a use case.
- Bring a mean shift in team performance – Bespoke salary benchmarking exercise can also give insights into other components beyond the fixed salaries. These include variable components such as incentives, commissions, bonuses, profit sharing, and stock options. Organisations have used such bespoke studies to understand best practices in salary structures and quantum of variable pay that can lead to a mean positive shift in overall team performance.
Vaibhav is the Vice President for Talent Consulting & Intelligence vertical at Catenon. If you are interested in commissioning a bespoke salary benchmarking or market mapping exercise for your company, you can reach out to him at firstname.lastname@example.org