Compensation has long been a taboo subject in the workplace. Until relatively recently, people viewed compensation as something very personal–a topic you didn’t talk about with other people, least of all your co-workers. But in recent years, as workplace norms have evolved, so have our views on pay transparency.
From an employee perspective, you can understand why there’s so much intrigue around compensation. We all want to know that we’re being paid fairly, but if we don’t know our value in the market, how can we be sure?
Conversely, talking about compensation with team members can be perilous from a manager or HR leader’s perspective. That’s because compensation is such a complicated and imperfect science.
One position’s value to an organization may differ dramatically from another company’s. Layer on pay differences by industry, location, and individual work experience, and you suddenly have a complicated situation on your hands.
One way companies can begin to navigate these compensation discussions with their people is by having a well-crafted compensation strategy … And your compensation strategy is only as good as the data that underpins it. This is where benchmarking comes in.
What is benchmarking, and why is it so important?
Benchmarking is a data-driven method of understanding what your competition pays people in similar roles. There are various benchmarking methodologies out there–some dependent on self-reporting (think: Glassdoor). Others like Mercer leverage company-submitted pay data from thousands of organizations globally.
Benchmarking providers work with companies to match internal jobs to the most accurate titles in their vast database of job descriptions. Unlike self-reported pay databases, job matching looks at the specific tasks and requirements for every role at your company. This process ensures that things like title inflation or obscure job titles don’t jeopardize the validity of your compensation data.
But job matching is just the tip of the iceberg. Benchmarking providers also look at your industry, people’s location, headcount, and annual revenue, among other factors, to provide the most relevant compensation reports to their customers.
Benchmarking is complete. Now what?
Once you’ve gained access to the benchmark data, your company will need to develop its compensation philosophy. A well-crafted compensation philosophy aligns with your company’s mission, vision, and values and answers crucial questions that will allow you to navigate tough compensation decisions in the future.
Some key questions to consider as part of your compensation philosophy are:
- How do you want to position your pay relative to your competitors? Do you strive for the middle of the pack at the 50th percentile? Maybe there are a few high-value roles for which you’re willing to pay top dollar at the 90th percentile.
- Do you differentiate pay according to location? What happens if a team member relocates to a less expensive market? Will you adjust their pay down to match the local market rates?
- What level of transparency are you comfortable with as an organization? Will you share salary ranges with your team members? As companies strive to be more diverse and equitable, many are also opting for greater pay transparency. Keep in mind that several countries (and US states) are now instituting pay transparency laws, so your approach concerning transparency may be predetermined.
- Besides cash compensation, what other incentives do you offer to attract and retain talent? Even if your company isn’t in a position to pay salaries at the top of the market, perhaps you make up for it in other ways. Company stock options, health and wellness benefits, growth opportunities, and culture are all part of your compensation package.
Talking about comp with your people
Once you’ve gathered your benchmark data and established your compensation philosophy, you’re almost ready to talk to your people about it. Crafting your communication plan is arguably the most important step of the whole process. Your company could have the most thoughtful, data-driven compensation program in the world, but it will all be for naught if you and your managers don’t feel comfortable talking about it.
Managers and HR pros alike should be prepared to answer questions like:
When will I receive my next salary increase?
Your compensation philosophy should detail the cadence with which your company plans to review people’s salaries each year–for most companies, this will occur once a year. As managers and HR professionals, it’s your responsibility to set proper expectations with team members about future pay adjustments.
Be as transparent as possible about the factors that impact your company’s compensation decisions, such as budget parameters, eligibility criteria, and individual performance. The quickest way to erode team trust is to make promises you can’t keep, so avoid setting unrealistic compensation expectations with your team members about the timing and amount of their next increase.
Why am I earning less than external market rates for my role?
When team members approach you with this question, start by asking them what compensation sources they utilized to form their conclusion. In many cases, they’ll tell you that they researched their job title and salary online. Free online “benchmarks” are often lacking in context, such as job level, experience, and company size, all of which can dramatically sway the results of the data.
This is where managers’ knowledge of the benchmarking process and strategy becomes useful. You can talk through the key factors that informed the company’s salary bands and the philosophy behind that approach. Perhaps your company’s base salaries are, in fact, below market rates, but its benefits and equity package offer a competitive edge. To navigate this conversation effectively, managers need to understand both the company’s position and their team members’ personal motivations.
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Why is my pay at the bottom of the posted salary range?
If you work in one of the many jurisdictions that now require pay transparency in job postings, you’re likely to encounter more questions like this from your team members. Of course, the way you answer will depend greatly on the individual doing the asking.
It may be that the person was recently promoted and is still developing their skill set for the new role. They could also be located in a lower-cost region where pay rates are lower. If there’s a performance reason for their pay situation, use this conversation as an opportunity to discuss performance expectations and areas for development.
Benchmarking is a modern business imperative
As business leaders, leveraging benchmarking data when making decisions about pay, and using it to speak to your people about their comp is critical, especially in today’s rapidly evolving job market.
Although the market is sending mixed signals, unemployment rates remain low, and the war for talent is still in full swing. Using relevant benchmarking data to inform the pay used to attract and retain the best talent out there is imperative for any company that wants to stay competitive for the long term.
From Annie Rosencrans
Annie Rosencrans is HiBob's Director of People and Culture in the US. She's managed People Operations for several New York-based startups, leading HR transformation and change management through periods of hyper-growth. In her free time, she can be found wandering the streets of NYC exploring the food scene.