The Art and Science of Compensation Benchmarking

The Art and Science of Compensation Benchmarking

Many organizations view their people as their greatest asset and source of long-term competitive advantage. Particularly in knowledge-based businesses (and, really, in 2023 what businesses aren’t?), compensation costs are often the largest ongoing investment. When you consider the hot market for talent, internal equity and affordability, not to mention external pressures such as high inflation, keeping compensation review practices up to date is of the utmost importance.

Compensation benchmarking, or systematically evaluating the remuneration your company offers, is essential for recruiting and retaining strong team members. So how does compensation benchmarking work? Essentially you’re solving for how much you should pay your people. The application of the process may vary from organization to organization, but the following overarching steps can generally be adhered to:

1. Determine your compensation philosophy, considering:
   • target pay levels relative to the market,
   • the mix between fixed and incentive-based pay, and
   • the mix between cash vs. equity awards (if applicable)
2. Review jobs across the organization and determine internal salary ranges
3. Choose external data sources from compensation survey providers such as Radford
4. Map your roles to the job codes used by the survey providers to ensure a relevant comparison is undertaken
   • This often involves going beyond the job title and reviewing the nature of the work itself, plus the level of seniority and geographic location
5. Compare current compensation levels for each role to the external survey data to identify where you may wish to calibrate pay levels
6. Compare current compensation levels for each individual to the internal salary ranges to identify their current placement in the range
7. Draft compensation adjustments for consideration, by creating scenarios (keeping any budget constraints in mind)
8. Gain buy-in from decision makers and finalize the adjustments
9. Roll out the new salaries, benefits or any related incentives via tried and tested communication techniques
   • Equipped with this information and analysis, at this stage performance leaders are typically involved. They will apply their judgment in recommending the specific compensation changes for each of their team members within the parameters outlined above, and considering the individual’s performance.

Closing Thoughts

Pay continues to be a key factor in employees’ job satisfaction, and operating a robust compensation review process can be a critical differentiator for high value-add People teams.

Implementing and running the process calls on a diverse range of skills including data analysis, budgeting, executive and Board presentations, and training/change management. Technology like HCM and financial systems can help with some of the “mechanical” pieces (i.e., the science portion of the process), but even for companies with hundreds of employees, this work can be effectively carried out with well-designed spreadsheet solutions. If establishing, assessing or fine-tuning your compensation review processes and tools is on your radar, contact us to learn more about how we can help streamline this important component of your operations.