For compensation professionals, market pricing sits at the core of compensation decisions

Establishing and managing the salary structure, designing short-term incentive plans, conducting internal equity analyses, and distributing merit increases during the performance management process all rely, to some extent, on accurate market pricing, otherwise known as salary benchmarking. Compensation management is an important component because it affects so many other functions. Your market pricing activities must be thoughtful, organized, repeatable, accurate, and, above all, aligned with and reflective of your labor market (that is, who you compete with for talent, not necessarily revenue).

What is the best way to ensure this happens? Start by developing a salary benchmarking methodology to ensure consistent, data-driven pay decisions.

Why is salary benchmarking important?

Salary benchmarking involves analyzing salary surveys to structure positions that align with the skills, responsibilities, and qualifications of each job within your organization. This process helps determine the market value of those roles. The resulting data indicates the external worth of the job, which you can then modify to account for its internal value.

This strategy will allow you to establish a market reference point that facilitates grouping of similar positions into a broader framework, such as a conventional salary structure or pay ranges.

Creating a structured approach for carrying out market pricing activities within your organization ensures that anyone involved in market pricing a position follows established methods for gathering, weighting, and integrating data consistently. An essential component of establishing a salary benchmarking methodology is gaining a comprehensive understanding of pertinent labor market data, which informs the selection and inclusion of appropriate compensation surveys.

The elements of a salary benchmarking methodology

Although the level of detail in a salary benchmarking methodology may vary, identifying, defining, and documenting the following elements, at a minimum, will ensure market pricing consistency.

Compensation philosophy

A compensation philosophy is your starting point. If you don't have one, STOP! Do not attempt to create a salary benchmarking methodology without understanding your organization's goals for positioning pay in the labor market.

A compensation philosophy statement can be something as simple as "ABC, Inc. targets pay at the median." Or, very often today, the philosophy will include

• pay structure details, such as how base pay is positioned versus variable pay
• a statement regarding the labor market competitors
• the role that pay-for-performance plays

With these considerations in mind, developing a clear understanding of your company's target pay positioning in the labor market should be your first priority before creating a salary benchmarking methodology.

Surveys

With the considerable budget you have at your disposal, it's easy to purchase loads of salary surveys, right? If that’s your situation, cheers to you!

However, most of us have a limited budget and need to be strategic when selecting which salary surveys to purchase. Be sure to choose reputable surveys that reflect your labor market competitors and contain jobs that match a significant number of the positions within your organization. Typically, you should plan to use and analyze data from multiple compensation data sources. This survey selection approach ensures the data you use reflects your talent market and supports accurate, competitive pay decisions.

Scope cuts and data elements

Developing a salary benchmarking methodology includes understanding how your company recruits talent and how that recruitment strategy may differ by employee segment.

In most organizations, there is a segment of jobs where the talent/candidates may come from various background industries, meaning it's not essential that candidates have experience in your industry. For example, a Human Resources (HR) job or an Administrative Support role is typically filled by a professional who demonstrates the skills you are looking for regardless of prior industry experience. They can learn the nuances of your industry; what’s important is their knowledge of HR.

However, other roles require specific industry experience or even experience working in organizations of a particular revenue size or type, such as a not-for-profit organization. The survey scope cuts that you choose to use should align with the kind of experience you require for each role. These scope decisions determine which data is relevant for each role and may directly impact how accurately roles are benchmarked to the market.

Beyond the data scope cuts, you'll want to document the data elements you will use from each survey. There's nothing more frustrating than collecting data from a survey and realizing as you are beginning to load it into your market pricing tool that you're missing some necessary data elements.

In analyzing your salary range competitiveness each year, use your compensation philosophy as the starting point, and then identify the data elements you will need to proceed with your salary benchmarking methodology. Most organizations will collect data on some variety of base pay, short-term incentives, long-term incentives, total cash compensation, and total direct compensation with reference points at the 25th, 50th, and 75th percentiles around the median, although the names of these elements in each survey may vary. You may need to use additional details to complete your salary benchmarking. In each survey, use your salary benchmarking methodology to document which data elements to pull for each data cut. By doing so, you will have a clear salary survey data element checklist to follow when you are collecting data to update your market pricing, which will improve efficiency, consistency, and accuracy.

Alignment to employee segments

Once you have identified the scope cuts, you now need to determine and document how to align the data to the various employee segments. Typically, it's appropriate to designate broad employee groups or departments (such as Finance), consider the experience desired, and translate that into the appropriate data scope. However, in some cases, it may be necessary to think in terms of jobs. A sample table outlining the data cuts for jobs in a healthcare organization is provided below. This alignment ensures the data used reflects how roles are structured and supports more accurate benchmarking across employee groups.

Developing composites

Typical guidance has always been to collect three survey data points for every job you are market pricing. (Yes, that means you will need to purchase three separate salary surveys, at least to benchmark your jobs.) As you probably know, that can be difficult to achieve. With multiple data points for every benchmark job, you are faced with the challenge of combining those data points into a composite. Again, you can achieve consistency and efficiency by establishing a set of market pricing guidelines for blending data in your salary benchmarking methodology. This approach ensures multiple data sources are combined consistently to support reliable market comparisons and pay decisions.

In creating your survey data composite, three strategies to ensure accuracy and relevance of the data include:

Combining data

The simplest method for developing composites is to average the adjusted market data for each pay element. Even in those cases, you will need to determine how to address data anomalies, such as zeros. Incorporating anomalies into your composites can inadvertently skew your composites.

Get the input you need

To make sure your salary benchmarking methodology supports your company’s critical talent objectives, the key to success is understanding your various labor market competitors and talent strategy thoroughly.

You can engage either the HR professionals that represent the multiple employee segments within your organization or the department/business leaders themselves.

Gather these resources and begin by educating them on what it is you are developing — give them a little “Compensation 101.” This leads to a discussion of how critical their input is in developing a salary benchmarking methodology. Engaging the department/business leaders in the development process produces a more accurate methodology, leading to more precise market pricing, which, in turn, leads to more competitive employee compensation. It also increases awareness among members of the organization, which can be critical in communicating compensation decisions to the broader workforce.

Looking for an expert?

In some cases, developing a salary benchmark methodology for your organization may be a job that benefits from some third-party advice or review. In that case, don't hesitate to engage a consultant, such as Mercer or another reputable consulting firm. Developing a comprehensive salary benchmark methodology is an important step that will provide significant improvements in efficiency, accuracy, and consistency. Trust us, the time spent is minimal compared to the gains you will realize.

Looking to talk to an expert? Give us a call at 855-286-5302 or email surveys@mercer.com.

For more information on developing a benchmark methodology or similar topics, look for other articles in our Compensation 101 series.