Market Benchmarking Basics
By Kathryn O'Connor, PHR, SHRM-CP, CCP, GRP, Director, Compensation Services
Published June 25, 2019
Market benchmarking (also called market pricing) is the act of matching a job and its duties to published salary surveys to determine the appropriate, market-competitive compensation for the role. This method has been the number one way of determining compensation for over a decade.
This approach relies heavily on valid, reliable survey data. This month HR Source will release our 2019 Library and 2019 Metro Chicago Compensation Surveys, which makes it a perfect time to review some market benchmarking basics.
Organizations that plan to pursue (or refresh) their base pay market benchmarking system should familiarize themselves with the following four steps.
1. Defining Compensation Philosophy
To define your organization’s compensation philosophy, ask yourself a few questions. First, who is your competition for labor? Competition may be from employers in the same industry or geographic area, or those similar in size, sales revenue, or operating budget. The answer to this question may be different for different job categories.
Second, how do you want to pay your employees compared to the competition? Do you want to lead, match, or lag the marketplace?
2. Selecting Surveys
The answers to the questions in Step 1 are necessary for Step 2 – selecting surveys. When looking for compensation survey sources, follow these best practices:
- Look for current data. Avoid using surveys more than 18 months old.
- Look for appropriate benchmark positions. The positions included in a survey should be common, easy to identify, found in most organizations, and well-defined.
- Look for helpful statistics such as mean, median, and percentile data. These are the numbers you will need to utilize to ensure the project aligns with your market pricing strategy.
- Look for strong participation numbers. Note the number of organizations participating in the survey, the number of companies responding for each individual benchmark position, and the number of employees represented by the data.
- Avoid anti-trust violations. All private-sector data should be provided in an aggregate format and not by individual employer, even if coded.
- Do not rely on just one source. Utilizing multiple quality sources will help to ensure that you are getting a good representation of the labor market.
HR Source compensation surveys are reliable, valid sources of data and meet the standards outlined above. Whether you’ve been a survey participant with us for years or are discovering our resources for the first time, we invite you to familiarize yourself with our vast array of surveys, and we encourage your organization to participate.
3. Matching Jobs
Once the survey sources have been identified, you are now ready for Step 3 – matching jobs. When benchmarking, aim for a 75% or more match between the job duties and qualifications of your position and the job description published within a given compensation survey. You may have to conduct formal job analysis to gather the necessary information about your organization’s positions to ensure appropriate job matches are being made.
4. Applying Data
The final step is to apply all the data collected. Once data is collected from salary surveys, it’s imperative to age (or trend) the data, weight the data, and calculate a final composite base wage. For some projects, it may also be necessary to adjust data for geographic differences and/or make workweek adjustments to annualized rates. Once a final market value is determined for each job, individual pay ranges or an organizational salary structure are often created. Having a well-defined minimum, midpoint, and maximum value for each job is especially helpful when trying to make individual pay decisions.
Interested in putting these steps into practice? Join us for Compensation Development Through Market Benchmarking on July 11, 2019.
For more information, contact HR Source’s Compensation Department at 800-448-4584 or email info@hrsource.org.