top of page

The ultimate guide to salary benchmarking in 2022

Magnifying glass showing the word benchmarking

Salary benchmarking, also referred to as compensation benchmarking or pay benchmarking, enables companies to compare the salary they offer for each role against market rates for similar positions.

To attract, hire, and retain the best talent, you need to offer a competitive salary and show your employees that you value them.

Knowing what your competitors are offering for similar positions will help you define your compensation strategy, position yourself in the market, and find ways to stand out.

In this article, we’ll talk about salary benchmarking: What it is, why it’s important, what its benefits are, and also how to do it right.

What is salary benchmarking?

Salary benchmarking is the practice of comparing salaries at your organization against market values for similar roles in your industry.

The purpose of benchmarking salaries is to ensure that your company is offering salaries that are competitive, and also to create a comprehensive compensation policy (or adjust your existing one). Since it can be difficult to know what a 'competitive salary' means without looking beyond your own company, pay benchmarking can help to give you a better idea of where you stand.

Then, if you define what is a competitive salary you can make informed decisions about how to set salary ranges for new job openings, and also how to compensate your employees adequately.

The data you can use for salary benchmarking can come from salary surveys, government statistics, job postings, or compensation and benefits specialists’ databases. A rise in compensation benchmarking tools is making it even easier to access the relevant data needed to do this.

Why is salary benchmarking so important today?

Compensation benchmarking is now more important than ever, with companies having access to a global talent pool, and also with more and more people aspiring to be location-independent or be able to relocate without losing their job.

In some industries, physical proximity is still necessary, such as in medical care, personal care, or leisure and travel, for example. In many others, however, remote work is slowly becoming more and more common, and, according to a FlexJobs survey, 58% of employees are hoping to work remotely, or continue to do so, while another 39% are interested in a hybrid work arrangement.

Companies that are willing to make the switch and hire most of their workforce remotely now have access to a much wider talent pool, as they’re no longer limited to a specific geographic area. This makes compensation benchmarking all the more important (and challenging): Organizations now need to look at global labor data and trends, and align their compensation policy with a remote working model.

If that’s your case, there are a number of important questions you must address:

  • Are you looking to hire remote workers in your country only, or are you interested in hiring internationally?

  • Are you looking to hire nearshore or offshore workers?

  • Do you prefer hiring in specific locations, due to legal considerations, time zone compatibility, etc.?

  • Will new hires be on your payroll or will you work with them as contractors?

  • Will they work full time for you?

  • Will you take into consideration their location or will you only concentrate on skills, experience, and qualifications?

  • Will you have different salary ranges for HCOL and LCOL (high/low cost of living) areas? Why, or why not?

  • What other benefits will you offer?

  • Do you expect them to travel to meet you or come to the office? How often?

The answers to these questions will guide your pay benchmarking efforts and you’ll be able to decide what data you need to look into, and how to obtain it.

It’s very important to define your compensation policy before you start hiring remotely, in order to get sufficient clarity and be able to be transparent and congruent with your workers.

Why you need to measure your total compensation – and communicate it clearly to employees

An important component to benchmarking salaries is knowing exactly where you stand in terms of the compensation you’re offering. Even if your compensation package is quite substantial, your employees might not be aware of everything they’re getting or how to use it.

For this reason, you and your employees need to know what their total compensation actually is. This includes your employees’:

  • Base salary

  • Bonuses (for example, performance or tenure bonuses)

  • Benefits

  • Equity (stock options)

  • Pension or retirement benefits

Many companies offer more than just a salary, especially in highly competitive industries or locations, but sometimes employees aren’t actually aware of the full scope of their compensation, and the information is often scattered or simply incomplete.

Employers should be able to measure compensation easily, ideally in real time and in one place, and make sure employees are fully aware of it and have all the details easily accessible – preferably in the same system.

This is extremely important for two main reasons:

  • You can only compare what you can measure: Without knowing your status quo you cannot compare yourself to the market rate salary – and any comparison should include both pay and additional benefits

  • Employees won’t consider their total compensation if they’re unaware of it: If employees don't know what they are getting (in terms of total compensation, not just cash), they are more likely to get swayed by recruiters throwing numbers at them

If the information is scattered across many systems (pay in payroll, options in Seedlegals, pension in a separate system, and so on), employees often won’t be aware of their total compensation and won’t appreciate its full value.

If employees’ total compensation is meaningfully higher than the cash compensation – for example, if their share options are appreciating over time or if they have private insurance and pension – you need to be aware of the risk that they actually forget about it when discussing job offers with recruiters.

Recruiters focus on the cash compensation because they are paid a percentage of it, so if your employees are only comparing salaries, this leaves you and them at a disadvantage.

In addition to that, companies that offer equity as a part of their compensation package should actually make sure their employees know exactly what this means for them, and educate them on the value and importance of the stock options they own.

Many employees do not understand what equity is but might be hesitant to admit that to their employer or coworkers. For this reason, you need to:

  • Gather all the information in a single system, where both you and your employees can access it.

  • Communicate your compensation plans to your employees

  • Educate them about the different benefits they’re getting

Having everything in one place also helps you figure out your gender pay gap, not just in terms of cash but also total compensation. Most tools are not able to measure pay gaps in total compensation, because they simply don't have all the data.

The benefits of salary benchmarking

Benchmarking salaries has a number of important benefits. It enables you to:

Recruit top talent

If you want to recruit top talent, you need to be able to offer competitive pay. Of course, both “top talent” and “competitive pay” will be up to you to define. For this, you need to ask yourself questions like:

  • Are you looking for someone who has a specific number of years of experience in your industry?

  • What’s the career path of the person you’d like to work with?

  • Are you looking for someone who is fluent in different languages?

  • Is your ideal candidate highly specialized in their niche, or are they a fast learner and a multipotentialite?

  • What are the most important skills they need to have? What are some nice-to-have skills on which you’re willing to compromise?

  • Are you open to hiring remotely? Will you take into account your employees’ location and their cost of living?

Retain your best employees and reduce employee attrition

Salary is an important element to employee retention, and because of this, you need to know the market value of each role at your organization.

This doesn’t mean that you should offer the same amount as the average salary in the industry and in your geographical area; after all, these are just averages. Rather, you should be aware of the differences, and be transparent.

People don’t leave simply because of a low salary: Often, the reason they leave is that they don’t feel valued or appreciated. Salary benchmarking will allow you to know where you stand and define your compensation policy. After that, you need to create a specific strategy to communicate the reasons why your salary is higher or lower than market value.

These reasons might include:

  • The business’ early stage

  • Equity

  • Pension, healthcare, and other benefits

  • Your organizational culture

  • Your values and mission

  • The type of work they’ll be doing, among others.

A startup might be able to offer a less competitive salary than a well-established organization but provide more interesting work opportunities in the future, as well as equity and a solid benefits package.

Provide a positive employee experience

Employee experience, or how your employees feel about their work and your organization, is one of the most important contributing factors to the success of a business. Unsurprisingly, compensation is an important element of it.

A good employee experience is not simply about salaries, but about feeling valued and empowered. To provide a positive employee experience and retain your employees, you need to be transparent about the reasoning behind your compensation policy, and also be clear about your long-term strategy.

Some of the ways you can show your employees that you value them is by:

  • Having a clear, well-defined compensation plan that you discuss with each staff member

  • Implementing a unified workspace platform where employees can access all information relevant to their compensation and benefits, and make choices important to them in a seamless manner, such as selecting and switching benefits and pension savings, purchasing or selling options, and more

  • Frequently asking them for feedback and taking meaningful steps to implement it into your processes.

All of this shows them that you’re transparent, honest, and respectful, and that you value their contributions, time, and energy, and that you’re open to constructive feedback.

Benchmarking salaries is key to this, as you need to have clear information on market value and be able to communicate your compensation strategy.

It also allows you to offer the right compensation to new hires: If you ever need to make a downward adjustment to salaries, this would have a profoundly negative impact on employee experience, satisfaction, and retention, and if an employee needs to be replaced, you’ll need to bear the associated turnover costs.

What data should you use for benchmarking salaries?

There are several approaches to salary benchmarking:

  • Use salary surveys from employers or employees

  • Use crowdsourced data

  • Fetch data from job postings

  • Use government labor market data

  • Get advice from a compensation and benefits professional

Let’s look into each one.

Salary surveys