For compensation professionals, market pricing sits at the core of many responsibilities and outcomes

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 important 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 labour market (i.e., 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.

Why is salary benchmarking important?

Salary benchmarking involves analyzing salary surveys to find positions that align with the skills, responsibilities, and qualifications of jobs 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.

The result is usually a market reference point that enables you to group 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, weighing, 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 benchmark methodology

Although the level of detail in a salary benchmark methodology may vary, 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 benchmark methodology without understanding your organization's goals for positioning pay among your labour market competitors.

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 labour market competitors
• the role that pay-for-performance plays

In any case, you must understand your company's target pay positioning in the labour market to develop a benchmark methodology. If that's not in place, that's your first task — get to work!

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 labour 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.

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 Resource job or an Administrative Support role can typically be 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.

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 — whether that's a market pricing tool or a spreadsheet — that you're missing data elements you need.

Use your compensation philosophy as a starting point to identify the data elements you will need to analyze your salary range competitiveness each year. Most organizations will collect some variety of base pay, short-term incentives, long-term incentives, total cash compensation, and total direct compensation at the 25th, 50th, and 75th percentiles, 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 benchmark methodology to document which data elements to pull for each data cut. By doing so, you will have a clear salary survey 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 take broad employee groups or departments (e.g., 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.

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. Again, you can achieve consistency and efficiency by establishing a set of market pricing guidelines for blending data in your salary benchmark methodology.

Combining data

The simplest method for developing composites is to average the adjusted market data1 for each pay element. Even in those cases, you will need to determine how to address data anomalies, such as zeros.