What is salary benchmarking and why is it important?
Salary benchmarking keeps your pay rates in line with market averages to help you attract and keep hold of your best talent. It’s a key element to keep a check on if you’re rewarding your people fairly and competitively without paying over the odds.
But without the right processes in place, benchmarking can be difficult, costly and labour-intensive. This blog shows you the best way to benchmark salaries reliably, quickly and without busting your budget.
What is Salary Benchmarking?
Salary benchmarking is a way of making sure the salaries you pay compare fairly and competitively with the pay offered by other companies for equivalent roles.
Salary benchmarking involves gathering, evaluating and analysing pay and benefits data from various organisations to calculate the standard average for each role. This includes assessing job descriptions by industry and geographic location, as salaries can vary by sector and differ widely in different parts of the UK.
Having collated all this data, you can then compare what you’re paying to the salaries paid by your competitors and peers. You can also keep a close eye on the evolving job landscape to spot salary trends and make sure your pay stays in sync with changes in the market.
All this ensures that you can set the right pay for every role. Pay below the going rate and your people could feel undervalued and soon be looking elsewhere for a better paid job. On the other hand, overpay and you’ll be wasting budget and creating a poorly balanced pay structure that’s awkward to manage and maintain.
As well as helping you onboard, attract and retain top talent, effective pay benchmarking helps HR teams get a grip on costs without sacrificing operational efficiency. Finally, it keeps you on the right side of compliance with the UK’s latest employment laws.
Why is Salary Benchmarking Important?
Salary benchmarking is important because it helps companies set fair and competitive compensation based on accurate data. It confirms that existing employee salaries are meeting job market trends and helps organisations attract talent in a competitive job market.
Done correctly, salary benchmarking comes with plenty of proven business benefits and quickly pays back your investment.
1. Boost Your Employee Retention
Salary and compensation benchmarking helps you understand the dynamics of pay in your industry and set comparative pay rates within your business. These days, retention has never been more critical, and you can’t afford to lose good people by paying below the going rate.
Apart from the cost of hiring, onboarding and training new staff, increased employee turnover is a drain on resources, saps staff morale, harms productivity and can impact the quality of customer service.
High churn can kick-start a cycle of inefficiencies and costs that go on to damage your bottom line. Pay benchmarking helps you minimise staff turnover, combat employee dissatisfaction, and retain the skills and experience of star employees to make your business more competitive.
2. Drive Your Recruitment
If you post job adverts with pay packages at competitive rates, your company is more likely to catch the eye of well-qualified prospective candidates and persuade them to apply. In fact, according to CK Group, a whopping 66% of employees state that salary is an important driving force to them in their decision to start looking for a new role.
Salary benchmarking helps you decide the optimum rates and mix of compensation that appeal most to your ideal recruits and clearly differentiate your business from your competitors.
Attracting the right talent with salaries that match market rates makes it easier and faster to pull together a pool of high-quality applicants and saves you the time, cost and hassle of running protracted recruitment campaigns.
3. Achieve Pay Equity
Salary benchmarking helps you become an equitable employer by making certain all your employees are paid fairly. It cuts the risk of unintentional disparities in compensation based on gender, disability, race and other factors.
By creating a level playing field, benchmarking helps you grow an inclusive workplace culture where all your people feel equally respected and valued.
Pay equity is an essential part of any fair pay philosophy. But this only works if salary benchmarking is run regularly to help you monitor market changes and reflect those in ongoing salary reviews.
It’s important to bring your pay philosophy to life too, by educating your management team on the importance of pay equity and clearly communicating your pay philosophy to all your employees.
4. Protect Your Brand Reputation
A brand’s reputation is shaped by a raft of different factors, from product quality and customer service to financial performance and professional integrity.
A solid brand reputation is hugely valuable and helps drive sales, bolster customer loyalty and grow investor confidence. But corporate reputation also hinges on your standing as a good employer.
If your people enjoy your work environment, rewards and culture, they are likely to be strong brand ambassadors. But, with the ability to share information online in an instant, it’s no surprise that changing a current or prospective employee’s perception of your organisation can happen - and fast.
Take gender pay equity as an example. This is seen as a key indicator of whether an employer is compensating fairly employees across the board.
UK businesses with 250 or more employees are obliged to publish their gender pay gap report annually online. Poor pay gap stats can diminish your brand reputation, both externally to customers and job applicants, and internally to employees who may decide to vote with their feet and move to a more equitable employer.
A fair pay compensation strategy backed by robust benchmarking helps minimise pay gender gaps, keep your employees on-side and maintain a positive employer brand.
5. Avoid Overpaying
Overpaying can prove just as problematic as underpaying. Without accurate pay benchmarking to give you a wider market perspective, it’s easy to set salaries unnecessarily high, especially if some employees are more demanding or perform the same job role for many years.
But overpayment can cause inequity, distort pay structures and create division between colleagues and across teams.
Needless overpaying is an extra burden on your payroll costs too and particularly impactful for businesses working to tight margins or undergoing rapid growth. Worse – ongoing overpayment will damage profitability and make your business less resilient in the face of economic downturns.
Salary benchmarking is a good way of keeping your payroll costs in line, balancing the priorities of paying competitively and keeping your company finances on an even keel.
How to Conduct Salary Benchmarking
Define Your Goals
Benchmarking is much more than a standalone process. It should also feed into your compensation strategy and form part of your wider company roadmap.
First, you’ll need to define your benchmarking parameters, which are dictated by your company size, sector and location.
Map out your current hierarchy of roles and salary ranges by pinpointing the highest and lowest pay rates for each job role. Take growth requirements into account to future-proof your pay benchmarking.
Collect Salary Data
Get a broader picture of what other companies are paying by gathering market information.
Salary surveys and industry reports collate salary data from multiple companies but can quickly become out of date and sometimes come at a significant cost.
While searching recruitment websites, HR publications, networking platforms and online job boards is free, the process can easily become lengthy and labour intensive.
A fast, reliable and cost-friendly alternative is a benchmarking platform like HR DataHub, which connects you instantly to real-time salary averages by collecting salary data daily from thousands of job postings across the UK.
Wherever you choose to source your data, make sure you focus on companies within your industry sector, of a similar size to yours and based in your area.
Analyse and Compare Your Data
Next, create market salary bands for each role by analysing your collected data to define the minimum and maximum pay rates and those in between.
Once you have set a salary range for a role, you can calculate the mean or median salary that equivalent employers are paying.
You can then compare your internal pay range for that role with the market pay range, make necessary adjustments and consider policies or criteria to dictate how employees within the range could earn more.
Communicate and Implement
Use your benchmarking research as evidence to support your fair and competitive compensation strategy and pay conversations with company managers and employees.
Demonstrate fairness by showing how your salary ranges are market-competitive and reflect the averages paid by your competitors and other companies of a similar type and location.
It helps to be transparent about how and when your benchmarking was completed so your colleagues understand its recency and methodology.
Salary benchmarks make it easier to justify current salary adjustments and define criteria for how your employees can achieve future promotions or pay rises.
Salary Benchmarking Tools: What are Your Options?
Good salary benchmarking relies on good employee compensation data. But finding the right information to feed your salary benchmarking process isn’t always easy.
Ideally, you need access to a healthy mix of external data sources to give you a broad sweep of information and a way of cross-checking market salary rates to verify that your data is robust and dependable.
But finding and mining multiple data sources can be a time-hungry and expensive process, making it especially tough on smaller HR teams with constraints on budget and resources.
Here are some of the pros and cons of the most common salary benchmarking tools:
Salary Surveys
Pros:
- In-depth analysis
- Salary levelling
- Enterprise level data
Cons:
- High cost
- Time-consuming
- Requires data submission
- Dated information
For years, salary surveys have been the go-to methodology for HR and pay professionals to take the pulse of the salary marketplace.
Produced by consultants and published annually, salary surveys define pay ranges across a wide variety of job titles and industry sectors. Salary data is gathered from hundreds or thousands of companies and aggregated to show typical salaries for different job positions.
The surveys are available to purchase by employers (often at a sizeable cost), enabling them to compare the salaries they offer with those of competitors and other similar companies.
Although surveys are a credible source of pay market insights, the big downside is a lack of real-time pay data. Salary surveys may take months to compile and produce, so by the time they are published, much of the data behind the insights will be out of step with more recent changes in the fast-moving pay marketplace.
To be fully reliable, benchmarking data must keep up with constant changes in the pay landscape, driven by external factors such as adjustments in work culture, shifts in market demand and supply, or broader economic impacts.
With their hefty price tag, salary surveys can be especially poor value for SMEs with more modest HR budgets. Also, survey publishers routinely gather their pay data from larger enterprise-sized companies, which tends to skew results to favour bigger businesses and make it less relevant for benchmarking in smaller or mid-sized companies.
Whatever your business size, if you’re solely using salary surveys, you’ll probably be relying on out-of-date data to set your pay strategy.
Employee Submitted Salary Information
Pros:
- Cost-free
- Easy to use
- Accessible online
Cons:
- Unreliable data based on self-reporting
- No way to verify accuracy
- Out of date info
Many recruitment sites source salary data from their site visitors. These are usually current or former employees who post anonymously and submit information about their salary, role, location and industry.
Websites like Glassdoor, Reed and Indeed collect this data to create average salaries for a range of job roles and feed into their online salary checker tools. These sites can be helpful for job hunters and employees to check how their pay compares to people in like-for-like roles and can be used by organisations as a data source to understand salaries by job role.
But, because it’s self-reported pay data, there’s no consistency in how people report their total compensation package and no incentive or controls to make sure salaries are reported accurately.
Also, these websites show the mean salary per job role, calculated by averaging all the salaries submitted to their site. Averages aren’t the best practice for salary benchmarking because they’re skewed by outliers. Instead, we always recommend using median salaries during the benchmarking process.
Finally, much of the data used to calculate the pay averages is historical and captured over time. This means the results are out of sync with the actual averages at the time you search.
Manually Reviewing Job Board Data
Pros:
- Budget-friendly
- Uses in-market data
Cons:
- Time-intensive
- Difficult to extract and compare data
- Over-reliance on spreadsheets
Some businesses in the UK still rely on manually scraping job boards to harvest pay data and benchmark salaries.
Although this ‘back to basics’ method may sound straightforward and cost-friendly, in reality it can take days or weeks of painstaking work and lock up the time of valuable team members doing repetitive online research.
With so many different sources it can be hard to validate your results and, once the data has been gathered, extraction and comparison can be difficult and time-consuming. Typically, the data ends up stored in individual spreadsheets and becomes quickly outdated as market pay averages change. The sample you get from manually pulling job-board data also gives you a snapshot of time, meaning that you can't spot spikes or dips in the market that might be skewing your data.
Real-Time Salary Benchmarking Tools
Pros:
- Results in minutes
- No expertise required
- Analysis of niche roles
- Location-specific data
- Real-time market data
- Cost-friendly
Cons:
- Hard to benchmark for senior roles
Today, thanks to advances in technology, annual salary reviews and manual checks aren’t the only ways to benchmark your salaries.
Digital salary benchmarking tools like HR DataHub make it much easier for HR teams to make sense of salary data and make well-informed pay decisions. With no tedious research or spreadsheets to format, you can enjoy access to accurate, reliable, relevant and up-to-date pay insights in just a few clicks.
HR DataHub brings you real-time salary benchmarking based on over 30 million data points. Our up-to-date data is refreshed daily to reflect the latest salary trends and lets you filter and search for specific roles, levels, locations, company size and more.
HR DataHub’s real-time salary benchmarking takes the hard work and uncertainty out of the process. It’s simple to use and returns accurate results for even the most unusual, niche roles in only seconds.
Can you Benchmark Salaries using ChatGPT?
While it certainly is possible to use ChatGPT to estimate salaries, it's certainly not recommended. Why? Because ChatGPT isn’t able to verify the accuracy and freshness of the salary data it is drawing from. Also, ChatGPT doesn’t draw upon all available data sources; it picks and chooses information to try and answer your question the best it can. But you’ll notice if you try the same prompt multiple times, you will get a slightly different answer every time.
Worryingly, we’ve received feedback from the marketplace that HR professionals are regularly utilising ChatGPT for salary benchmarking. If you are doing this, it can actually mean you are overpaying or underpaying your employees quite significantly. The result is inefficient use of budget or unsatisfied employees who choose to leave.
Brittany Schmaling from EBN ran an interesting test that showed ChatGPT benchmarking salaries up to $60,000 more than their salary benchmark data showed. This shows a worryingly high disparity.
To be absolutely certain that you are paying competitively, it’s important to turn to robust, reliable and real-time data sources, such as HR Datahub, to ensure you are not overpaying or underpaying your employees.
Can You Rely on Recruiters to Benchmark Salaries Accurately?
Yes, but we would advise against relying solely on recruiters' salary insights. While a great recruiter certainly knows their market well and will often provide a fairly accurate ballpark, they are also motivated by commission rates. A higher salary for a new employee equals a higher commission rate for them.
Even if a recruiter advises you to pay only £2,000 more than the market average per employee, this will add up over time and ultimately squeeze your budget. To avoid overpaying your employees, we recommend you always validate any salary benchmarks you receive from a recruiter against wide-ranging, real-time salary data.
Common Challenges in Salary Benchmarking: How to Overcome Them
Out-Dated data
The job market is always evolving, so an average salary today may be completely different tomorrow. Always check the recency of your data sources or use a real-time benchmarking tool like HR DataHub to ensure your data is completely up to date. Benchmark regularly to keep up with changes and identify job market trends over time.
Niche roles
Pay data may be limited or difficult to find for some less common job roles. Make sure your benchmarking takes this into account and that you have sufficient source data to calculate meaningful salary averages.
Location variables
Salary rates can vary significantly for similar roles across different cities and regions of the UK. Make sure your benchmarking allows for these variations by focusing your research on salary data specific to your site location.
Time for Research
Salary benchmarking can consume a lot of valuable time, especially if you resort to more traditional methods such as pulling data from job boards and compiling spreadsheets manually. Use real-time benchmarking tools like HR DataHub to quickly access real-time data and salary trend insights in seconds.
Boost Your Pay Benchmarking with HR DataHub
HR DataHub is the only real-time benchmarking tool that collects pay data from all live and historical job postings across the UK. Our salary insights are backed by data from over 30 million job adverts and updated weekly for a truly comprehensive view of the pay marketplace in just a few clicks. Use HR DataHub to make salary recommendations with 100% confidence.
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