Comparing Employee Compensation & Handling Compensation Conversations

If you want to attract and retain top performers, the salary you offer matters. You want it to be enough to close the deal. But you don’t want to put the new hire out of sync with your budget, other people doing similar work, and your compensation philosophy. One exercise businesses can undertake to find the sweet spot is compensation benchmarking.

This competitive compensation strategy can help employers promote fair and competitive compensation offers. This article will explain what compensation benchmarking is and how you can execute it as part of your hiring practice.

What is compensation benchmarking?

Sometimes called salary benchmarking, compensation benchmarking is a process HR professionals and business managers use to help them match an internal job with market pay data, salary surveys, or other compensation metrics to identify the market rate for each position.

It can help you to offer fair (or even competitive) market rates, and make you a more competitive employer in the quest for top-notch talent. Compensation benchmarking can also help keep your employees happy and satisfied in their jobs. When people find out they are making less than someone with the same same job title or job description trouble often ensues.

Compensation benchmarking can make it much easier to balance your budget while reducing or eliminating salary disparities — a win-win for both employer and employee.

How is benchmarking done?

Salary data surveys are a good first stop as you determine pay scales for positions. Remember that survey data collected by a third party is more accurate than information self-reported by employees. Several salary comparison tools aggregate market data for specific roles.

The Bureau of Labor and Statistics offers years of comparative wage data for many occupations at the national, state and metropolitan level.

Glassdoor and Indeed provide a free tool for salary comparisons.

PayScale, Salary.com, and LinkedIn Salary require a subscription or payment to access data, but contain a large number of job titles and data sets.

Once the right data is in hand, match internal job descriptions to external job data. This process is the essence of compensation benchmarking. It can get a little complicated, however.

Many companies, especially small businesses, have roles filled with people who wear many hats. So it’s important to identify the key attributes of a position. If a given position involves, for example, running social media, explore the going rates for social media marketers. Estimate the percentage of time you expect your employee to dedicate to social media. With that number, you can decide how much of their labor costs should reflect that work. Break down the rest of the position in the same manner to help determine the labor costs associated with the position. The most valuable skill in the job description, however, might carry extra weight as you determine the pay range.

Some companies hire a compensation consultant to help them sift through the salary benchmarking process. These experts are skilled at analyzing salary data and labor costs. They also are aware of the best practices to use in comparing your internal jobs to external market rates.

Set pay ranges and salaries

Once you’ve aggregated the internal and external data associated with each of your job descriptions, you can begin to set a pay range for each position that is aligned with current market trends or a reliable salary survey. As you develop your list of salary ranges for current and future job roles, consider:

• The size of your organization.
• The range in the hierarchy between your lowest and highest ranking jobs.
• How you calculate pay increases and promotions within your organization.

The compensation management strategy at many companies is to target the middle of a salary range. They want to leave wiggle room for salary negotiations. Find the midpoint of the market value for each job title, based on salary data. Next, calculate the spread between the minimum and maximum salaries for the role, or how much negotiating room you want to create.

Setting pay ranges can help keep you competitive. Candidates who are very qualified might come from either end of the spectrum.

How do I analyze compensation packages?

When building compensation packages, employers should pay special attention to the job type and geographic location of the role instead of locking themselves into set salary ranges across the board. Cost of living can have a dramatic impact on the salary range. States with higher costs of living typically offer higher average wages; workers in Silicon Valley will likely receive higher salaries than workers in the Midwest for the same job title.

If you have a distributed workforce with employees in different states, consider adjusting wages based on the cost of living. To ensure an accurate comparison between salary data and roles, look at job responsibilities and descriptions rather than job titles, as titles often vary by organization.

Lastly, look beyond base pay as you analyze compensation data. Consider how you will balance salary with bonuses, performance-based pay increases, and other forms of equity, like profit sharing and stock options.

Can I evaluate compensation without benchmarking?

Occasionally, compensation benchmarking isn’t feasible for a particular role because survey data doesn’t exist. Sometimes the role is brand new to the market and there is little information for comparing salaries.

In these cases, you must determine appropriate compensation from scratch to develop a competitive salary. You can do this by evaluating the business impact of the role, gathering background information for job responsibilities, and comparing the overall compensation package to similar roles.

Finally, you’ll need to gain leadership buy-in for the new pay structure. Document your process to aid in future evaluations. This will be important, in part because a market salary for that new position will begin to emerge and influence future salary benchmarks.

How do employees respond to compensation benchmarking?

Because compensation benchmarking keeps pay transparent and more equal, employees tend to love it — especially if it applies to promotions, too. This goes a long way toward earning employee retention and boosting employee morale.

Of course, compensation is about more than just money. Fair and competitive compensation includes benefits like 401(k) matching, paid time off, and vacation time. As you establish the levels at which people will receive promotions and what those promotions will contain, remember that a promotion can come with a mix of these elements.

Because compensation benchmarking helps to ensure that you’re not underpaying your employees, both in relation to their coworkers and to outside rivals, you can establish yourself as a competitive employer with high job satisfaction rates. This helps to attract the attention of top talent.

The value of a compensation philosophy

If you are in charge of recruiting, hiring, and retaining talent for your company, then you know the challenge of competing against other organizations to attract the right employees. By using compensation benchmarking, you can protect the interests of future and existing employees while positioning the company for sustainable growth.

Compensation Conversations: Why They Matter and How to Proceed

How often do you talk to your employees about compensation? Many managers find employee compensation conversations uncomfortable. Yet it’s important to talk with employees about their pay and benefits regularly and compare their current salaries to market rates for their positions. In this article, we’ll explore how to start a compensation conversation and why these discussions are important.

What’s so important about discussing employee compensation?

Discussing employee compensation opens a dialogue about pay and benefits. Managers gain the opportunity to discuss the salary range for the employee’s role and scenarios in which they may be eligible for a salary increase, promotion, or bonus. If the employee is already taking on extra work and responsibilities, the angle is slightly different. The employee gains the opportunity to talk about their current salary and reasons why they may deserve a pay increase.

Why are compensation conversations difficult?

Employee compensation conversations can be difficult for different reasons. Among them is the fact that many people believe it’s inappropriate or rude to discuss what others consider “taboo” topics. Typically those include politics, religion, and money. Compensation conversations are about money. For that reason, many people simply don’t feel comfortable or don’t know how to approach and discuss the topic. But while pay transparency in social settings may not be the norm, in an employment relationship it’s a necessity.

9 Tips and talking points for discussing compensation

If starting a conversation about compensation seems daunting, don’t let that stop you. These tips can help you address the points that are most important to you and your employees.

1. Review your company’s data on employee compensation

Before initiating the compensation discussion, it’s a good idea to review your company’s policy on employee salaries and wages and all the current employee compensation data. By reviewing these items, you’ll understand the basics of how your employees are compensated for their time. This can help you start thinking about the topic in a logical fashion.

2. Review your company’s policy on promotions

Reviewing your company’s policy on promotions allows you to discuss options with your employee. This is especially helpful if they are currently up for a promotion or you see advancement in their future. The conversation can then shift naturally to the next steps in the employee’s career path.

3. Review data on industry salaries

What are the high, low, and average salaries of other individuals in the field? Does your employee’s salary fall into that range given their levels of education and experience? Performing this step can help determine if an employee is being paid fairly and ensure they’re not being underpaid. Employers who want to keep good talent aim for salaries that meet or exceed those at other companies.

4. Start salary discussions early

When it comes to talking about salaries and salary expectations, it’s best to get started early. Most prospective employees want to see your salary range in your job ad. This immediately lets the employee know if you can pay their preferred wage. If you don’t list the salary range in the job ad, bring it up as soon as possible in the interview process, preferably during the first call. From an employee perspective, this demonstrates that you are upfront about your pay and benefits and likely transparent in other areas of your business as well.

5. Review the employee’s performance

If you plan to discuss compensation with an existing employee, review their performance in advance. Have they been on time with their reports and met or exceeded all their performance metrics? Are they showing initiative? Have they completed all the training for their position and inquired about more? If so, your employee may deserve more compensation.

If you discover they’re on a performance management or improvement plan, prepare to discuss their current salary and how to attain a higher salary tier or raise.

6. Open on a positive note

Regardless of the content of the compensation or salary conversation, always open on a positive or neutral note. If you’re talking with a new hire, simply remind them of your salary range and ask if that range is acceptable.

When broaching compensation matters with existing employees, let them know you’d like to schedule a meeting about their current pay, benefits, and career goals. Once the meeting begins, explain the discussion topic again and invite questions up front.

7. Ask relevant questions

During those meetings, ask relevant questions for information and clarification. These questions could include:

• How do you like your current position?
• Do you feel you are being paid a fair pay rate for your position, experience, and education?
• What job title or position would you like next?
• Do you know the average salaries or pay ranges for people in your field?
• Are you ready to take on more training or learn new skills to position yourself for a potential promotion or raise?

8. Remember to listen

As questions are asked of you, remember to listen and not interrupt. They can lead you to points you hadn’t thought to address now or in the future. For example, do you need to better educate employees on your benefits plans or the company vision for expansion? Provide relevant and informational answers. And try to gain an understanding of how the employee feels about their position, the company, and advancement prospects.

9. Review compensation regularly

Plan to review each employee’s pay and compensation package regularly. Compare them to the national averages for similar positions. You never want an employee to fall behind the pay scale, especially if you like their performance and work ethic. Also analyze what other key compensation metrics you’ve established for insights about your current plan’s effectiveness. Generally, it’s wise to review salary and benefits packages yearly.

When it’s time to discuss salary and salary expectations, have no fear. Instead, be confident in the knowledge that you’re devoting worthwhile attention to important elements of mutual growth and stability. Embrace the opportunity for transparency and positive dialogue. With current employees, the compensation conversation can involve their personal growth, career goals, and next steps for achieving them. Discussing salary with prospective new hires is an initial step toward establishing a good employer-employee fit.

Compensation Issues: 6 Problems to Control

HR professionals and hiring managers often walk a fine line when it comes to employee compensation issues. If you are involved in the hiring process, you’ve probably already faced challenges with compensation structure and pay levels for existing and new hires. If you haven’t, the chances are good you will at some point.

The Bureau of Labor Statistics (BLS) reported on Dec. 2, 2022, that average hourly earnings were up 5.1% over the previous year. However, that was below the inflation rate for the same period. That means employers could face compensation challenges.

In the following sections, we’ll cover 6 of the top compensation issues that HR leaders often face when navigating the compensation strategy for new and current employees.

1. Compensation planning

Compensation planning means you don’t leave it up to chance whether you attract top talent and retain it. A strategic long-term approach, if done right, can help keep employees happy and reward them for their efforts. Many businesses struggle to balance compensation needs with their current financial position and future goals. But that’s really an argument for planning, rather than against it.

Compensation planning involves weighing the levels of pay rates, bonus structures, raises, and other perks. Achieving the best balance of compensation and company finances can be difficult. Finding it, however, can help a company keep its positions filled with top talent and gain a competitive advantage.

2. Internal equity

Internal equity means you provide the same level of compensation to all employees who fill comparable positions or use similar skill sets to perform the same jobs or similar ones. Compensation includes:

• Base salary
• Employee benefits
• Job perks

If you don’t develop internal equity, you risk losing employees and potentially facing lawsuits since equal pay for equal work is required by law.

3. Employees’ perceived equity

The way your team perceives equity is vital. Even if they are getting what the market commands, they might feel underpaid if they think they are overworked. Likewise, once they start to think that someone or some group is being treated more favorably, the perception of unfairness can grow quickly. When this happens, it often leads to lower engagement and morale. Certain things tend to foster a perception of equity, such as: information, transparency, listening to employee concerns, and adherence to standards for managers’ interactions with staff. The goal is to help employees see that they are valued and are compensated accordingly.

4. Lack of a human resources department

Many small and mid-sized businesses don’t have a dedicated HR department to address compensation matters. As a result, mistakes may occur, and some of them might damage a brand or break employment laws.

Hiring a compensation consultant can help SMBs overcome compensation challenges, including:

• Setting salaries and pay grades
• Making salary adjustments
• Recommending bonus structures
• Initiating retirement plan savings
• Establishing other compensation benchmarks

With this kind of expert help, small businesses can stay abreast of the latest compensation trends. Both compensation consultants and compensation management software can help a business address top compensation issues, remain competitive, and sidestep legal problems.

5. Geographical differences

Technology has drastically widened the talent pool and employers have the option of hiring people from all over the country or even the world. However, companies must consider factors like local cost of living as they decide whether remote employees earn enough money. At the same time, they must balance requirements of equal pay for equal work.

Depending upon the size of the company and whether employees perform remote work or in-house, geographic differentials can complicate compensation programs for many employers. In addition to setting compensation, they must explain location-based differences to other team members.

6. Executive compensation

Good executives and senior managers are a key to achieving positive business results and strong company performance. Executive compensation packages play an important role in securing top talent. Common items to include are:

• Base pay.
• Health benefits.
• Retirement benefits.
• Short-term and long-term incentives (e.g. stock options).
• Bonuses.
• Other fringe benefits.

Not all companies can afford to offer massive executive compensation packages. However, companies can offer more flexibility and creativity in their compensation to draw great leaders, too.

Staying on top of compensation issues

Employers who promptly address compensation issues can build an employee-friendly environment with a reputation that draws talent. Even the most organized businesses can develop problems, but a proactive stance gives you the best chance for success.

Best Practices for Compensation Comparison

Whether you’re a business owner looking to hire or a worker hunting for a job, one word is at the top of your mind: salary. For employers, compensation comparison can feel a bit intimidating. How do you know if you’re offering the right salary? And how do you keep your employees’ salaries correct down the road?

Let’s take a look at some best practices for compensation comparison and determining compensation for employees.

What’s the best way to determine the salary of my employees?

In this article, we’re going to discuss 5 best practices for compensation comparison and salary determination.

• Determine the value of the position.
• Research mean pay rates in your industry.
• Set a pay range.
• Consider perks and benefits.
• Stay flexible.

1. Determine the value of the position

Hopefully, you already have a detailed job description for the position. (If not, then you might want to complete that step first– here’s a post to help.) Think about variables such as:

• Job title
• Duties
• Hours of work per week
• Travel involved
• Seniority
• Level of education and experience required
• Remember to be truthful and include the good and the bad

Now consider how much time and energy it will take to do the job. What would you expect to be paid for that? Also think about the value that this position brings to your organization. Will this person have a basic skill set, or is this specialized work that your firm can’t live without?

2. Research mean pay rates in your industry

You want to be competitive. You can only attract the best employees if you pay at least as much as other businesses in your industry. You also want to know that you’re paying your employees fairly, and that you’re not overpaying them.

Research the median pay for each position in your firm. You can use that information to predict what salary a new recruit will expect. It should also give you a good idea of how an employee’s experience, education level, and other qualifications affect salaries across the industry.

To do this, use software with reliable and statistically significant data. Make sure it takes into consideration your field, the size of your company, the benchmarks of similar companies, and the details of the role.

3. Set a pay range

Now that you know the median salary for your position, you should be able to determine a minimum and maximum that your company is willing to offer. Of course, it’s important that your pay range is feasible as well. If you offer a salary that you can just barely afford, you may not be able to sustain that position in the future.

Ask yourself: What is the minimum amount that a candidate is likely to accept? What is the maximum amount that I can afford to pay comfortably? There’s your pay range.

Including salary ranges in job descriptions may give you a competitive advantage in attracting top candidates. In a LinkedIn study, over 70% of participants said they want to hear about a position’s salary in the first message from a recruiter.

4. Consider perks and benefits

Usually, the base salary will be the most significant component of your compensation package. But you may have other perks that could sweeten the deal for a potential hire. Think beyond the common benefits like health insurance and retirement accounts. Can you offer tuition reimbursement? An employee discount, stock options, paid time off, wellness programs, and weekly catered lunches are other ideas. Many employers offer attractive benefits and perks that make their workplace attractive to employees.

Make sure to establish your organization’s benefits program objectives, and the available budget for spending on benefits.

5. Stay flexible

Depending on your personality type, you may love or hate haggling. But regardless of your feelings on the subject, you should expect new hires and even existing employees to try to negotiate their salaries. This is actually a positive characteristic. When employees know their worth and confidently negotiate on their own behalf, that means they are capable of doing the same for your company.

It’s important for employers to remain flexible during these negotiations. Don’t give more than your can afford, but do try to compromise when you can. It will go a long way toward improving your relationships with your staff.

Though compensation comparison can feel a bit intimidating to some employers, it doesn’t have to be. Use these best practices so that you can feel confident that you are offering the right salary to attract the best employees.