Introduction to Salary Benchmarking
Salary benchmarking, also known as market pricing, is the process of comparing an organization's compensation levels to external market data to ensure pay remains competitive. This practice has become the dominant method for setting pay levels in most industries, often supplementing or even replacing traditional job evaluation approaches. For SHRM exam candidates, understanding market pricing methodology is a core competency in compensation management.
The Market Pricing Process
Step 1: Identify Benchmark Jobs
Benchmark jobs are positions that are common across many organizations, have standardized duties, and are frequently surveyed in compensation studies. Ideally, 60 to 70 percent of an organization's positions should be benchmarkable. Jobs that are unique to a specific organization (sometimes called non-benchmark or proprietary jobs) must be priced through internal alignment techniques such as slotting.
Step 2: Select Appropriate Surveys
Choosing the right salary surveys is critical to obtaining accurate and relevant data. Consider these factors when selecting surveys.
- Industry match: Surveys should represent the industries from which you recruit and lose talent
- Geographic scope: Data should reflect the labor markets where your employees work
- Job matching accuracy: Survey job descriptions should closely match your positions
- Data currency: Survey data should be recent, typically no more than 18 months old
- Participant quality: Surveys should include reputable organizations of similar size
Step 3: Match Jobs to Survey Data
Job matching requires comparing the essential duties, scope, and requirements of your positions to survey job descriptions. A match is generally considered valid when at least 70 percent of the job duties overlap. Avoid matching solely on job title, as titles vary widely across organizations.
Step 4: Analyze and Age the Data
Once matches are made, analyze the survey data using appropriate statistical measures. The most commonly referenced data points include the 25th, 50th (median), and 75th percentiles. When using data from multiple surveys, you may need to age the data to a common date using a market movement factor, typically 2.5 to 3.5 percent annually.
Step 5: Develop Pay Structures
Use the market data to build pay ranges with defined minimums, midpoints, and maximums. The midpoint typically represents the market rate for a fully qualified performer. Range spreads vary by job level, with broader ranges at higher levels (60 to 80 percent for executives) and narrower ranges for lower-level positions (30 to 40 percent).
Key Compensation Metrics
- Market ratio: The organization's actual pay divided by the market rate. A ratio above 1.0 indicates the organization pays above market.
- Compa-ratio: An employee's actual pay divided by the pay range midpoint, showing where they fall within the range.
- Range penetration: Shows where an employee's pay falls as a percentage of the total range spread.
Common Challenges
Market pricing is not without its difficulties. Organizations must navigate survey data limitations, rapidly changing labor markets, remote work considerations that blur geographic boundaries, and the challenge of pricing unique or emerging roles. Additionally, an overreliance on market pricing can perpetuate existing market inequities, particularly for roles historically underpaid due to discrimination.
Integrating Market Data with Internal Equity
The most effective compensation strategies balance external competitiveness with internal equity. This means using market data as a primary input while also considering factors such as job evaluation results, organizational hierarchy, and employee perceptions of fairness. When market data and internal equity conflict, HR must make thoughtful decisions about which to prioritize based on the organization's compensation philosophy.
SHRM Exam Relevance
Expect SHRM exam questions on survey selection criteria, job matching best practices, aging data, interpreting percentile data, and building pay structures. Understand how market pricing relates to and differs from job evaluation, and be prepared to recommend approaches for pricing non-benchmark jobs.