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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,, 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 ensure that you’re not underpaying your employees, both in relation to their coworkers and 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. Let's 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.

8 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.

Key Considerations for Business Alignment and Growth

  1. Alignment with Business Strategy:

  • How does our compensation plan align with our broader business strategy and goals?

  • Are our pay structures designed to incentivize the behaviors and performance outcomes we value most?

  1. Cultural Fit:

  • Does our compensation philosophy reflect our company’s culture and the high-performance environment we wish to sustain?

  • How do we reward teamwork, innovation, and other cultural values through our compensation plan

  1. KPI Development:

  • What KPIs can we establish to ensure our compensation strategy is driving the desired results?

  • How do we track the effectiveness of our compensation plan in promoting high performance?

  1. Market Competitiveness:

  • Are we regularly comparing our compensation packages against the market to ensure we remain competitive for top talent?

  • How do we adjust our compensation plan to reflect changes in the competitive landscape?

  1. Performance Incentives:

  • How do we tie individual and team incentives to performance metrics that reflect both short-term results and long-term growth?

  • What measures are in place to ensure that performance-based pay is transparent and understood by all employees?

  1. Employee Development:

  • How do our compensation and benefits encourage ongoing employee development and career progression?

  • Do we offer learning and development opportunities as part of our compensation package to foster a growth mindset?

  1. Equity and Fairness:

  • How do we ensure equity in pay across all levels and roles within the organization?

  • What steps are we taking to address any disparities and promote pay equity?

  1. Flexibility and Adaptability:

  • How flexible is our compensation plan to adapt to individual employee needs and changing business conditions?

  • Are we able to customize compensation packages to attract diverse talent and meet individual performance goals?

  1. Total Rewards Strategy:

  • Beyond base salary, how are we using our total rewards strategy to attract, motivate, and retain employees?

  • Do our benefits, bonuses, and other forms of compensation align with the performance and behaviors we’re trying to drive?

  1. Leadership and Management Training:

  • How well-equipped are our leaders and managers to have effective compensation conversations with their teams?

  • What training do we provide to ensure they can explain the rationale behind pay decisions and promote a transparent pay culture?

By contemplating these questions, you can create a compensation plan that not only attracts and retains talent but also fosters a high-performing culture aligned with clear and measurable KPIs.

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