What Is Compensation Benchmarking?

Compensation benchmarking is a process used by companies to determine the salaries that they should pay employees and offer potential hires. This is done by identifying similar jobs that are offered by competitors and finding out what compensation is offered to the workers filling those jobs. Performing compensation benchmarking requires acquiring the research data necessary to perform the comparison between the salaries offered by competitors and the salaries offered by the company in question. The data needs to be accurate and the company should have specific goals in mind pertaining to the benchmarking process for this technique to work properly.

One of the key components to any business is determining how much money to pay employees. This process greatly affects a firm's budget, so it is important to not overpay individuals lest profits be diminished. Still, an organization is only as solid as the employees that comprise it, so it's also important that companies stay competitive in the salaries that they offer. Maintaining this balance is a difficult task, which is why firms may use the strategy of compensation benchmarking to help them along.

As with any other type of benchmarking, compensation benchmarking requires determining some sort of industry standard. Once these standards are determined, the company then must decide where it differentiates from the standard and if this deviation needs to be corrected. If it does, the company must devise the methods by which they can approach the desired standard. In this case, that means adjusting the salary structure of the firm.

It is important that any compensation benchmarking process have definite goals behind it. In some cases, that goal might be to improve the level of employees that can be lured to a company by offering more money to select employees. By contrast, some companies might want to use benchmarking to lower costs, perhaps even determining if some jobs can be combined to lessen the salary burden. With these goals in mind, benchmarking is much more likely to be effective.

Companies must understand the costs associated with compensation benchmarking. To acquire the necessary data that shows the salary levels within a particular market, a company should be prepared to pay a significant amount. In addition, a company that lacks benchmarking expertise in its human resources department may have to hire outside consultants to assist them in the process. While these costs can be substantial, the benefits of the benchmarking process, which can include better employees and lower salary costs, can more than atone for them.