Use salary benchmarking data to make better decisions on compensation
Most businesses don't know where to start assessing competitive wages because they don't have the information and resources to gain insight into market rates. In this article, it is articulated how executives can use salary benchmarking data to make more informed decisions about salaries and attract their top talent.
Traditionally, it is the duty of managers to give employees a raise in salary once a year in order to compensate them and keep them motivated. However, the world of work is changing, and to reflect these changes, compensation strategies need to evolve. The modern worker wants not only a competitive wage but also greater transparency in compensation. This means that progressive managers not only need to consider realistic pay benchmarks as part of their compensation plans but also need to be able to communicate how decisions on wages are made.
Where to start when benchmarking?
Properly run organisations have remuneration committees in place for precisely this reason, but it can be difficult to know where to start without any clarification on the compensation packages provided by other organisations. Salary surveys can be useful for benchmarking at higher levels, especially with the large volume of data that can be generated when comparing pay for roles that are relatively common in the marketplace. However, these are not as useful at the highest level – where there are simply fewer roles to compare and we typically see a huge variation in the composition of compensation and benefits packages.
What is salary benchmarking?
Benchmarking wages will help companies solve these problems. Essentially, this is a method that is much more oriented and comprehensive than a conventional wage survey. Benchmarking provides a complete overview of the compensation package helping companies to compare salaries and benefits offered across specific sectors and designated firms. Therefore, it's a much more precise science in general.
When it comes to pay decisions and conversations, access to wage benchmarking information can be a powerful tool. Here are three ways in which salary benchmarking data can provide managers with the required data to make more informed compensation decisions:
1. Make more informed merit decisions
According to Talent's 2018 Pulse, respondents expect an average salary increase of 5 percent per year, and those who have been with their organisations for three to ten years expect an annual salary increase of 10 percent. Nonetheless, the average pay rise in 2019 in America is estimated to be around 3.1%, and companies expect to raise their best talent by about 4.6%. Employee expectations have changed, meaning that a percentage increase is no longer effective each year based on performance and increasing living costs. Many other considerations, such as time in place, compa-ratio and market price, should be weighed when deciding on an increase in fair and competitive merit. Exposure to compensation benchmarking information can help managers understand what the scope is for a position in order to compare it with other criteria in order to make an informed decision to increase the value.
2. Address potential flight risk
It is important for businesses to retain their best talent and recognise workers who are a potential flight risk. Nevertheless, executives do not always recognise such risks in a timely manner without the right experience, and as a result, their top-performing workers leave to pursue other opportunities. According to Zimbabwean labour recruitment statistics, employees are looking for other jobs at an unprecedented rate. The top reason employees left their last job was because they didn’t make a good salary. Administrators can gain insight with the right benchmarking data as to whether they pay their top performers below the market rate. Such information will help administrators identify flight risks before it is too late for them to take constructive action.
3. Enabling managers to have more transparent pay discussions
Employees of today want more accountability in terms of pay and benefits. In fact, 33 percent of workers refused a raise were given no reason behind it, and Ceridian's 2019 Work Experience report found that only 30 percent of employees were fully satisfied with the accuracy of their work data. Another recent study in America, found that for employers to retain employees, compensating top talent at market value and discussing how pay was determined is more effective than paying them more than market value and keeping them in the dark about compensation decisions. All this demonstrates that salary benchmarking information, combined with transparency in other employee data such as performance, compa-ratio, and job time, will allow managers to have these critical salary decision-making conversations with employees.
Organisational benefits from using benchmarking data
Benchmarking is an important tool and useful investment for HR to benefit the company by attracting and retaining the best talents while controlling the organization's wages and costs in the right way. In terms of internal and external benchmarking, it is critical from a people's perspective to ensure fair wages. This is to make it easier to connect with employees and managers and make pay decisions on a solid data collection. Employee costs are usually one of the organization's major cost elements from an economic point of view. HR is, therefore, responsible for one of the key cost drivers.
Benchmarking helps to make the right wage management decisions and thus has a significant impact on the organization's cost management. These two aspects have a major impact on risk management when considering the loss of key talent as well as the cost escalation.
Last but not least, the organisational dimension of benchmarking should not be ignored. Although benchmarking may at first seem difficult, some simple guidelines aid in a comprehensive approach to performing a benchmarking project that will lead to useful results. It is important to equate "apples with apples," which is valid for the occupations to be benchmarked, and to ensure that compensation components are equal to each other – both internally and externally. Also, the definition of a relevant reference market should not be underestimated, and it should be understood how the data was collected, calculated, and manipulated when using benchmark data.
In conclusion, with pay variations potentially the difference between retaining or losing highly valued managers and keeping shareholders happy, salary benchmarking can be crucial to an organization's success.
Milton Jack is a Business Consultant at Industrial Psychology Consultants (Pvt) Ltd, a business management and human resources consulting firm.
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