Navigating Compensation Benchmarking: A message to leadership
07.12.23 ArticlesAn organisation’s ability to attract and retain top talent is influenced by many factors. Your current and prospective employees look for many things in an employer. From career development, to doing meaningful work, to leadership and culture. All play a role.
But over the years, what remains consistent when attracting and retaining top talent, is compensation and benefits. McKinsey & Co’s 2022 research placed total compensation in the top 3 reasons why people leave their roles.
As business leaders, you need to understand how your comp schemes and benefits are working for you. And while this practice is important, there are pitfalls to be mindful of.
What is Remuneration Benchmarking?
Remuneration benchmarking is the evaluation of an organisation’s compensation packages against industry standards, ensuring they remain competitive and aligned with market trends. This information acts as a compass, guiding businesses in setting salaries, bonuses, and benefits to attract, motivate, and retain employees.
Benchmarking provides actionable data to steer your planning around headcount and budgets, culture, talent strategy, and performance, to list a few.
Competitive compensation enhances an organisation’s attractiveness to top talent – but remember, ‘competitive’ doesn’t always mean the most money. Benchmarking helps you understand how attractive you are to the talent market. It also helps you understand how to structure your compensation schemes to drive your desired culture, values and how to attract the right talent to your business. As well as supporting employee satisfaction, motivation, engagement, and retention. All of which build productivity and drive performance – so what’s not to like?
The pitfalls of benchmarking
Like any kind of comparison, its effectiveness is underpinned by data and its accuracy. So, to go with my benefits of benchmarking, here are my pitfalls to watch out for:
- Data: Be careful that your data set is up to date, sufficient and relevant. Relying on outdated or insufficient data leads to inaccurate comparisons and misguided decisions. This may seem obvious, but I still encounter organisations who routinely base decisions on generalised, largely irrelevant data sets. Taking advantage of “free” comparison tools may save you in the short term, but it will cost you dearly in the medium to long term.
- Averages: Be wary of averages which might not reflect the nuances within a specific function, role, industry, or geography. Tailoring benchmarks to specific requirements will always yield the best results. I personally prefer to use quartile ranges, so you can make decisions about where you want your compensation ranges to fall in relation to your market.
- Silver bullet: Getting your monetary compensation on point does not mean you’ve solved your attraction, engagement and retention objectives. You cannot and must not neglect the significance of non-monetary benefits. In the 2022 McKinsey & Co research I highlighted earlier, 9 of the top 10 reasons for employees quitting their roles was lack of non-monetary benefits.
- Individuality: Mimicking industry standards without considering an organisation’s unique culture and values, might result in misaligned compensation strategies. So, take heed. To counteract this, use multiple data sources, and where possible businesses who bear similarity as a point of comparison.
Tips for successful benchmarking
With all this mind, here are my tips for a successful benchmarking exercise:
- Robust Data: Access reliable and up to date data, from multiple sources such as salary surveys, industry reports, and specialised benchmarking tools to gather a comprehensive data set.
- Customise Benchmarking: Tailor comparisons to specific job roles, skill levels, geographic locations, and industry sectors for more accurate assessments. Where you can partner with other businesses in your industry to share data.
- Consider Total Rewards: Assess not just base salaries but also bonuses, incentives, and non-monetary benefits to provide a holistic view of compensation packages.
- Align with Organisational Values: Ensure that compensation strategies, and benchmarking in support thereof, align with the company’s culture, values, and long-term goals.
- Time: Be prepared to invest the time and resources to produce a meaningful benchmarking program. The investment will pay dividends 10-fold over time.
Remuneration benchmarking remains a cornerstone in the quest for fair and competitive compensation strategies. However, it is essential to tread carefully, avoiding the pitfalls that could lead to misinformed decisions. By leveraging accurate data, customising benchmarks, and aligning strategies with organisational objectives, culture and values, businesses can ensure that their compensation practices truly reflect market competitiveness and foster a satisfied, motivated workforce.