Benchmarking Employee Compensation: The Art and Science of Ensuring Competitive Pay within an Industry

Companies often engage in the practice of benchmarking employee compensation with other organizations within their industry. This is known as benchmarking, and it is a method that helps ensure that salaries and benefits are competitive. In this article, we discuss the reasons behind this practice and the steps companies take to conduct such comparisons.

Key Reasons Why Companies Engage in Benchmarking

There are several compelling reasons why companies engage in benchmarking for employee compensation:

Attracting Talent

One of the primary goals of benchmarking is to attract the best talent in the industry. Competitive compensation packages are essential in the job market, where employers need to stand out against their competitors to attract the top candidates.

Employee Retention

Understanding industry standards is crucial for employee retention. Even the best talent in the world may leave a company if they feel they are not fairly compensated compared to their peers. By benchmarking employee compensation, companies can ensure that their salaries are competitive, which can lead to better retention rates.

Market Positioning

Companies want to position themselves favorably in the market. Compensation is a significant factor in this positioning. Benchmarking can help companies ensure that they are offering salaries that match or exceed those of their competitors, thereby reinforcing their market position.

Performance Management

Benchmarking can also inform performance management systems. By aligning pay with industry standards and employee contributions, companies can create more effective performance management systems that reward high performance and encourage continued development.

Legal Compliance

Companies must also ensure that their pay practices comply with laws regarding equal pay and wage transparency. Benchmarking can help them stay compliant and avoid legal issues related to pay practices.

Conducting Salary Surveys: A Necessity or a Nightmare?

To effectively benchmark employee compensation, companies need to conduct salary surveys, industry reports, and gather compensation data from consulting firms. However, regularly conducting these comparisons is essential for several reasons:

Companies that do not conduct such comparisons periodically or at all may have no defense against claims that they either underpay or overpay. This can result in legal challenges and reputational damage, which can negatively impact their HR policy standards.

Company pay policies are typically based on relatively equivalent comparative peer relationships. Even if these policies are not always applied, they must exist and be up-to-date to meet HR policy standards.

The Challenges of Conducting Salary Surveys

Conducting salary surveys can be a challenging and complex process. Here are some of the issues that companies may face:

Identifying Comparative Employers

One of the most significant challenges is finding sufficient relevant comparable employers in specific hiring locations. This is a difficult task, as the companies willing to volunteer their pay information may be limited.

Evaluating Benchmarked Observations

Once data is collected, companies must evaluate the accuracy and reliability of the benchmarked observations. This requires a combination of statistical analysis and vetting to ensure the data is trustworthy.

Updating Figures and Applying to Policy Lines

Updating the figures and applying them to the company's desired policy line is another critical step. This requires careful analysis and strategic planning to ensure that the company's compensation practices are competitive and aligned with its goals.

Competitive Pay Surveys and Antitrust Regulations

While benchmarking and salary surveys are essential for ensuring competitive pay, they can also raise antitrust concerns. Competitive pay surveys can potentially violate antitrust laws if they are not conducted properly.

The U.S. government has established a joint agreement between the Federal Trade Commission (FTC) and the Department of Justice (DOJ) to carefully define the "safe harbor" provision. This provision allows for surveys that do not violate prohibitions against illegal restraint of trade.

The safe harbor provision requires that a professional outside objective pay consultant conduct and report the survey results. The results should be slightly out of date and cannot be individually identified to avoid exposing participants to charges of illegal collusion.

Conclusion

In conclusion, benchmarking employee compensation is a vital practice for companies. It helps attract top talent, retain employees, maintain a favorable market position, and ensure legal compliance. While conducting salary surveys can be challenging, it is a necessary step for companies to stay competitive and avoid legal issues.

Companies must regularly conduct these comparisons to stay competitive and meet HR policy standards. By working with professional consultants and following the guidelines set by regulatory bodies, companies can ensure that their compensation practices are fair, competitive, and in line with legal requirements.