What Is Salary Benchmarking?

Salary benchmarking involves comparing pay rates for similar positions advertised by external organizations. Human resources and hiring managers may consider several factors when trying to obtain accurate market salary data. Some of the factors that can affect pay rates include geographic location, experience, education level, job responsibilities, organization size and financial resources. Other factors that might be included in determining the salary for a position include the strength of the company's benefit package and its total rewards system.

When a company determines how much it should pay employees in certain positions, the hiring manager will usually come up with a salary range. For example, a company seeking to fill customer service representative positions might decide on a salary range of between $25,000 and $35,000 U.S. Dollars (USD) per year. In order to come up with this range, the human resources department will perform salary benchmarking. One of the methods that companies use to benchmark pay rates is to compare the amount offered by other companies for positions with the same title and job duties.

Large organizations may use the services of an outside company or online tool to perform salary benchmarking. With some of these tools, a hiring manager can locate aggregate market data for a specific geographic location, title or job specialty. When conducting research, a firm might also obtain market pay rates that take into account differences in education and experience level. For example, some companies pay employees a higher salary in entry-level positions if they have a bachelor's degree or a certain amount of experience.

Accurate salary benchmarking attempts to locate market pay structures for positions that are similar in terms of job responsibilities. Since comparing job titles alone can be misleading, the actual scope of the work performed in a position will often be used to help determine the salary range. For example, the duties of positions with the title of "sales representative" can vary widely. Some sales representatives focus on account maintenance and customer service for established clients, while others spend most of their days scouting for new business and delivering product presentations.

In some cases, salary benchmarking also considers the organization's ability to deliver a comprehensive benefits or total rewards package. For instance, some employers cover the full cost of an employee's insurance in exchange for a slightly lower salary. Other large organizations may include benefits like stock options, matching contributions for a retirement plan, or annual performance bonuses. Most companies use salary market data in order to remain competitive, reduce turnover, and recruit the best talent possible.