A Guide to Salary Benchmarking

Professional businessman analyzing salary benchmarking data on his laptop and documents at his desk in the office.

A company with employees often realizes salaries as the most significant operating expense on the income statement. It is also a complex equation and balancing act, keeping salaries low enough to make a good profit but keeping wages at a level that attracts and retains valuable human capital.

The key to getting the equation right is salary benchmarking, and knowing the steps and best practices for benchmarking will help you balance costs and retention.

What is Salary Benchmarking?

 

To understand the importance of salary benchmarking, we must first define it and show its significance to the organization.

Defining Salary Benchmarking

 

Salary benchmarking is the process of comparing the job descriptions and requirements and their pay ranges with those of similar positions in other companies. Using this process of compensation comparison, the company will learn the salary being paid in the employment marketplace and then be able to adjust as necessary to control costs while attracting and retaining talent.

For successful benchmarking, HR departments will consider such factors as the industry, comparable company size, benefits, location, training needs, and required education or experience. Suppose HR learns the company is over or underpaying for a specific position. In that case, they will adjust to the correct amount to attract new talent while not costing the business unnecessarily.

Once a pay range is known, companies can assess market competitiveness to attract the best employees with the expected salaries. Each role in the business will be part of an overall benchmarking template where data can be entered as tailored for each position. Knowing the specifics of each role, hiring managers, company executives, and other stakeholders will have the reports necessary to determine future salary settings and the impacts on the bottom line.

Salary is only part of the total picture to be competitive in the employee marketplace. In addition to salary, the company will know the benefits that need to be included as part of overall compensation. The organization will calculate everything from the expected health insurance, paid time off, retirement co-contributions, stock options, or parental leave. 

The Significance of Salary Benchmarking

It needn’t be said that one of the most crucial aspects of a company’s future success is attracting and retaining talented employees. The loss of an expert team member and the cost of bringing a replacement employee on board is incredibly high when calculating the intangibles beyond salary and training costs alone.

Businessman discussing salary benchmarking strategies with board members during a meeting in the conference room.

Bringing the most exceptional employees into the company gives the organization a tremendous competitive advantage that could include excellent customer service, future product development, sales success, financial management, and leadership that fosters employee happiness and excellence. Every talented employee lost to a competitor is ceding ground in the form of lost opportunities to outperform the industry.

Additionally, with ongoing salary benchmarking, the company knows the continuing cost increases expected to attract and retain its talent. Suppose benchmarking shows an ongoing trend for percentage increases among other similar firms. In that case, it has a predictive model for the years to come to know where its most significant cost is headed.

The Salary Benchmarking Process

Salary benchmarking entails understanding numerous aspects of the employment market and the company’s place in it. It isn’t as simple as looking at what a similar company offers for a similar position on an employment website.

Four high-level steps comprise the salary benchmarking process.

Data Collection and Analysis

The benchmarking process starts with the data collection necessary to have analyzable information. Finding current data that aligns with the industry, position locations, and job descriptions is essential to setting the correct salaries and overall compensation. The sources matter and need to be complete, accurate, and timely.

Data could come from free services such as the Bureau of Labor Statistics [1], which has wage data for over 800 positions, which can be searched by state, characteristics, or industry. Other free surveys that also provide basic information might be available. The free sources, like the BLS, are helpful but typically fail to account for all the nuances attributable to specific positions. They exist as a starting point where paid data will be more precise and much easier than the time commitment required to aggregate and analyze data within the organization.

If self-compiled, the data will need to be analyzed for how well it aligns with current company positions and noted where it does or does not. The closer the match, the more informed the strategy.

Market Research and Industry Standards

Colleagues reviewing salary benchmarking spreadsheets together on a computer during a collaborative work session in the office.

During data analysis, market and industry standards must come into play. An employee in a construction company might command a very different wage from a similar position in a tech company where the knowledge requirements differ. 

Another factor that comes into play is the market constraints for employees in specific locations, industries, or positions. It could be much easier to fill particular positions in one city than another, impacting the prevailing wage.

As part of establishing standards, it is crucial to document everything that has gone into setting those benchmarks. Management buy-in becomes possible with documentation, and future benchmarking will follow the same criteria.

Knowing the specific marketplace and industry standards is crucial for accurate benchmarking.

Establishing Fair Pay Ranges

When armed with comprehensive data, the organization establishes the pay ranges for each position based on its compensation philosophy and strategy. If the company is committed to paying above-average salaries to attract and retain talented employees, it knows the market standards it must exceed to do so.

Ongoing Adjustment and Revision

A benchmark is based on the available information at a place in time and will need to adjust as time advances. What is a fair salary now could be very different even months later. During the pandemic, we saw many wages change dramatically as companies raced to bring back employees in a period of less than a year. The benchmarks for many positions in February 2020 significantly differed a year later.

Benchmarking can be said to be a process that doesn’t end if attracting and retaining employees is to be successful. A company using its established benchmarks from the past year could surrender its competitive advantage.

Benefits of Salary Benchmarking

The benefits of accurate salary benchmarking are tremendous and could mean the difference between a successful company and one struggling to compete.

Retaining Top Talent

Companies that retain their top talent save time and money. The cost of replacing an employee goes far beyond the cost of recruiting and training, with some estimates putting the cost of replacing an experienced employee at between one and half and two times that employee’s annual salary [2].

The costs associated with losing top talent include:

  • Lost productivity
  • Potential customer loss
  • Overtime
  • Burnout or morale loss among other employees
  • Training costs
  • Hiring costs
  • Loss of valuable expertise that was a competitive advantage

Knowing the industry compensation standards, a company stays ahead of its competitors by retaining its top talent. An organization with significantly lower turnover saves money and experiences far less turbulence on the road to success.

Promoting Fair and Non-Discriminatory Compensation

Meeting market standard compensation doesn’t just retain and attract employees; it protects the company. When an organization can show that it meets industry or market standards for positions within the company, unfair or discriminatory compensation charges are averted.

Businessman participating in a video chat interview with a potential candidate remotely

Internal equity is maintained [3] when the company can show that the salaries of all positions are paid equally for the work performed and the job requirements per market standards.

Streamlining Recruitment Efforts

Recruiting efforts become more accessible and streamlined when the recruiter knows the industry and market standards for employees in similar positions. Positions are recruited with advanced knowledge that the compensation offered is competitive, and attracting the best talent becomes more effortless when potential employees see that the organization cares enough to pay its people fairly.

How S Corps Can Benefit

S corps benefit immensely from knowing fair compensation not just for attracting and retaining talent but also for ensuring that company shareholders are not over or underpaid. While employee-owners of an S corp with over 2% ownership have the significant benefit of not paying employment taxes on distributions above their compensation, that compensation must be deemed reasonable for the position and its requirements.

If the employee-owner is overpaid, they cost themselves needlessly by paying their share of the 15.3% self-employment taxes above what is necessary. If underpaid, the IRS will view the given wage as a way to game the system and avoid paying employment taxes. While the IRS has no specific guidelines for specific positions, it states that courts will consider the following factors when determining what is reasonable [4].

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

When a company has salary benchmarks for specific positions, it ensures owners don’t overpay employment taxes and that the IRS is satisfied. If ever questioned, the organization has the data to present to the IRS or court to show that it follows reasonable compensation standards, avoiding potential time-consuming audits or tax liabilities, interest charges, and penalties.

How To Implement Salary Benchmarking

The benefits of salary benchmarking are best realized when a successful implementation strategy is set before beginning the process.

Choosing Suitable Data Sources

Salary benchmarking is only as successful as the quality of the data behind it. Poor or incomplete data sources could result in incorrect salary ranges, meaning the attraction and retention of employees might not be successful. Additionally, bad sources could result in S corp owners not being paid reasonable wages, triggering an IRS audit.

If the company’s HR department cannot access quality data, the company is essentially flying worse than blind. It’s misinformed and not meeting marketplace standards.

Should the information available be flawed, or should the company’s HR employees be mis-equipped or unfamiliar with benchmarking best practices, using a third party like RC Reports, with a reputation for salary benchmarking excellence, is a spectacular choice.

Applying a Compensation Strategy

Successful businessman shaking hands with a newly hired candidate after finalizing the employment agreement

An excellent compensation strategy will attract new employees, retain valuable talent, and foster improved employee morale and performance. 

The plan will consider employee performance, raises, perks, benefits, schedules, company financial goals, and competition within the employee marketplace.

At its heart, a compensation strategy has three main goals [5]:

  • Recruiting and retaining talent
  • Aligning company costs
  • Driving the company’s culture and employee engagement

The strategy will reflect where the company wishes to be in the employment marketplace, the culture it wishes to maintain, compliance with state and federal standards, the budget, and potential rewards for longevity, position, or performance.

Once a strategy is in place, it must be documented, regularly reviewed, and strictly adhered to if the organization will ensure it is continually meeting its goals. Rules around compensation calculations and benefits need to be explicitly spelled out and should be part of the employee manual.

A compensation strategy should be as specific, accurate, and straightforward as possible to ensure future success.

Creating Salary Ranges

With data in hand, the company will set salary ranges for the various positions within the company. To do this, jobs will have accurate and complete descriptions of what they do and the position’s requirements. Then, the organization determines if jobs are paid on separate scales throughout the entire company or if it groups them into job categories [6]. Those job categories could account for whether positions are considered technical, managerial, or administrative or where the positions are located and within which company divisions.

Positions in specific categories might then have ranges further defined by time on the job, the work expectations, significance to the company, and the number of employees under that position’s supervision, to name a few. A standard range will typically be 30-40%, although that range might be much more significant for executive compensation.

Having established and accurate benchmarks as a guide makes this process significantly easier.

Salary Benchmarking Results in an Effective Company

Knowing the proper salaries for employees, executives, and owners helps attract and retain the best talent, keeps the company running smoothly, and maintains a strong internal culture. Organizations with comprehensive and regularly updated salary benchmarks have a leg up on others within their industry, avoid legal jeopardy, save S corp owners money, and simplify recruiting.

Companies that know market salaries and keep updating their benchmarks outperform.

RC Reports is an expert in salary data and benchmarking. Their reasonable compensation analysis holds up to IRS scrutiny, increases firm revenue, and saves companies the time and money involved with developing their own benchmarks.

Get a demo from RC Reports today to start the salary benchmarking process on the right foot.

Sources

1. Benchmarking. (2015, September 30). U.S. Bureau of Labor Statistics. 

https://www.bls.gov/opub/hom/topic/benchmarking.htm

2. The Real Cost of Employee Turnover (And How to Prevent It). (2023, November 26).  Jobvite. https://www.jobvite.com/blog/cost-of-employee-turnover

3. Cosentino, J. (2023, October 31). 7 Compensation Issues and How to Fix Them

AIHR. https://www.aihr.com/blog/compensation-issues/

4. Wage Compensation for S Corporation Officers (FS-2008-25). (2008, August). 

Internal Revenue Service. https://www.irs.gov/pub/irs-news/fs-08-25.pdf

5. Building a Compensation Strategy for Your Business. (n.d.). Indeed. 

https://www.indeed.com/hire/c/info/building-a-compensation-strategy

6. How to Establish Salary Ranges. (n.d.). SHRM. 

https://www.shrm.org/resourcesandtools/tools-and-samples/how-to-guides/pages/howtoestablishsalaryranges.aspx

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