Compensation benchmarking is the process of using internal job descriptions to match to established salary survey jobs in order to identify the external market rate for each benchmark position.
Why is compensation benchmarking important as a “best practice”?
Establishing market rates for core positions within an organization is important for a variety of reasons.
First and foremost, it guides decision making for pay decisions including hiring, promotions, internal equity salary adjustments, and general compensation budget planning. Because labor costs are the largest cost to any organization, a solid understanding of the external value of each position allows an organization to develop an approach for setting overall compensation philosophy, or the level at which the organization will set salary levels.
The ability to balance the needs to attracting and retaining talent with fiscal responsibility of the organization is a key priority for Executives. Compensation benchmarking provides the information leaders need to define the costs associated with salaries and other compensation components such as profit sharing or bonuses.
In some cases, major organisations don’t want to risk losing their top executives to offers of better pay packages from competitors. In others, they want to be able to prove to their shareholders in black and white that their senior staffs provide value for money. With variations in pay potentially being the difference between retaining or losing highly valued directors and keeping shareholders happy, salary benchmarking can be vitally important to the success of an organisation.
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