The times we live in demand a greater sense of transparency of the principles behind key decisions – from pay budgets to the Employee Value Proposition, through to day-to-day pay management decisions made in areas such as hiring salaries, out-of-cycle increases, and how to apply benchmarking.

With pay budgets having increased over the past couple of years across all sectors (albeit still lagging behind inflation), there is a greater ability to be able to prioritise and differentiate investments in pay. A key aspect of making these decisions is the role of market benchmarking.

This, plus the continuing tightness in the jobs market, has thrown up several questions:

• To what extent is the market really moving?
• Are recruitment salaries accurate compared to people already in posts?
• Which functions are moving the most?
• Is the regional pay market changing?
• How do we use benchmarking results in the context of the current climate?
• How do we know benchmarking is reflecting real pay movements?

Before the cost-of-living crunch, reward professionals were already beginning to manage expectations around benchmarking – defining what the purpose is, and what the outcomes do (and more importantly, don’t) mean.

More interest and scrutiny than ever are being applied to pay decisions. Here are our thoughts of how to make benchmarking work for you:

Be clear on the purpose
 

It is often unrealistic to benchmark every role in the organisation on a regular basis just in case the market has moved – and for anyone to expect the outcomes to result in justifiable adjustments to pay.

However, in relatively high inflationary times it is still important to test pay structures on a regular basis. Individual benchmarking can then be focused on roles facing recruitment and retention pressures to gain a reference, thus ensuring key talent is not lost due to a lack of competitive pay data.

Being clear on the purpose of benchmarking (i.e. to gain objective evidence as a reference to assess competitiveness) is key to managing expectations in a climate where pressure and questions are being asked about pay rises. A proactive approach on communications can help reduce the headaches many organisations can face from their benchmarking.

Ensure your data reflects the current world
 

Now more than ever, market rates may move quickly. There is now a realistic potential for rates to significantly increase for certain roles and/or functions in the current climate, given the increasing pay budgets and organisations battling for key talent.

Therefore, it is important to establish whether benchmark matches reflect current market conditions to identify real movements. We find the most accurate method of doing this is to compare same incumbent salary movements – as we do in all our salary surveys.

This will allow organisations to look past disgruntled noises being made by employees and managers, and gain a clear view of exactly how the market is changing for different areas of the business.

Understand what role the market plays in pay decisions
 

How much emphasis are you willing to place on keeping up with the market compared to potentially distorting internal equity for your current employees performing similar roles? Would you be happy justifying such differences in pay? Which principles are your organisation currently focusing on – and what impact does this have on these questions?

Our research predicts greater focus on internal equity for organisations moving forward with even more scrutiny on justifying the validity of pay differences – particularly across levels of seniority.

If you are focusing on the internal equity picture, benchmarking exercises without careful thought may cause more problems than solutions unless you are clear about the instances that merit benchmarking, the purpose behind it and what you will likely do with the outcomes.

Robust foundations
 

Getting reliable, up-to-date data for areas where recruitment and retention pressures are being most keenly felt is the key to navigating through these choppy waters – mixed in with clear thinking about the purpose and outcomes of benchmarking exercises.

Drawing clear lines behind benchmarking and explaining the key messages to line managers and business partners means that employees and managers will not focus too heavily on market data – and the impact that pulling the benchmarking lever may have on pay.

Contact us if you would like to use us as a sounding board to test your ideas or if you would like to explore our approach to benchmarking.

Peter Fairchild, Lead Consultant at QCG – July 2023