Compensation Benchmarking is Required Competitive Intelligence

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Elevate your organization's compensation strategy. Learn about the latest developments in compensation benchmarking and five ways modern tools can help your organization.

Benchmarking originated when land surveyors chiseled marks in a stone that would serve as the basis for their measurement.

Today, the term and concept of benchmarking is used more broadly. It still has to do with measurement, but we use data and innovative technology instead of chiseling stone. It's a lot easier, more accurate and cleaner too.

Compensation benchmarking tells you what the market is paying people by location and job so you can see how your compensation compares.

Measuring and benchmarking compensation can be complex because you need detailed information about the work, qualifications and skills needed, along with pay, bonuses, and benefits. And that's before adding data about company size, industry and location, or information about workforce qualifications and availability.

Then, you need to ensure you are getting current data to track compensation trends over time and know whether wages are headed up, down, or holding steady. Current and accurate data for each of these elements is the foundation for understanding the market, where you fit, and what's needed to get to where you want to go.

ADP has some of this information available on its Pay Trends page, where you can see monthly data about what's happening with median wages in the U.S., with additional information based on state, gender, new hires, and raises for current employees. Data at this level is helpful for organizations to determine their overall labor budgets.

The best way to understand how the labor market affects your organization is to have accurate compensation benchmarking data about your industry, geographic location, job titles and skills.

Achuth Rao, Chief Product Officer, VP Product Management, DataCloud, ADP

The latest in benchmarking technology will also let you know the skills jobs require. This makes it easier to compare work and pay to stay competitive with compensation and assess pay equity. Understanding the skills needed in different roles also helps organizations guide employees in developing the skills needed for their next role and to map new career paths.

For comprehensive market intelligence, you want data about where and whether people are available for work based on job title, location, skills, and compensation. Compensation benchmarking tools are designed to give you additional insight into market pricing for specific jobs so you can be more competitive when hiring and retaining employees.

5 ways compensation benchmarking can help

1. Competitive compensation

It's essential to understand what's happening in the market. Is your pay too high or too low for the roles you want to fill. When there are not enough workers, wages tend to increase where there are shortages.

When hiring is easier due to more desirable roles or larger applicant pools, you don't want to overpay. Knowing the current going rates can save you money while hiring and retaining talent more easily.

"The best way to understand how the labor market affects your organization is to have accurate compensation benchmarking data about your industry, geographic location, job titles and skills," explains Achuth Rao, ADP's Chief Product Officer, VP Product Management, DataCloud.

2. Optimized budgets

Budgets are not suggestions or goals; they are limits that affect the bottom line. Having up to date, accurate data means you can have a better view of what you will need to budget for employee compensation in the coming year. And that usually affects budgets in other areas.

It can also mean you won't have to ask for more money in future quarters or budget cycles because nobody enjoys that process. And if you're not successful, then you have goals to meet but not enough resources. That rarely turns out well.

3. Strategic retention

In Today at Work, the ADP Research Institute reported that workers who believe their pay is unfair are 3.4 times less likely to be engaged. And when your workers do not feel their pay is fair, it's likely that 40% are already in the process of leaving their organization.

With new pay transparency laws, both job applicants and current employees have a clearer picture of what they should be making. To attract and retain the people you need, you need this information, too.

4. Pay equity

Financial fairness is not just a good idea; it's the law. To assess pay equity, you need accurate information about the work people do and what they are paid to do that work. This is the same data used in compensation benchmarking.

For internal pay equity, you look at your organization's jobs, pay, and demographics to see where you have potential pay gaps. To understand whether you are competitive and paying fairly in the market, you need compensation benchmarking.

In addition, the best strategy for reducing risk and compliance with employment laws, including wage and hour, discrimination, and pay equity laws, is to monitor your data so you can identify issues before they become problems.

It's no longer possible to ignore what's going on until someone makes a claim. Besides, nobody wants a lawsuit. They are expensive, disruptive, and take people and resources away from serving your clients.

Having access to the right tools based on accurate data means you can reduce the risk of claims and lawsuits by addressing issues when they arise instead of after it's too late.

5. Accurate analysis

You want the most accurate and up to date pay data possible with software that can connect pay data to jobs, job levels and classifications, turnover rates, hiring activity and decisions, demographics, absences, engagement, and other metrics that can tell you what is happening both inside and outside your organization. The quality of your data is the foundation for all of these insights.

Accurate data is also the basis for identifying trends and can help you determine when things started and what might be causing the changes.

The world of compensation benchmarking has changed.

"It's an exciting time for people analytics and their capacity to change the way we understand our organizations, our work, and the market. At ADP, we are leveraging machine learning to provide the right and complete coverage of information in compensation benchmarking to bring new insights and relationships between pay, people and their work," says Rao.

We can now see job duties become skills, so we can assess, compare, and understand the value of the work people do beyond their job titles. When we can compare the actual work, our pay equity analysis will improve since our assessments of what work is comparable will be more detailed and easier to compare.

We now have an enhanced methodology that can effectively fill in gaps in our data. If there are no widget designers in Lawrence, Kansas, the benchmarking tools can look at whether there are some in Topeka, Manhattan, or Columbia, Missouri, what level and industry they work at, and what they're paid. Then, the tool will be able to tell you what the likely going rate for widget designers is in Lawrence.

Even better, these compensation tools are available immediately and are refreshed regularly. Organizations can have them up and running in a few hours or days instead of months.

Find out more about compensation benchmarking and how it can make a difference for your organization through our infographic.

ADP Compensation Benchmarks partial infographic 2023