Are you paying your employees enough? In a time where talent retention is cited as the biggest challenge for UK employers, it’s important to check that you are paying your team a competitive salary.
According to Lorien, 39.64% of candidates believe that salary is the most important factor when they’re searching for a new role, so it’s clear that finding ways to attract and retain talent is vital in a competitive labour market.
This is where salary benchmarking comes in. Benchmarking your team’s salaries can ensure that your organisation stays attractive to candidates and retains your current employees. Plus, it will help you keep ahead of rises to the National Minimum Wage and ensure you meet your legal obligations when it comes to equal pay and gender pay gap reporting.
In this guide, we’ll explain what effective salary benchmarking is, its benefits and how to use it to give your company the competitive edge.
What is salary benchmarking and why is it important?
Salary benchmarking is a strategic business tool that provides an objective, analytical approach to evaluating pay structure, helping your organisation to remain competitive, fair and compliant.
It involves collecting and analysing data and information about roles, responsibilities and average salaries to compare your company’s wages against competitors and other organisations in similar sectors.
Salary benchmarking is important because it helps you understand whether you’re paying your team too little and risk losing talent, or whether you’re overpaying compared to the rest of the market. It also helps you to understand whether your pay structure is aligned with job levels and responsibilities.
How your organisation approaches salary benchmarking often depends on its size and whether it operates in the public or private sector. You may already conduct regular pay reviews, or you might be at the very beginning of considering how your salaries stack up against the competition. Whatever your starting point, salary benchmarking can help you make informed decisions around pay.
A note on internal vs external benchmarking
Salary benchmarking can be both internal and external.
Internal benchmarking assesses consistency within your own organisation. It ensures roles of similar value and level are paid fairly, helping reduce pay compression, gender pay gaps and other inequalities.
External benchmarking compares your pay to that of the wider market or industry. It’s essential for recruitment and retention planning.
Using both helps you get the most comprehensive view of how fairly you’re paying your staff.
Benefits of salary benchmarking
We’ve already touched on some of the benefits of salary benchmarking, but there are plenty more. Let’s explore them in more detail:
- Keeps you competitive: You’ll stand out in a competitive labour market, improving the quality of candidates that apply to your roles. It prevents you from overpaying as well as underpaying.
- Improves retention: Benchmarking salaries shows your existing employees that you value their contribution and their progression in the company is important. Research published in the Harvard Business Review found that a gain of about 6% in average salary was followed by an increase of about 16% in the retention rate of employees over the following 12 months.
- Maintains internal pay equity: Conducting pay and benefits reviews and benchmarking ensures that every employee is compensated according to the work they do, and things like gender or race don’t have an impact. As well as being a legal requirement in many cases, it also shows your employees that you value their contribution.
- Protects your employer brand: Word can travel fast in the recruitment world. Keeping employees satisfied with their compensation means they are more likely to recommend your company to potential candidates, ensuring that you stay a desirable organisation to work for.
- Supports talent planning: Benchmarking will help you understand market expectations for new roles and plan your budget when expanding your team or creating new positions.
So, salary benchmarking is a powerful tool that helps you make data-led decisions that help you retain employees and ensure you use your talent budget effectively. But how do you get started?
How to approach salary benchmarking
Salary benchmarking can seem overwhelming at first, but if you break it down into steps, it’s a much more manageable process. Here’s our recommended approach to salary benchmarking:
1. Define your short- and long-term goals
Decide what you want salary benchmarking to achieve in your organisation, both in the short and long term.
Short-term goals might include benchmarking a small cohort of roles or specific departments to help you understand how much work you have ahead of you, or how long the process may take.
Long-term goals could include building a consistent pay structure, improving internal pay equity or supporting your reward strategy.
2. Establish a timeline and budget
It’s important to set timelines and budgets before you start. A small-scale benchmarking project may take a few weeks, while a full audit of your entire workforce could take months if your organisation has a lot of employees. You should also establish how often the process should take place. It’s good practice to conduct salary benchmarking annually.
How much budget you need will depend on whether you use your internal HR team, outsourced HR services or paid benchmarking platforms. You’ll also need a budget for increases in salaries if you find that you need to do this, so it’s worth getting the finance team involved from the start.
3. Map your organisational structure
Mapping your organisational structure helps you to understand where each role fits within your company and allows you to accurately compare roles internally and externally.
Once you’ve mapped your structure, you can review job titles, descriptions and levels to ensure they’re reflective of your team’s actual responsibilities. Vague or very creative job titles can make benchmarking more difficult when you’re trying to compare with the wider market.
4. Decide what to benchmark
Decide what you want to compare against your industry and market standard. You could choose to benchmark only your employees’ basic salaries or include their total earnings, such as bonuses and location allowances.
The other option is to compare your employees’ total reward, which will help you understand your true competitiveness in the job market. Total reward encompasses all the benefits that you offer your team – more on that later.
5. Collect data from high-quality, reliable data sources
A triangulated approach increases the accuracy of your benchmarks. Use multiple layers of reward data, ensuring the datasets are relevant to your sector, scale, location and operations.
Tools and data that can be useful include:
- Reward platforms and salary benchmarking tools such as Korn Ferry, Cendex, Payscale and World at Work
- Sector-specific surveys
- Public data such as ONS figures
- Job boards
- Professional associations and pay clubs
- Specialist consultancies and pay databases
6. Compare existing employees’ salaries and set salary ranges
Once you’ve gathered your data, assess where each employee sits in relation to the benchmark. This may flag areas where you need to make pay adjustments or offer progression opportunities to your existing team members.
Then, set salary ranges for each role with a minimum and maximum that new hires will fit into. You can decide where their starting salary should sit in this range, depending on their skills and experience.
7. Document everything
Keep records of data sources, methods, assumptions and your decisions. If you’re audited or challenged under equal pay legislation, this evidence will demonstrate that you are offering fair and competitive compensation. It also ensures transparency among existing staff and future hires.
How often should you benchmark salaries?
As we said earlier, it’s good practice to benchmark annually. This ensures that you keep up with market changes, inflation and evolving expectations from your staff and the wider job market.
However, you may need to do it more frequently if:
- Your business is growing quickly
- You’re in a highly competitive or fast-moving sector
- You’re undergoing change, such as mergers or restructuring
If you’re unsure how often you should be benchmarking salaries, speak to an HR consultant who specialises in pay and benefits to get advice.
Challenges with salary benchmarking
Like anything, you can encounter challenges when you conduct salary benchmarking. Being aware of them can help you put steps in place to mitigate them:
- Complex organisational structures that make it hard to compare like-for-like roles
- Niche roles (or niche industries) with limited external data
- Broad pay bands that make pinpointing accuracy difficult
- Regional variations, with London salaries being much higher
- Time and resource constraints
- Affordability, if you find that you are paying many employees below the benchmark
- Evidence gaps – lack of documentation makes it hard to defend decisions
Despite these challenges, the benefits usually outweigh the difficulties. Being prepared for them can help you overcome them if you experience them.
Total reward packages
Salary is only part of what your employees receive. Total reward encompasses all the financial and non-financial benefits your team receives. In our opinion, it’s best practice to benchmark total reward over just basic salary.
While we’ve seen that salary has a big impact on employee retention and attraction, it’s not the be-all and end-all for many employees. A LinkedIn Workplace Learning Report found that 94% of employees would stay longer at a company if it invested in their learning and development, while 52% of employees feel more engaged when their organisation offers access to counselling or wellness programmes.
Total reward includes:
- Base salary
- Bonuses and performance incentives
- Pension contributions
- Annual leave and additional paid time off
- Flexible and remote working options
- Private medical cover or wellness benefits
- Employee recognition programmes
- Learning and development opportunities
- Staff discounts or discounts available via your organisation
Benchmarking total reward – not just salary – provides a more accurate picture of your competitiveness. It also gives you more options when salaries are constrained by budget. For instance, providing extra annual leave or hybrid working options can make your overall offer more appealing.
Total reward statements
If you decide to benchmark total reward, after you’ve conducted your annual salary benchmarking you could give your employees a total reward statement. Total reward statements can be useful, especially when your compensation review has driven you to make changes.
A total reward statement breaks down the monetary value of an employee’s remuneration package so they can see their total reward beyond their salary. You should include all the additional benefits your employees receive, as we just outlined in the previous section.
Total reward statements are a great way to retain staff as they help your employees see beyond their basic salary and understand the value their reward package provides. They can also help improve employee engagement and uptake of certain benefits, such as your employee assistance programme, as it reminds your team that it’s available to them.
Pay policies
Once you’ve documented your salary benchmarking process (and you’re happy with it), you should add it to your pay policy.
A pay policy outlines how your organisation approaches employee pay. Documenting your organisation’s principles and directives around employee pay ensures that you operate a fair pay system that aligns with company strategy and goals.
Your pay policy should cover:
- Your organisation’s values that drive decisions about salaries – for example, fairness, equity and transparency
- How, when and by whom pay reviews are conducted
- Structure of pay bands or grades
- Information about variable pay, such as bonuses or commission
- Benefits available to employees, such as pension contributions or private healthcare
- The basis for salary decisions, e.g. market rate, experience and qualifications
- Approach to pay progression and promotions
- How benchmarking data is used
- Your commitment to equal pay and fair treatment
Having a clear pay policy helps standardise decisions, supports transparency and demonstrates fairness. It can help you attract and retain staff as well as eliminate any perceived inequality between your team members. It’s also helpful in aligning HR and business strategy and communicating expectations to staff.
So, now you understand what salary benchmarking is, how it can benefit your employees and how it can make up part of your pay policy, it’s time to get started on your first benchmarking project.
How we can help
Whether you’re just beginning to explore benchmarking or looking to refine your reward strategy, we can help you take the next steps. Our services include:
- Reward strategy and audit: A complete review of how your organisation compensates employees
- Job analysis and job evaluation: Ensuring job roles are accurately defined and fairly rewarded
- Pay and benefits reviews and benchmarking: Comparing your packages against your sector and the wider market
- Incentives and recognition schemes: Creating initiatives that drive motivation and reward contribution
- Pay grade frameworks and progression models: Establishing clear routes for advancement and pay development
- Remuneration Committee Service: Supporting executive-level pay decision-making
- Gender pay gap and equal pay reporting: Providing evidence-based insight to support legal compliance and equality
Book a free consultation or give us a call on 0330 223 5253 to see how we can help.
Further Reading
- How to develop a resourcing strategy
- Managing salary reviews in schools
- A guide to gender pay gap reporting
- How to recognise and reward employees authentically
Key takeaways on salary benchmarking
- Salary benchmarking helps you stay competitive: Comparing your pay against market rates ensures you attract and retain the right talent without overpaying or undervaluing your team.
- Fair pay boosts employee retention and engagement: Employees who feel fairly paid are more likely to stay, perform well and speak positively about your organisation.
- Internal and external benchmarking serve different purposes: External benchmarking keeps you aligned with the market, while internal benchmarking ensures fairness and consistency within your organisation.
- Use accurate data and job descriptions for meaningful results: Clear job descriptions and multiple, relevant data sources help you compare like-for-like roles and make informed decisions.
- Benchmark total reward, not just salary: Benefits, flexible working, recognition and development opportunities all contribute to perceived value and should be included in your analysis.
- Create a clear, consistent pay policy: A well-documented pay framework supports transparency, legal compliance and more confident decision-making.
- Review and update benchmarks regularly: Annual reviews help you keep up with inflation, changes to minimum wage and shifting market expectations.
- Salary benchmarking is a strategic asset: When used effectively, it supports recruitment, retention, compliance and organisational growth.
