How to run a salary benchmarking exercise and pick the right tool

Salary benchmarking is crucial when you run a small business, and that’s why at Charlie we wanted to tackle the problem early on.

So a few years ago, as part of our work to create a career progression framework, we got in touch with Alistair at Justly – an expert in salary and compensation who helps organisations build trust through fair and transparent pay, to help us build a compensation calculator.

To do this, Alistair explained we needed to pick a salary benchmarking tool to get the right data first, then map our roles to the right salary benchmarks, and assess our current team members against it.

Before we got in touch with Alistair, we didn’t put too much thought into picking a salary benchmarking tool, but we quickly understood how crucial it was to get the right data source for our compensation calculator.

It took some time, but once we had picked a tool and built our compensation calculator, we greatly benefited from it. Not only did it make us highly competitive as an employer (especially for a small business), but it also enabled us to create financially responsible budgets and make fair decisions based on real, market-driven data.

So if you’re wondering how to run a salary benchmarking exercise and you don’t know which data source tool to pick, you’re in the right place. We’ve invited Alistair to take us through the process of salary benchmarking and understand all the elements that go into it.

What is salary benchmarking?

Salary benchmarking is the process of comparing your company's salaries with those of other companies within your industry and/or the broader marketplace.

This helps ensure your salaries are competitive and aligned with market standards. By incorporating additional data points like employee attrition and candidate rejection rates due to pay, this assessment is a great way to identify areas where salary adjustments may be necessary to boost competitiveness.

Why is salary benchmarking important for small businesses and startups?

It’s a misconception that salary benchmarking is reserved for larger organisations; in reality, it’s essential for all organisations, regardless of size.

In my work at Justly I regularly collaborate with small companies which have fewer than 20 employees, like Charlie did back when I first worked with them (they’re now over 40 team members). The leaders, typically second-time founders or individuals with prior experience, have witnessed the benefits of salary benchmarking and taking a structured approach to pay in their previous roles.

Salary benchmarking is the cornerstone to creating salary bands and when combined with a robust compensation philosophy, it allows you to take a fair and consistent approach to compensation.

There are benefits across four key elements:

Hiring clarity – Salary benchmarking and a structured approach to pay provide clarity during the hiring process, enabling transparent communication with candidates. Recruiters can confidently present offers aligned with market rates and internal structures, fostering trust and demonstrating the organisation's commitment to equitable practices. Without pay foundations, negotiations tend to prioritise the assertiveness of the candidates involved.
Individual growth and transparency: Employees gain clarity on their compensation and growth trajectory. Understanding market rates provides context for compensation packages, while salary bands tied to individual growth offer insights into future earning potential.
Equitable team compensation: Salary benchmarking creates equitable pay structures within teams, standardising compensation and reducing concerns about pay discrepancies. This promotes transparency, trust and unity among team members and helps mitigate gender pay gaps.
Competitive and responsible company salaries: Salary benchmarking enables organisations to establish competitive yet financially responsible salary structures. Informed decisions about budget allocation ensure competitiveness in attracting talent while maintaining financial sustainability.

Without salary benchmarks and data driven salary bands, compensation decisions can become ad-hoc, leading to ambiguity and inconsistencies in hiring and retaining talent.

We really saw a big difference when working with Alistair, and it gave us so much more knowledge, paired with the capacity to be competitive as a small business. Amy Cowpe, CharlieHR’s COO

And if you want some help with your own hiring, maybe it's time to have a look at investing in an ATS that does the job.

What do you need to conduct a salary benchmarking exercise?

In order to carry out a salary benchmarking exercise and build salary bands you need to:

Choose a relevant and reliable data source tool to benchmark against.
Introduce a job architecture consisting of tracks, levels and job families so you can map back to the market objectively and compare ‘apples to apples’.
Define your compensation philosophy - this is where you choose a competitive market position for each of your roles, define your approach to location-based pay, define your salary band structures, and determine how pay increases will be managed amongst a number of other decisions.

What salary benchmarking tools are available to get reliable data sources?

Navigating the world of salary benchmarking can be daunting, especially with the myriad of tools and data sources available. To simplify this landscape and aid in decision-making, I categorise market data sources into two categories; primary 'Give-to-get' tools and secondary sources that complement and validate the primary data.

Primary data sources, aka 'Give-to-get' salary benchmarking tools

In the 'Give-to-get' model, you share your company's salary data in exchange for access to benchmarking data. These providers (Ravio, Mercer, Radford, Pave, Figures etc.) deliver reliable benchmarks and a levelling structure for consistent comparisons.

What are the cost considerations of using a salary benchmarking tool for your data?

Costs may vary by geographic region. For instance, Pave offers free data in certain countries, but charges elsewhere. Ravio has once price for an organisation's HQ vs a higher price for global coverage. In comparison, Radford’s fees are calculated on the number of locations you require access to.

What is the value of the paid data?

Paid primary sources provide consistent, structured and reliable data, essential for maintaining credibility with employees. The consistency and structure of this data allow for more accurate and effective benchmarking, helping you make informed decisions. The cost of premium data is minimal compared to the potential expenses of employee turnover due to poor salary setting.

How many primary sources can you use?

Typically, one provider is sufficient for consistency and budget control, but using multiple providers can help identify discrepancies and ensure data accuracy, as fluctuations may occur due to various factors.

Why would there be discrepancies between primary data sources?

If you choose more than one primary data source, don’t expect the numbers to always match. There could be a lot of differences, discrepancies and variations when it comes to certain aspects of the data such as in:

Job family classification
Public vs. private companies
Sample sizes
Reporting methods
Collection timeframes
Cleaning and processing techniques
Interpreting job roles and levels
Market changes or anomalies in data set

If you choose two or more data sources, you should spend some time investigating the root causes of discrepancies to make informed decisions when setting the base pay for a role.

We were really impressed by how clear everything was when it came to picking the right data set for our compensation calculations. With Alistair's help, we felt confident choosing the best salary benchmarking tool to finish our project. Amy C. Charlie’s COO

Secondary data sources – another salary benchmarking tool on top of your primary data source

While I always recommend reviewing secondary sources, you should also be aware of their potential limitations. These sources can sometimes provide a false impression of the market data for a role, possibly due to outdated information, sample bias, or discrepancies in job role definitions. It's important to critically evaluate how these factors might affect the accuracy of the data and consider them in your benchmarking process.

All in all, the primary source should be your main reference for salary benchmarking, but you can enhance your analysis by incorporating secondary sources. Use these to verify numbers, fill in gaps, and gain a more complete understanding:

Job boards – e.g. Company career pages, Otta, LinkedIn, AngelList, Indeed, Glassdoor etc.
Salary scraping platforms – These platforms get data from job boards e.g. TalentUp, Levels.fyi, HR Datahub, etc.
Local recruitment surveys – e.g. Hays Annual Recruitment survey, Sedlak Tech survey in Poland etc. – very useful for niche roles and locations, but could involve a lot of copy/pasting as they’re often delivered as PDFs.
Local recruiters – specialised in a particular area or location.
Professional networks – getting in touch with specialists in your area to talk about a specific role, especially when the role is very niche and unlikely to have data.
Recruitment team – speak to your own team and ask what the candidates are talking about and what they’re looking for when applying for your company. Get your recruitment people to keep track of salary expectations.
Managers – speak to managers within your business to see if they have additional sources for salary data.

Pros of using a secondary data source for your salary benchmarking exercise

Using a secondary data source addresses gaps in primary ones that are related to specific locations and roles. Your own recruitment team and managers could potentially provide more accurate insights as they have direct conversations with candidates and are more attuned to current trends. Bear in mind that a large proportion of secondary sources are also free of charge in comparison to your main salary benchmarking tool used for primary data source.

Cons of using a secondary data source

Many secondary sources rely on crowdsourced data, which differs significantly from using a salary benchmarking tool such as Ravio or Pave. Crowdsourced data has its drawbacks, including:

Limited job details – it lacks detailed job role information, making precise salary comparisons difficult. Key factors like job level, experience, location and industry, which significantly impact salaries, may be missing. Just relying on job titles for comparison may be risky due to varying interpretations across companies.

Lack of verification – it’s not always validated, increasing the risk of inaccurate or misrepresented information. Without checking the data, it becomes unreliable, potentially skewing the final results.

Sample bias – it may suffer from sample bias due to its reliance on voluntary contributions. This can lead to an unrepresentative sample, distorting the true job market picture. Certain demographics or industries may be over or underrepresented, affecting data accuracy.

Data quality control – it lacks the rigorous quality control seen with professional benchmarking providers. Unlike objective sources such as Radford or Pave, crowdsourced platforms may not use robust methodologies or statistical techniques, impacting data accuracy and reliability.

What questions should you ask yourself before picking a salary benchmarking tool as your primary data source?

It’s important to not get into this without knowing what questions you should ask to a potential salary benchmarking tool to use as your primary data source. Here’s a sample of questions to help:

Can they cover all your roles and locations?
What filters are available (industry, revenue, headcount, etc.) and how do they interact?
How frequently is the data updated, and by what method?
How accurate and reliable is the data, and what are the data sources and methodologies?
Are there additional costs for specific filters or data types?
Do they offer benchmarking data for non-salary components like bonuses and stock options?
How user-friendly is the filtering interface, and is there support available?
How is the data validated statistically, including sample size and analysis?
If using regression-based data, can they explain the process?

FAQs for salary benchmarking

We’re a small business and don’t want to introduce levels and job architecture. Can we still carry out a salary benchmarking exercise?

Unfortunately not. You need a ‘common language’ to map yourselves objectively back to the market. Without this, your salary benchmarking exercise can become extremely difficult and you’ll end up having to match on other parameters such as job titles. It can be a very risky process as job titles can mean different things in different organisations.

Remember: levels are not only useful for salary benchmarking and designing pay structures, they also form the backbone of many other People initiatives such as career development, performance management and organisational design.

Should I really pay for salary data?

In a nutshell, yes. Paid sources of data and in particular ‘primary sources’ are typically a lot more consistent and reliable than free sources. This consistency and reliability of the data ‘buys’ you trust and credibility with your employees.

Being able to reference the salary benchmarking provider you use, such as ‘we take salary data from Pave which has over 7,500 public and private companies across the globe…’, is a stronger message than ‘we crowd source data from various job boards…’

Also consider this: while there might be a small price tag attached to accessing premium data, it's a small price to pay compared to the potential costs of losing valuable talent due to poor salary setting and vague black box calculations.

A one-time annual fee of £5k to a primary data source is a fraction of what it could cost your organisation when it comes to productivity levels, recruitment, and training expenses associated with employee turnover.

How often should you carry out a salary benchmarking exercise?

Once you've carried out a salary benchmarking exercise and established your salary bands, it's best to revisit them against the market once or twice a year. No more than that. Constantly scrutinising and adjusting your salaries may indicate underlying issues with your compensation approach.

N.B. Exception to this rule: If you consistently get rejections from candidates or experience employee turnover directly attributed to salary misalignment, it's prudent to reassess market data outside of the once or twice a year cycles. This ensures you're attuned to any shifts in the compensation landscape for specific roles.

What should we do if our salary benchmarking data shows we’re below market rates?

If the salary benchmarking data indicates that your pay rates are below your desired market rate, it’s important to develop a strategic plan to adjust salaries gradually. Immediate increases across the board might not be feasible for a small business, so consider prioritising where the biggest pay gaps are, key roles or high performers first. Communicate transparently with your employees about the plan and timeline for adjustments to manage expectations and maintain trust.

Hopefully this guide helped you understand how to run your salary benchmarking exercise and pick the right tool to get your data from.

And if you have any questions or want to deep a bit further into it, simply get in touch with Justly.