Using Salary Benchmarks Wisely Carla Joinson

Printer-friendly version

Using salary benchmarks ought to be simple: just see what others are paying employees and try to fall in line. Instead, benchmarks are just a starting point, and the questions they raise aren't always easy to answer. What figures are most important? Should information be national, regional or local? What should you add to a base figure to make total compensation competitive?

Salary surveys and benchmarks can be rigid, since they ask specific questions that require specific answers, says Terrence Dickenson, manager, E-Recruiting at Wilmington, Del.-based DuPont Corporation. "Or, you try to make sure you compare similar companies—but how many DuPont's are really out there?"

Know what goes into your figures

"When you get data, you must make decisions," says Charles Quatt, PhD, president of Washington D.C.-based consulting firm Quatt Associates, Inc., which specializes in compensation issues.

Quatt explains that salary survey data are sorted in a variety of ways, and employers must try to extract the most meaningful data. For example, employers may want to first determine whether they're competing nationally or locally. Even if they're competing nationally, says Quatt, they may need to ask, "do we need to consider local aberrations and add them?"

From there, HR might look at the organizations in the database and see how well they fit the make-up of their own organization. "Are the companies privately held, non-profits, or service organizations?" Quatt asks. The bottom line is, how closely do the surveyed organizations fit mine?

It's also important to see how many data points the survey uses. "You might look at a position where the title matches, but only eight companies were surveyed," says Quatt. "The median data will be very different if you look at a survey where there were 500 companies—and it would be different again if the survey used 400 companies that were from an area where pay practices are lower."

Large surveys have cuts that show segments of the survey, says Quatt. Some will cut by size ($100 million, $500 million, or $1 billion in revenue) or by the number of employees. "HR needs to make choices about which data cuts to use, and be consistent in using it across the board."

Tweak to fit

"Benchmarking isn't new, but what is new is that the financial community is asking: do we ever get a return on this money we throw out?" says Steve E. Gross, principal, Mercer Human Resource Consulting in Philadelphia.

The whole question of compensation becomes more complicated for HR, since there's no easy formula to follow, says Gross. "It's important to know what the competition is doing, but benchmarking isn't sufficient: remember that half the world pays above the median, and half below it." He advises HR to "think broadly in terms of pay, benefits and careers."

Staff who tweak compensation components have to ask questions like "should we give raises or perhaps pick up more for health care? They may even have to ask: if we pay a premium, will we be more productive?" Gross says. "The challenge for HR is to meet the demands of employees, the needs of the labor market, and the needs of their companies."

The reality is, salaries can be based anywhere along the salary line and make sense if the marketplace bears it, say experts. "Some people use the median data for their salaries," says Quatt. "You can capture a good part of the marketplace, but only in the middle. To be more competitive, you may use the third quartile—and if you can't pay those salaries, you use the first quartile."

In any case—but particularly the latter—companies must look beyond a benchmarked salary point and find additional ways to compete. LeRoy Walker, director of HR at Massachusetts Water Resources Authority (MWRA) in Boston, believes that salary surveys and benchmarks are useful tools to gather information and understand what's going on in the market. "But they're not the instruments that lead to the answer on where salaries ought to be."

Walker says that public organizations like his can't base salary decisions entirely upon benchmarks. "We look at what's going on in the market, at cost of living issues, how the economy is doing, and at our collective bargaining strategy."

MWRA can't usually offer private sector salaries, so "we create recruitment strategies that don't highlight salaries," says Walker. "We focus on the mission of our organization. We have some pretty interesting scientific and technical challenges in water technology and the science of water quality-these are things that matter and have high visibility. We're selling a chance to be on that team."

Salaries are seldom the entire reason behind any job decision, so even a company that can't pay the high end of the fourth quartile can find ways to look attractive. Make sure recruiters mention any of the following, if relevant:

• Bonuses (sign-on, performance, team-based, profitability-based)
• Matching 401k contributions
• Stock options
• Profit sharing
• Incentives (trips, prizes, time off, spot awards)
• Benefits
• Perks (free snacks, subsidized health clubs, day care center, low-cost cafeterias)
• Company culture
• Career opportunities
• Attractive location (outdoor recreation, low cost of living, city amenities, public transportation, short commute, cultural opportunities)

When talking to employees and applicants, HR should take into account what employees want at different stages of their career, and emphasize the attractive options the company offers. "At twenty-two, employees are looking for job opportunities. At sixty-two, they're looking for benefits," says Gross.

Educate employees and applicants

Deep analysis on HR's part means little when employees don't understand how their salaries are created. Any employee (or applicant) can look at salary web sites like Salary.com and see what the rest of the country is getting for the same job. How do you explain to employees why you're not offering what these Web sites say they ought to make?

"Employees are usually comparing apples to oranges," says Dickenson. "What I see are cases where employees are comparing the same position within different industries."

HR should not dismiss employee concerns, say Quatt and Gross. Instead, explain to employees that they may not be comparing apples to apples when they rely on Web data.

"Many of the Web databases are poorly managed, with information collected from a variety of sources," says Quatt. "And often, Web sites don't tell who participated." He believes that HR may even want to show employees the surveys they use and break down the data into area, job, level or career ladder. HR will seldom go wrong by helping employees understand the whole picture.

"The salary information may not even be for the same job, since titles aren't always a good indication of actual duties," says Gross. "Help employees see whether or not the information they've come to you with is valid."

HR can also use this opportunity to help employees understand what the company offers toward quality of life that may not be reflected in a salary survey. The benefits of flexible schedules, telecommuting and other work/life adjustments will not be captured in salary data.

Compensation trends

"I see things going full circle to more stabilized compensation," says Dickenson. "Sign-on bonuses still exist, of course, but the cars and other extravagant perks are going away. Employees are really looking for a good salary, great benefits, and a stable organization."

Employees also want intangibles: work/life balance, more input into their career within the organization, and continued professional skills development, says Dickenson. "Even if they could spend an entire career with a company like DuPont, they're still looking at employability—skills they can use if they should happen to leave the company."

Gross says 2002 was a mixed blessing for companies—some were hit hard, and others had little change. "The malaise is going away; it's not as good as it was, but it's back to business." He sees salary increases at about 1 - 1� percent over the inflation rate for the near future.

Walker believes there's an increased emphasis on recognition and reward programs, whether they're financial or non-financial. "Employers everywhere are looking at how you recognize the accomplishments of your employees in a timely fashion." Several surveys cited in University of Tampa's Human Resource Institute's "Alternative Compensation and Reward Systems" report show that base pay is seldom the only form of compensation for employees. Alternative compensation can take many forms: bonuses, noncash incentives, profit sharing, and so on.

HR has many sources to draw on when developing compensation plans. Used wisely, they will attract and retain talent for the company, and keep it competitive in the talent marketplace.

Carla Joinson is a Stafford, Va.-based writer specializing in human resources and management topics.