HOW TO PERFORM
COMPENSATION BENCHMARKING
AND SET SALARY RANGES
www.payscale.com2
INTRODUCTION
It shouldn’t be a surprise to you to hear we live in an employee’s market. Potential hires today are more informed than ever about the market rate
of their positions. These days, skilled professionals are highly confident they can leave their existing job and land a better one. In fact, PayScale
conducted a study in 2019 to understand the primary reasons people quit their jobs. We discovered wanting higher pay was the number one
reason people decided to quit their job (selected by 27 percent of respondents).
The loss of knowledgeable employees has serious financial consequences to a business. Revenue and market share could be lost due to
delayed product launches, missed quotas, inability to service customers, hiring and training costs and more.
To compete for talent and win, your organization must understand what the market is willing to pay for the positions you need to hire and use
that information to develop competitive salary ranges for each position. In this guide, we will show you how to choose relevant data sources for
benchmarking compensation and create salary ranges that align with your talent strategy.
WHO IS THIS GUIDE FOR?
This guide is for any founder, CEO, HR or compensation professional who is ready to dig into the data and create a well-informed compensation
structure for their firm. This guide is for those who have already defined their compensation philosophy and strategy. If you have not done the
work of defining your compensation philosophy and strategy, please take the time to complete these steps before moving onto this information.
Here’s a resource to help you get you started.
The key steps in the compensation benchmarking process are:
Choose data sources that fit with your business context
Apply your compensation strategy to the data
Create salary ranges
3 www.payscale.com
STEP 1: SELECT THE DATA
The first step to compensation benchmarking and creating salary
ranges is selecting data sources for market salary information.
You want the data to be specific to your industry, geography, size
of organization and type of organization (e.g. non-profit versus
for-profit). And, your goal is to benchmark 75 to 80 percent of your
positions. This means the data must also cover a variety of skill
sets, experience levels and educational backgrounds.
How to Choose Market Data To Benchmark Your Jobs
Choosing the right data sources is a question of knowing your talent
market and being honest about the talent you need to grow as well
as what you can afford.
Your talent market consists of other employers who seek to hire
the same types / caliber of employees as your business. It is the
combination of your industry, company size and location. You can
get clarity on your talent market by talking to employees — where
did they come from and where do they go when they leave your
company?
Also, keep in mind that your talent market isn’t static. As your
company grows, you may need to bring in people who have had a
different set of experiences from your early employees. Additionally,
you’re likely facing different talent competitors for different roles
and locations.
Once you’ve established the market in which you compete for
your talent (industry, company size and location), you can identify
the data sources that cover your talent market(s), job types and
locations. There are three primary sources for validated, external
salary data and each have their own strengths and use cases. When
making your selection(s), consider what type of organization you
are as well as your available budget for conducting a market study.
www.payscale.com4
PayScale’s Crowd-Sourced Data
Methodology: PayScale administers the largest real-time salary
survey in the world. We get more than 10 million website visitors
each month; people complete a salary profile on our website in
order to find out what they’re worth as they prepare to ask for a
raise or evaluate a job offer. The survey is detailed and dynamic,
designed to collect useful information on the specific skills,
certifications and education needed for each job. We use a multi-
step, rigorous process to validate the data to ensure the data
delivered to customers is valid and defensible.
Check out PayScale’s data methodology here.
Benefits: Because employees know the most about their own jobs,
crowdsourced data allow for much more specific and granular data.
Crowd-sourced data typically cover more jobs and locations, as well
as fast-moving and newly emerged jobs, because they are updated
on a daily basis. At PayScale, we have more than 55 million crowd
sourced data points and we collect around 200,000 new, usable
salary profiles every month.
Disadvantages: Some groups are underrepresented with
crowdsourced data. Often there is no motivation for executives
to fill out online surveys; they know what they’re worth. Similarly,
people in minimum wage jobs are less likely to fill out online
surveys. Finally, online surveys tend to skew white collar, since they
require easy access to a computer or smartphone.
Jobs With Good Data Coverage:
• Fast-moving jobs (often in the technology and healthcare sectors)
• Jobs where specialized skills make a big difference in pay
• Emerging jobs
• Jobs in the U.S., Canada and within major English speaking countries
• Jobs in rural locations
• White-collar jobs
www.payscale.com5
Data Sharing Networks
Methodology: This is a newer type of salary data that’s sourced
from participating employers. In 2017, PayScale developed a
solution that allows our customers to share data across our
compensation platform (we call it Company-Sourced Data). By
leveraging customers’ in-product behaviors and their previously
uploaded HRIS data, PayScale aggregates the information and
automatically generates updated compensation benchmarks every
quarter.
Benefits: Participants of PayScale’s data sharing network receive
aggregated data that is specific to their market (city, industry)
quarterly. This data source contains some interesting job categories
that are hard to find elsewhere. Getting this data requires zero
work for a user, because PayScale has automated the work of data
collection through our system. Uses of this data source benefit
from network effect: the larger the data sharing network grows,
the better the data becomes (in depth and breadth). As of this
writing, PayScale has more than 1000 participating members in our
data sharing network, covering 3500 unique positions across 12
industries, and we’re growing at a rapid pace.
Disadvantages: Some groups may be underrepresented with
company-sourced data.
Jobs With Good Data Coverage:
• Executive pay
• Technical jobs
www.payscale.com6
Employer-Sourced Surveys Provided Consulting Firms or Professional Associations
Methodology: This category includes names such as Mercer,
Radford, Aon-Hewitt and Willis Towers Watson. Organizations
(typically larger ones) participate in these surveys by matching their
employees to survey job titles and descriptions, then submitting
the data to the consulting firm. The firm then verifies and crunches
the data to provide distributions back to the participants, and
sometimes nonparticipants, typically for a fee.
Many industry associations offer industry-specific surveys that
service only a given vertical. Trade associations will often make
data available to their member bases as well.
Benefits: The methodology of this data source is well-understood.
Employer-sourced surveys typically provide a participant list,
giving visibility into which businesses (and competitors) are also
participating in the survey. Usually this list contains mostly larger
companies.
Disadvantages: Sometimes, the data could be broad or perhaps
doesn’t provide info for more rural areas. These data sources
are usually published annually based on data that are up to nine
months old. As a result, they often come with “aging coefficients” to
apply to the data. Because the data often lack freshness, they may
have gaps for newer jobs and hot jobs.
Jobs With Good Data Coverage:
• International locations
• Executive jobs
• Minimum wage jobs
• Companies in large revenue buckets
Remember, no single source of data will cover all of your jobs,
and each has its own strengths. The key is to make sure the data
sources you select cover the jobs you care about, your industry
locations, and competitive set. To get there, you must understand
the methodology of the survey you are using. This means knowing
how the data is collected, if skill or geographic differentials are used
and what the effective date of the data is. This information helps
you assess the quality of the data and know whether it will truly
offer your company a competitive advantage.
Also, keep your budget in mind. High cost does not always equal
high value. Beyond just what you are directly paying the survey
company, you must also consider indirect costs, such as time for
your own company’s participation in a traditional survey. One way to
break down the numbers is to estimate and compare the cost of the
survey per positions matched in your company.
7 www.payscale.com
STEP 2: APPLY YOUR COMPENSATION
STRATEGY TO THE DATA
Once you select sources for your data you believe will give your
organization the best quality and value, your next step is to apply
your organization’s compensation strategy to the data. Your
compensation strategy defines your plan for compensation and
it should be tightly linked to the organization’s business strategy.
Your compensation strategy will answer important questions for
your salary benchmarking projects, such as: How do we define our
competitive set? Where do we want to be relative to the competition,
namely lead, meet or lag? What are the goals of our compensation
program, such as drive performance or reward longevity? It’s not
enough to just define the strategy, but to earn employees’ trust, you
must be transparent about it.
How to Select Jobs to Benchmark
After setting up your competitive set based upon your
compensation strategy, identify the positions within your
organization you wish to benchmark against. When selecting
your benchmark jobs, you can start with those positions that
are standard across different industries, such as HR generalist,
accountant and administrative assistant. Next, choose industry-
specific positions that are standard at your company compared to
positions in other organizations within your industry, such as civil
engineer, registered nurse and welder.
www.payscale.com8
Hybrid Jobs: How to Price These Roles
Every organization will have some jobs that are unique. To address
highly specific business needs which cannot be met by the typical
roles in the market, organizations often create new roles where
disparate or unusual skills are combined in a single role. These are
known as hybrid jobs. Here at PayScale, we’ve seen examples where
companies blend Program Manager with SEO Manager, Taxonomist
with Administrative Assistant and HR Director with Director of IT.
For these roles, you may not find a good match in your survey
data. Averaging the market value of two roles isn’t always the
right answer either. The right approach for you depends on the
role in question, your business needs, your talent market and your
organization’s pay philosophy. That said, there are four distinct
approaches we’ve seen organizations take. To illustrate these
methods, we’ll use HR Manager/Officer Coordinator as the example.
1. The Blending Method
This method begins by benchmarking each job separately and then blending the
market data to create a composite. If the position has clear delineation of duties
performed, you can apply the appropriate weight before blending: HR Manager 40
percent, Office Coordinator 60 percent.
The blending method works best for companies who value a fair balance between
market competitiveness and internal equity. However, if one or more of the jobs
you are blending is not common in the market and the market data doesn’t instill
confidence, this isn’t the best approach for you.
2. Highest Level Role Method
Sometimes it helps to imagine you are posting this job for external candidates. Are
you looking for an Office Coordinator with HR Manager experience or the other way
around? It is common for the higher-level position to drive the pay in the market for
the talent you are seeking. If this applies to you, it makes sense to match this role
to the higher level of responsibility when choosing a title. In this case, selecting
the HR Manager title would be the best approach. This approach works well for
organizations which want to pay competitively to the market.
3. Internal Equity Method
If your hybrid role is so unique you just can’t nail down a match or blend of market
data that instills confidence, you may choose to align these roles to your internal
structure. In other word, find the best internal comparable role to determine the
market rate for this role. This method aligns well for those organizations which value
internal equity. But this can also be a good resolution if you are struggling to nail
down market competitiveness.
4. Premiums & Discounts
If you have a strong pulse on the market and you understand the value of certain
skills, applying a premium can accomodate for any skills that might not be typical
to the position the hybrid role was assigned to. Or perhaps, the job that your hybrid
position best aligns to needs an adjustment in the other direction based on internal
leveling. For instance, you might match a Manager level to a Director level and apply
a 10 to 15 percent discount to bring that role in line.
No matter what approach you take, having the right tools and an understanding
of the different methods you can apply will get you to a more reliable range.
Compensation management platforms like PayScale Insight Lab can make this
process easier and help you find the right balance or blend of data.
www.payscale.com9
Refine and Correct the Data
You might want to make some adjustments to the external salary
survey data before it is used for benchmarking. One potential issue
with some data is age (e.g. the data was collected last year). In
this case, you will need to age the data from the effective data in
the survey to the effective date for your organization. You do so by
choosing a multiplier from a source such as www.worldatwork.com
and following the steps below.
Aging Data
• Find the effective date of the survey data and decide on the target date for the data. The effective date is date that the survey data represents. The target date is the date to out to which you would be aging the data.
• Decide on an annual adjustment factor. Typically, this tracks year-over-year cost-of-living increase.
• Calculate the portion of the factor to use based on the effective date.
• Apply the aging factor to the market data.
PayScale’s compensation management platform gives you the ability
to easily age your data.
2.9%
Effective Date
Target Date
Source 1
Source 1 aged
Source 2
Source 2 aged
Source 3
Source 3 aged
Buyer II 12/2/18 6/2/19 1.50% $55,000 $45,408 $46,089 $41,601 $56,000 $56,840
Marketing Coordinator
12/2/18 6/2/19 1.50% $53,000 $52,000 $52,780 $32,469 $53,978 $54,788
Accountant 12/2/18 6/2/19 1.50% $58,000 $56,345 $56,500 $57,190
Another step is to weight your sources. If certain sources are likely
more accurate, you want to make their data have more influence over
the final salary ranges you come up with. You can weight different
sources more or less than other sources on a position-by-position
basis. For example, if you have an industry specific salary source, you
may weight your data more heavily for that survey for positions that
are highly influenced by industry. Steps to weight your sources:
1. Choose the weight you will assign to each source.
2. Use the aged data from that source.
3. Multiply the source data by the weight assigned to that source.
4. Calculate your weighted average.
Position Source 1 Weight Source 2 Weight Source 3 Weight Weighted Average
Buyer II $55,000 0.25 $45,408 0.5 $56,000 0.25 $50,454
Marketing Coordinator
$53,000 0.25 $52,000 0.5 $53,978 0.25 $52,744
Accountant $58,000 0.5 $56,345 0.6 $57,172
10 www.payscale.com
Match Your Internal Jobs to Your Salary Data
No matter how specifically the data matches your organization’s
positions, you’re still going to need to review your internal job
positions’ requirements for knowledge, skills and abilities (KSA), as
well as experience level and education, then apply the external data to
develop your salary ranges.
Basic guidelines for matching the survey data to your organization:
Don’t match on title alone. The external sources of data may use a title
similar to one in your organization for a fairly different job position.
Take a careful look at the requirements of the job rather than just
matching the titles.
Look at the scope. When looking at the requirements of the job
position you’re matching, some specific factors to consider are who
the position reports to, education and experience level needed and
decision making required.
PayScale matches based on over 250
compensable factors, giving you more
in depth insight than any other source.
www.payscale.comv
STEP 3: CREATE A SALARY RANGE
FOR EACH POSITION
A range contains a minimum (the least you need to pay to get a
qualified person to accept the offer), a midpoint (the 50th percentile
of the range), and a maximum (your ceiling for what you’d be willing
to pay / can afford for a position). These are the steps to creating a
range.
Step 1 - Determine the Range Midpoint
In general, you want to start by determining the range midpoint for
each of your positions. Look at the market midpoint for each position
from your external salary survey. The market midpoint is the median
value of the aged, weighted market data for the position.
However, you do not need to make the market midpoint the midpoint
for your range. It’s up to you to decide how competitive you want to be
in setting pay for each position (lead, match or lag the market). Here
are some questions to consider to inform this choice:
1. How critical is this particular role to your organization?
2. What is your organizational profile (small startup, fast-growing
company, publicly traded vs. private, etc.) and company stage?
3. What can you afford?
4. How much would you like to spend on base pay versus other areas
of your total rewards package (variable pay, commissions, benefits,
and perks)?
Let’s say based on how the external salary data you’ve selected,
you find a Data Analyst who knows Excel and SQL with two years of
experience makes between $60,000 to $80,000 a year. In this case, the
minimum (or 0th percentile) is $60,000, the range maximum (100th
percentile) is $80,000. The range midpoint (or 50th percentile) is
$70,000, and the range spread is $20,000.
However, your circumstances are a bit different. Your leadership team
has decided the Data Analyst position is critical to your company
growth in the next 12 months, and you really need someone highly
skilled who can make a difference on day one. For those reasons,
you may decide to target the 75th percentile of the market (lead the
market) for the Data Analyst position, and set the range midpoint at
$78,000.
To get to this number, we used this formula: range minimum + range
width multiplied by target percentile. In this example: $60,000 + (0.75 x
$20,000) = $78,000
Once you have decided on the midpoint for a position, the next step is
to decide how wide you want the range to be.
0th PERCENTILE 50th PERCENTILE 100th PERCENTILE
$60,000 $70,000 $80,000
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Step 2- Determine the Width of a Salary Range.
There are no hard and fast rules on salary range width; it will depend
on your goals and particular organization. Generally, the wider the
range, the more opportunity there is for employees to move up in
salary.
Typically, you’ll want to consider having wider ranges for higher level
positions, where the expectation is employees will have more longevity,
or differentiation of skills or performance. On the other hand, if you
want people to quickly master a position (e.g. entry-level positions)
and give people a sense of rapid career growth, you may set narrower
ranges for each position but set the expectation with employees that
these are “stepping stone” positions.
In general, ranges start from 30 percent in width for junior roles and
can be up to 60 percent in width for executive level roles.
Position LevelRange Width
or Spread (% of minimum)
Sample Job Titles Sample Range
Nonexempt positions 30%Marketing
Coordinator$50,000 to $65,000
Exempt positions (individual contributors)
40% Software Engineer $80,000 to $112,000
Exempt positions (managerial)
50% Director of HR $80,000 to $120,000
Executive positions 60%Chief Product
Officer$130,000 to $208,000
Range Spread (or Range Width): Distance between bottom and the top
of the range.
= (Max - Min)/ Min
Step 3 - Create Guidelines for Each Compensation Scenario
Once you have the ranges built out, you’ll want to develop guidelines
for different situations, including:
• Where new employees enter ranges
• How and how quickly current employees move within ranges
• What happens when an employee is promoted
• How much discretion managers have to move someone through the range
In general, it makes sense to curve out sections of the range for newer
vs. proficient, vs. highly seasoned / high performing employees. For
example, you might start a new employee in the lower third of the
range, and increase their pay to the 50th percentile of the range in 12
months, once they gain full proficiency in the role. You might reserve
the top third of the range for employees who are high performers and
those who are going above and beyond in their job. What you decide
needs to sense for your specific organization.
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Use metrics to stay consistent to your guidelines
To manage employee pay through a range, you’ll want to get familiar
with a couple of metrics: Compa-Ratio and Range Penetration.
Compa-Ratio and Range Penetration are indicators of how employees
are performing relative to the ranges.
Compa-ratio and range penetration are measuring the same thing,
just that one is a ratio and one is a percentage. They both help you
understand if you are rewarding people appropriately for the behaviors
you need to achieve business objectives. They both help you identify
underpaid and overpaid employees. When you layer this information
with data about employee performance, you can make the best
decision for the employee from a pay perspective.
Range Penetration = (EE Pay - Min) / (Max-Min)
Compa-Ratio = EE Pay / Midpoint of the assigned range
Range penetration benchmarks to remember:
0% is the minimum of the range.
50% is the midpoint of the range.
100% is the maximum of the range.
Compa-Ratio explained:
1.0 is the midpoint, meaning that the employee is at the 50th
percentile of the range. A compa-ratio of beneath 1.0 means that the
employee’s pay is in the bottom half of the range and a compa-ratio
above 1.0 means that the employee is in the top half of the range.
What is acceptable as a compa-ratio range varies by compensation
strategy, we recommend you start with a guideline of 0.9 to 1.1. In
general, if you are way under 90 percent, you are non-competitive
under your own plan and if you are far over 110 percent, you are paying
more than you should pay for typical performers.
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SUMMARY Think about how many staffing headaches, product delays, missed
quotas and customer issues you will avoid if you can ensure your
employees are satisfied with their pay and their jobs.
To have full confidence that your compensation strategy is
lock-step with your business goals, you must have accurate
compensation data that is reflective of the current market as well as
your organizational context. Creating pay ranges that are informed
by data and aligned to your talent strategy will help you bring the
right people into your organization, make offers with confidence,
mitigate risks of turnover caused by inequitable pay practices and
manage pay with confidence.
PayScale provides organizations instant access to fresh external
salary data, filtered by your talent market and aligned with your
criteria. PayScale software dramatically reduces the amount of
manual work associated with pricing jobs and building salary
ranges. In addition, our solution will help you identify potential
issues with employees’ pay in real time, so you can resolve the
issue before a valuable employee walks out the door and takes their
talent to the competition.
ABOUT PAYSCALE
PayScale offers modern compensation software and the most
precise, real-time, data-driven insights for employees and employers
alike. Thousands of organizations, from small businesses to
Fortune 500 companies, use PayScale products to power pay
decisions for millions of employees.
For more information, please visit: www.payscale.com or follow
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