How to Do a Salary Comparison Analysis with Compensation Software

As companies work towards meeting their business goals, they engage in a constant battle of attracting and retaining top talent. It is no secret that when its employees perform exceptionally in their jobs, it yields higher profits.

Compensation is still the top consideration for candidates when evaluating job offers, thus it is a priority for companies to get it right. To achieve this, conducting a thorough compensation analysis is crucial, and Salary.com's Compensation Software provides valuable assistance.

What is a Compensation Analysis?

A compensation analysis is the process of evaluating a company’s current pay practices relative to the industry. It examines the employees’ pay within the organization to know how well it aligns with its compensation philosophy.

Key Elements of Compensation Analysis

There are four core components in performing a compensation analysis:

• Internal Equity. This compares the wages of employees doing similar roles in an organization; it prioritizes fairness in pay within an organization.

• External Competitiveness. This considers the total compensation that your competitors would pay for similar jobs; it should not only include base salary but also other rewards models such as benefits and bonuses.

• Geographic Pay. In conducting a compensation analysis, employers should compare the salaries of employees per region. This incorporates the cost of living in different locations into the compensation package.

• Performance Level. An effective compensation analysis should include relating an employee's performance to their pay.

Benefits of Conducting a Compensation Analysis

Analyzing compensation is vital for organizations to maintain fair and competitive pay. Here are a few reasons why it's important:

• Compensation analysis helps organizations attract top talent by offering competitive salary packages.

• It ensures internal equity, promoting fairness and preventing pay disparities among employees in similar roles.

• By benchmarking against industry standards, compensation analysis helps organizations stay competitive in the labor market.

• Compensation analysis motivates and retains employees, as fair pay is a key driver of job satisfaction.

• It supports strategic business goals by aligning compensation with performance and organizational objectives.

• Through regular reviews, compensation analysis allows companies to adjust compensation to reflect changes in the market and industry.

• Compliance with legal and regulatory requirements is ensured, mitigating risks associated with compensation practices.

How to Conduct a Salary Analysis

Now that we have identified the benefits and valuable elements that comprise a good compensation analysis, let us go through a step-by-step guide to conducting one with the help of Compensation Software.

1. Step 1: Determine the Purpose

   Lay out the objectives of your salary analysis. What do you want to achieve with it? Do you want to lead the market and attract top talent? Do you want to close the pay gap within your organization? It is critical to define the scope of your analysis.

2. Step 2: Perform a Job Analysis

   The next step in conducting a wage analysis is to perform a job analysis. This will help your organization classify its jobs appropriately and position your employees relative to your company structure.

   Define the roles and responsibilities for each position and see what job titles can be grouped in the same salary bands. Conduct a job evaluation to establish the value of a job relative to other positions in the company.

   The Compensation Software provides job titles and job descriptions for various positions with relevant market data, aiding job classification and grouping similar roles. Its job evaluation tools can help determine the relative value of jobs within your organization.

3. Step 3: Know the Current Internal State of Compensation

   An integral part of the salary analysis is to collect internal data on salaries, bonuses, non-monetary benefits, and other forms of compensation. Analyze pay by position, work experience, education, and skills. You should also gather data on personal employee characteristics such as gender, race, ethnicity, age, and physical disabilities for you to be sure that there are no inequities that exist.

4. Step 4: Salary Benchmarking

   A formal pay structure does not guarantee that all employees in your organization are paid fairly and competitively. This creates the need for salary benchmarking against industry standards. To ensure that data is comprehensive, valid, and accurate, experts recommend using at least three different sources, and they may include:

   • Third-party traditional surveys. These offer a wide range of data from the government, industry associations, but the downside of using these data is that it may not be relevant to what is happening in the market because it takes months for these surveys to be published.

   • Crowdsourced data. These sources can offer current and convenient employee salary information for comparison because it is collected in real-time. Since this is an employee-submitted survey, you should take thorough steps to validate the information.

   • Custom surveys. You can hire third-party consultants to provide reliable and comprehensive market data and help you perform a salary analysis.

   The software helps you quickly price and benchmark your organization's jobs by providing up-to-date data for comparisons with industry standards and competitors.

5. Step 5: Perform Salary Analysis

   Use benchmarks to gauge internal equity and assess salary competitiveness. Audit compensation for similar roles across departments to identify unintentional biases. Review employee data, including skills and performance, to explain differences.

   Also, evaluate your pay against market standards, research competitor benefit programs, and create a compelling compensation model that considers job location adjustments for cost of living and talent demand in specific regions.

   The Compensation Software offers salary modeling tools to address inequities and establish a fair, competitive salary structure. Its intuitive drag-and-drop editor simplifies range expansions, job movements, and structure creation. The tool also includes a survey management feature that centralizes all compensation data sources, streamlining market pricings and survey management in one place.

6. Step 6: Address the Outliers and Inequities

   Based on your findings from the salary analysis, summarize any adjustments needed in your current salary structure. These changes should be able to correct discrepancies and put you on par with industry standards.

   For example, suppose you have two employees with the same skills, education, and experience working on similar jobs, but one is underpaid. At the same time, the other is getting paid above average. You can work your budget to reward your underpaid employee with merit increases or adjust the timeline for salary raises of the overpaid employee until they both achieve equitable compensation.

7. Step 7: Communicate Strategically

   The final step in creating a well-designed salary analysis is communication. It is essential to communicating the conclusions to your employees after conducting your compensation analysis. However, you should identify what information should be discussed and who needs to know them.

   Since your managers are the people who directly face and work with employees, training them to discuss pay with the employees is crucial. Managers need to know how to conduct appropriate conversations, including the right amount of information to disclose.

Compensation Analysis Misconceptions

Compensation analysis is vital in HR management for attracting, retaining, and motivating talent. Yet, there are common misconceptions that can hinder a clear understanding of compensation strategies. Here are a few:

• Only External Benchmarks Matter

  Some organizations believe that compensation analysis should only rely on external market benchmarks. Though market data is essential, internal factors such as organizational culture, job roles, and employee performance should also be considered to create a well-rounded compensation strategy.

• Focusing Only on Salaries

  Relying solely on salary surveys may lead to a narrow perspective on market trends. A comprehensive salary analysis should also consider benefits, bonuses, and other non-monetary perks that contribute to the overall employee value proposition.

• Assuming Pay Equals Performance

  Some may assume that higher compensation automatically translates to better employee performance. While salary analysis indicates that competitive pay is important, it's crucial to recognize that other factors, including job satisfaction, recognition, and opportunities for growth, also significantly impact overall employee performance.

• Uniform Salary Adjustments

  A common misconception is that salary adjustments should be uniform across the board. Compensation analysis should consider individual performance, skills, and contributions to tailor adjustments, promoting a merit-based compensation structure.

• Neglecting Total Rewards Communication

  Some organizations assume that employees inherently understand the value of their total rewards package. Effective communication of the complete compensation package, including benefits and non-monetary perks, is essential for employee engagement and satisfaction.

• Ignoring Long-Term Incentives

  Salary analysis sometimes focuses too heavily on short-term benefits, overlooking the importance of long-term incentives. Considering stock options, retirement plans, and other deferred benefits is vital for retaining top talent and aligning employee goals with organizational success.

Addressing these misconceptions in the context of salary analysis helps organizations develop more accurate, fair, and strategic approaches to reward and retain their workforce.

The bottom line

The challenge in compensation analysis is managing an overwhelming amount of data and aging reports to paint an accurate picture of what is happening in the market. Compensation Software maintains a database of your salary ranges and employee data and updates its database of HR-reported surveys monthly to guarantee that the insights you get are relevant to making informed decisions for your organization.