How To Conduct Salary Benchmarking: An Employer’s Guide

Are you paying your people what they’re worth? It’s a simple question with a complex answer. Guessing what the market rate is for a role is a high-stakes gamble. Pay too little and your best people will walk. Pay too much and you could cripple your budget. In a competitive talent market, you can’t afford to get it wrong.

Stop guessing and start leading with data. This is where salary benchmarking comes in. It’s not just an HR admin task; it’s a powerful strategic tool that helps you attract top talent, retain your best performers and build a fair and transparent pay structure. This guide will show you exactly how to conduct salary benchmarking to give your business a critical competitive edge.

What is in this guide?

• Five-step salary benchmarking cycle 
• How to embed salary benchmarking into your HR strategy
• Benchmarking policy template
• Glossary of key terms

Download the guide.

What is salary benchmarking?

Salary benchmarking is the process of comparing your internal salary structures against external market data. It involves researching what other companies are paying for similar roles in your industry and location. This isn’t the same as an annual pay review, which typically focuses on individual performance. Benchmarking is about ensuring your compensation strategy as a whole is competitive, fair and legally compliant.

Data can be sourced from various places, including official reports from the Office for National Statistics (ONS), salary aggregators on job boards and specialised industry surveys. The goal is to build a clear picture of the going rate for a specific role, so you can position your offers with confidence.

Doing this effectively brings a host of powerful benefits.

What are the benefits of salary benchmarking?

A data-led approach to pay isn’t just about numbers; it’s about people. Getting compensation right has a direct impact on your ability to grow and succeed.

Improved retention rates

When employees feel they are paid fairly, they are more engaged, more motivated and far less likely to look for opportunities elsewhere. Proactive benchmarking helps you address pay issues before they become reasons for resignation, forming a key part of your employee retention strategies.

Improved recruitment rates

In a tight labour market, a competitive salary is your ticket to the game. Benchmarking ensures your offers are attractive enough to catch the attention of high-calibre candidates. It stops you from losing out on top talent before you’ve even had a conversation and powers your talent sourcing strategies. 

Improved employee engagement

Fair pay is a foundation of trust. When your team knows you have a structured and equitable process for determining salaries, it builds confidence and psychological safety. This transparency fosters a culture where people feel valued, leading to higher engagement and productivity.

The strategic advantages don’t stop there.

Additional benefits to salary benchmarking

Beyond recruitment and retention, salary benchmarking provides critical business intelligence. It can help you identify and address pay gaps within your organisation, ensuring you’re meeting your equity and diversity goals. It also highlights regional pay variations, which is vital for budgeting if you have a distributed workforce. This data empowers you to make smarter, more informed decisions about your biggest asset: your people.

So, how do you put this into practice?

How should salary benchmarking be carried out?

A robust benchmarking process is systematic. It starts with defining the roles you need to benchmark and gathering reliable external data. You then compare your internal salary bands against the market rates and analyse any discrepancies. The next step is to create a plan to adjust compensation where necessary, ensuring changes are rolled out fairly. Finally, you must document the entire process and its outcomes to ensure transparency and consistency for future reviews.

Following a clear methodology is key to getting it right.

What best practice advice should be followed for salary benchmarking?

To ensure your benchmarking is effective and fair, adopt these best practices: 

• Be transparent with your employees about your compensation philosophy and how you use benchmarking.
• Make benchmarking a regular cycle, not a one-off project. Review benchmarks at least annually to account for market changes.
• Keep meticulous records by documenting your data sources, benchmarked roles, and decisions made. This creates an audit trail that supports fairness and compliance.

However, salary is only one part of the puzzle.

Is salary benchmarking the best way to attract and retain staff?

Salary benchmarking is essential, but it isn’t a silver bullet. While competitive pay is crucial, it’s not the only factor that influences a candidate’s decision or an employee’s loyalty. Non-monetary benefits like flexible working, professional development opportunities and a positive company culture are just as important.

The best approach is to use benchmarking to ensure your pay is fair and then compete on the value you offer as an employer. When a candidate asks those dreaded salary expectation questions, you’ll be able to answer with confidence, knowing your offer is grounded in solid data.

So, why do so many smart employers rely on this process?

Why do employers use salary benchmarking?

Employers use salary benchmarking for three main reasons: strategy, compliance and budgeting. Strategically, it ensures they can attract and retain the talent they need to grow. From a compliance perspective, it helps them identify and close unfair pay gaps. For budgeting, it allows finance and HR teams to forecast payroll costs accurately and allocate resources effectively. It’s a foundational activity for strategic HR planning. And with tools to help you find candidates, you can make sure your competitive offers reach the right people.

Let’s get into the practical steps.

How do you conduct salary benchmarking?

Follow this five-step framework to conduct a thorough and effective salary benchmarking exercise.

1. Identify benchmark roles: You don’t need to benchmark every single role. Start with key positions, roles with high turnover, or those that are difficult to fill. Create detailed job descriptions to ensure you’re comparing like with like.
2. Gather internal and external data: Collect your internal pay data for the benchmark roles. Then, gather external market data from reliable sources like industry surveys, government statistics (ONS) and reputable job sites.
3. Normalise pay data: Adjust the data to account for variables like location, company size and years of experience. This ensures you’re making a true apples-to-apples comparison.
4. Compare and adjust: Analyse where your salaries sit in relation to the market benchmarks. Decide on your desired market position (e.g., at the 50th percentile, 75th percentile). Create a plan to make adjustments for roles that are under- or over-market rate.
5. Communicate changes: Be transparent with your team about the process. For employees receiving an adjustment, explain how the decision was made. This builds trust and reinforces your commitment to fair pay.

Once you have the data, you need to present it in a way that drives action.

How do you produce salary benchmarking reports and data?

Your report should be clear, concise and visual. Don’t just present a wall of numbers. Use charts and graphs to show how your internal salaries compare to the market benchmarks. A good report includes an executive summary of the key findings, detailed comparisons for each benchmarked role and clear recommendations for action. Using a simple reporting template can help you present the data consistently and effectively, making it easy for leadership to understand and approve your proposed changes.

Ultimately, this process should be embedded in your wider people strategy.

Why should salary benchmarking be part of HR strategy?

Salary benchmarking is a powerful lever for driving your wider HR strategy. It is fundamental to achieving pay equity and supports your diversity, equity and inclusion (DEI) goals by revealing and helping to eliminate unjust pay disparities. A public commitment to fair pay, backed by a robust benchmarking process, also becomes a core part of your employer brand, helping you to stand out in the marketplace and find staff now. It signals to the world that you are a fair, modern and data-driven employer.

Download the full guide

Stop leaving your most important investment, your people, to guesswork. It’s time to take control of your compensation strategy with a data-driven approach. Building a fair and competitive pay structure is one of the most powerful moves you can make to future-proof your business.

Employment Hero’s guide gives you the framework to attract the best, retain the best and build a culture of trust and transparency.