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

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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.

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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

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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

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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.

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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.

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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.

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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

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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.

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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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