How to Avoid the Downside of Salary Benchmarking

How to Avoid the Downside of Salary Benchmarking


We’ve written previously about setting and benchmarking salaries – for example, how to stay competitive without breaking the bank and how to choose the right salary ranges. Some of our recommendations include benchmarking salaries, or using external resources to determine if your salaries are competitive and up-to-date. But external benchmarking has some important limitations that should be understood.

The anchoring effect can throw benchmarked compensation out of sync with performance.

The psychological concept behind “the anchoring effect” means that a person becomes “anchored” to a certain concept or, in finance, dollar amount. When it comes to salaries, the anchoring effect can result in businesses paying high performers too little and poor performers too much. Specifically, if you become anchored to a certain salary or salary range, you might refuse to pay top talent more than the benchmarked amount, even if their performance justifies it. But that could result in workers who no longer feel incentivized to put maximum effort into the work, or start looking for other opportunities. Conversely, you might end up overpaying low-performers.

Benchmarking does not consider the effectiveness of the salary.

Benchmarking will tell you what others in the industry are paying their people, but it will not tell you whether that salary successfully retains current employees, attracts new employees, and encourages workers to be maximally productive. Benchmark information is limited. You know the numbers, but not the context around them. You can also miss trends; for example, if the marketplace is in the midst of rapid change, your benchmark could fall out of date before you realize it. Even worse is when the benchmark data is for a role that’s not 100% equivalent to the position being evaluated.

Benchmarking is not an end, but it’s often treated as one.

Many organizations treat salary benchmarking as a self-contained activity, and once it’s done, salaries are set in stone. But benchmarking is ideally part of a larger process. It’s a means to an end: finding, retaining and inspiring the best talent you can afford. When treated in isolation, benchmarking creates a bureaucratic approach to compensation that can backfire by making people feel like the workplace rewards they receive have no relationship to their actual performance and productivity. 

What can you do instead?

Benchmarking still has value, but it must be part of a larger process that can account for the limitations described above. However, there are alternative approaches to market pricing, and that includes structured salary models where people move through salary grades. The salary range can be greater than the more precise market-priced salary ranges, but this gives managers more flexibility to reward employees appropriately. It makes it much easier to give raises without creating new titles. Structured salary models also incorporate internal factors more heavily, like how long the employee has been with the company and how they perform.

For more information about recruitment, contact CoAdvantage.