How to Conduct a Compensation Analysis

How to Conduct a Compensation Analysis

by on 2 Feb, 2022

Many employees have begun quitting their jobs at a significantly higher rate, which is largely due to their desire for higher pay within their industry. This is why businesses must offer competitive compensation to attract and retain top-performing employees. Although a healthy company culture and an appealing benefits package can help, competitive pay is more critical than ever today.

To thrive in these times, businesses need to conduct careful and re-occurring compensation analysis to determine where they stand.

What Is Compensation Analysis 

Compensation analysis involves looking at a combination of internal and external data to gauge whether a business sufficiently compensates its employees. Specifically, this entails comparing the business’s compensation practices and data to others based on the industry, internal equity, region, and employee levels.

Benefits packages also count toward compensation in addition to salary data.  

Why Is Compensation Analysis Important? 

There are several key reasons why employers should conduct compensation analyses and determine whether they’re fairly compensating employees. 

Attract and Retain Top Talent 

Competitive pay is crucial for gaining top talent and keeping your best employees from quitting. If employees find that another business is offering better pay for the same position, they’ll be inclined to seek that position. By conducting a compensation analysis, you can make the appropriate adjustments to your pay and ensure that new and existing employees are satisfied. 

Avoid Potential Lawsuits 

Without compensation analysis, pay inequities may appear without employers consciously recognizing them. If the pay inequity exists on the level of race or gender, even if the employer isn’t aware of it, this may be the basis for a discrimination lawsuit. Compensation analysis helps make sure you’re paying fair wages to all employees. However, this doesn’t mean you have to pay everyone the same—you can adjust compensation based on location, experience, and similar factors. 

Stop Overpaying 

If your business offers well above market rates, you may be using up money that could otherwise go toward performance bonuses or raises. Through compensation analysis, you can effectively determine what type of compensation you offer compared to others in your industry. If you discover that you’re overpaying, you can adjust accordingly while investing in other ways to maximize employee acquisition and retention. 

How Do You Conduct a Compensation Analysis? 

To conduct a compensation analysis, there are a few steps you need to take. Using the right process, you’ll be able to figure out how your business compares to others and set the ideal pay rate for both your business and your employees.  

Determine Goals 

Before you can conduct your analysis, determine what you want to achieve with it. Otherwise, you can collect all the data available to you, but you may not know what to do with it.

Ask yourself some questions to get you started. Why is compensation analysis important for your company? Is the main goal to ensure employees are retained? Is it to ensure compliance with federal, state, and local pay standards? Once you’ve decided on a goal, you can begin collecting data and conducting the actual analysis. 

Gather Internal Data 

Before starting your analysis, you also need to know what you’re currently paying your employees, along with their job titles. This will help establish a benchmark comparison that you can then make against the rest of the industry. Be sure to determine what employees make at different levels and based on other factors, including location and experience. 

Gather External Data 

After collecting all relevant internal data, it’s time to look at the market at large and turn your attention toward competing businesses. You can gather external data from various sources, including the Department of Labor, the Bureau of Labor Statistics, or third-party vendors.

The information you collect regarding your industry should include the full range of compensation that employees receive. Specifically, you should be able to view the range between the 10th percentile and 90th percentile of pay. This information can enable you to compare your business’s pay rates to competitors’ more accurately.  

Set a Pay Range 

Using the benchmarks you’ve set based on the data collected, you can see how much compensation is truly fair. You’ll be able to determine how much is needed to attract highly-paid employees in your industry for a particular job title. You should always set a compensation range instead of a specific number due to the varying experience of candidates. Not everyone who applies for a position will have the same level of expertise, though they may gain it over time after hiring them. If employees see a range and understand they don’t qualify for the maximum, they may be motivated to achieve that pay through more experience and consistently great performance. 

Compensation Analysis Is Not a One-Time Event 

The market is constantly shifting, so businesses require compensation analysis on a recurring basis. With the help of thorough compensation analyses, you’ll make sure your business remains consistently competitive. You’ll have the ability to adapt to the ever-changing market, give new candidates more incentive to apply, and encourage your existing employees to stay with your company. In turn, your business will benefit from happier and more loyal employees, consistent compliance, and increased profitability.

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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