Salary benchmarking

What is salary benchmarking?

Salary benchmarking is the process of comparing your employees’ pay against current market salary data for similar roles, industries, locations, and experience levels. Businesses use salary benchmarking to understand the market rate salary for a position, build competitive salary bands, and create a fair compensation strategy that helps attract, retain, and motivate employees.

Why is salary benchmarking important?

PwC's All Employee Reward Intelligence Survey found that 56% of organisations are experiencing pay compression, where pay differences between roles become too small.  

Salary benchmarking helps businesses identify these issues early and maintain clear, competitive pay structures that support employee progression and retention.

Key benefits include:

• Attracting and retaining top talent

• Building fair and consistent salary bands

• Supporting pay transparency

• Preventing overpaying or underpaying for roles

• Strengthening your overall compensation strategy

How does salary benchmarking work?

Think of salary benchmarking as a quick reality check for your pay structure. Rather than guessing what a role should pay, you're comparing it against what's actually happening in the market. Here's how it usually works:

1. Define the role - Get clear on the responsibilities, experience, and skills required.

2. Gather market data - Pull salary information from trusted surveys, reports, and benchmarking tools.

3. Compare the numbers - See how your salaries stack up against similar roles.

4. Spot any gaps - Identify where pay may be lagging behind the market or racing ahead of it.

5. Update pay ranges - Adjust salary bands where needed to keep things fair and competitive.

What factors affect salary benchmarking?

Pay can vary significantly depending on several factors, including:

• Location - Salaries in London are often higher than elsewhere in the UK.

• Industry - Demand and profitability differ between sectors.

• Experience level - Senior roles typically command higher salaries.

• Skills and qualifications - Specialist expertise can increase market value.

• Company size - Larger organisations may offer higher pay or broader benefits.

• Market demand - Shortages in certain roles can quickly push salaries up.

The more relevant factors you consider, the more accurate your salary benchmarking will be.

Salary benchmarking example

Imagine a Manchester-based marketing agency is hiring a Digital Marketing Manager. The business initially budgets a salary of £38,000 based on previous hires.  

However, after reviewing current market salary data, it finds that similar roles in the region are typically paying between £42,000 and £48,000.

Using this salary benchmark, the agency adjusts its salary band to better reflect market rates. As a result, it attracts stronger candidates, fills the role more quickly, and reduces the risk of losing talent to competitors offering higher pay.

Salary benchmarking vs job evaluation

They answer different questions. Salary benchmarking asks, "What is the market paying for this role?" Job evaluation asks, "How valuable is this role compared to others in our business?"

Most businesses use both. One helps you stay competitive externally, while the other helps you stay fair internally.

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Common salary benchmarking mistakes

Salary benchmarking is only useful if the data and comparisons are accurate. A few common mistakes can quickly lead to poor pay decisions:

• Using outdated market salary data

• Comparing roles with different responsibilities

• Focusing on salary alone and ignoring benefits

• Benchmarking too infrequently

• Applying the same salary benchmark across different locations

How often should businesses benchmark salaries?

Most businesses should benchmark salaries at least once a year. However, if you're hiring regularly, operating in a fast-moving industry, or competing for in-demand skills, it may be worth reviewing market salary data every six months.

Frequently asked questions

1. Is salary benchmarking only for large companies?

No. Businesses of all sizes can benefit from salary benchmarking. For SMEs, it helps ensure pay remains competitive, supports recruitment efforts, and reduces the risk of losing employees to better-paying competitors.

2. What data sources are used for salary benchmarking?

Common sources include salary surveys, industry reports, recruitment data, benchmarking platforms, and job market insights. The best results come from using current, reliable data relevant to your sector.

3. Does salary benchmarking always mean increasing salaries?

Not necessarily. Benchmarking identifies how your pay compares to the market. Sometimes salaries may need increasing, but it can also confirm that existing pay levels are already competitive.