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1.2.2 Benchmarking Pay
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From the course by University of Minnesota
Managing Employee Compensation
394 ratings
University of Minnesota
394 ratings
Course 4 of 5 in the Specialization Human Resource Management: HR for People Managers
From the lesson
Pay Determination
This module covers designing a compensation strategy and translating that into a pay structure.
Meet the Instructors
Alan BensonAssistant Professor
Carlson School of Management, Department of Work and Organizations
Mike DavisSenior Lecturer
Carlson School of Management, Department of Work and Organizations
In this video we're talking about how to benchmark pay.
So first of all, what is benchmarking pay?
Benchmarking pay is the process of matching our jobs
to our external benchmark jobs for the purposes of determining pay.
You're probably already used to benchmarking lots of other things.
This is essentially the essence of comparison shopping.
So for example,
let's say that you're interested in buying a three bedroom, three bathroom house.
So what would you do?
Well, you want to find external benchmarks that look
very similar to that house that you're trying to buy.
You might find some houses that are one bedroom one bathroom houses.
You might find some houses that are five bedroom five bathroom houses.
But as you know, neither of these are very good benchmarks.
They don't look similar to the house that you're trying to buy.
Rather the house that you are most interested in as using as benchmarks would
be those three bedroom,
three bathroom houses that look most similar to the one that you want to buy.
And this is essentially the essence of benchmarking.
We want to find those same jobs based on our job descriptions in the external
market that looks similar to the ones that we have at our organization.
So how do you benchmark pay?
Well, the first step is to start off with your job description.
Kind of like the house that we're trying to buy.
The second step is matching our external benchmarks.
This is our process of going off into the market and figuring out what are some
of the comparable job descriptions out there and how much do those houses cost?
How much did they recently sell for?
Or in the case of the labor market, for example, we're looking for
an administrative assistance, we go off into the labor market, find a similar
job description, and figure out how much administrative assistants are being paid.
Step three is to make adjustments.
Typically when your benchmarking something, whether its a house or a job,
you're not going to find the perfect benchmark.
And so we're going to talk about the different methods that we can use for
adjusting our benchmarks to our particular situation.
So the first step is to start off with our job description.
Once again, the job description is going to tell us what jobs we're looking for,
all right.
So this is kind of like if you are in a scavenger hunt,
this is the list of things that you're looking for.
And where are you going to search for it?
Well, there's a lot of different resources.
One of the government websites such as the Bureau of Labor Statistics.
The Bureau of Labor Statistics goes through a lot of effort to administer
surveys all over the country for all sorts of jobs in all sorts of industries.
And they generate information regarding the pay and
forecasted future pay of different jobs.
Another option is to go through different websites such as jobstar.org,
salary.com or glassdoor.com.
These websites also compile information about what people are paid in
the labor market.
Another source of data are trade association surveys.
Trade association surveys will typically cover their different members.
Their members would submit data on how they pay their workers.
The trade association will compile these and
disseminate this information back to their members.
So let's take a look at what one example looks like.
This is an example of Compensation and
Benefits Managers from the Bureau of Labor Statistics.
As you can see, the Bureau of Labor Statistics will tell you,
give you a summary of the job, the description of what they do,
the work environment, how you become one, the pay,
the job outlook, some of the occupations, and more information.
This information can be used in the basis of creating a job description and also for
benchmarking pay.
So let's say that you've chosen your source of data,
whether it's a government website such as the BLS, or trade association data or
some external resource.
Then you will have some list of jobs, and from that list of jobs,
you have to decide which one of those appear to make the best benchmark.
To do that, we don't necessarily want to use their job titles.
We'll want to actually compare based on the individual description,
the job summary, the job tasks, the requirements, the context, the KSAs,
which one of those descriptions look most similar to the job we want to benchmark?
It's kind of like for
the house, this is the house that has the same number of bedrooms and bathrooms,
the same square footage, and the same neighborhood and so on.
And so if we're going to our benchmark here, we might have a list of jobs such as
general managers, HR generalists, and bookkeeping clerks.
Might say well the general managers do a lot of duties, have a lot of job duties,
that aren't consistent with what our compensation benefits managers do.
Likewise, there's a lot of things that are compensation benefit managers do,
that our general managers do not do.
For bookkeeping clerks, it might look like not only do our compensation
benefits managers perform different tasks, but they also have certain requirements.
Our job, for example,
might require more education than the typical bookkeeping clerk.
And so from this information, it looks like our job description
is most similar to our benchmark job description for HR Generalist.
But, of course, this is all relative, you might be looking at a different resource,
and you might have a different list of potentially benchmarkable jobs.
So, for example, you might have another resource that has HR Generalists,
Compensation Specialists, and Payroll Clerks.
Well, in this case, if you're looking at the job description between them,
you might find the most similarities among the Compensation Specialists.
So let's go back to the example of the Bureau of Labor Statistics.
The Bureau of Labor Statistics has hundreds of different occupations
with these different benchmarks.
And again, as I mentioned,
one of the things that they'll have is compensation data.
Let's zoom in on the job summery there.
As you can see in 2012, it says the median pay for this job was 95,250 per year.
That means that half of compensation benefits managers were making more than
that number, half of them were making less than that number.
So what do we want to do with that information?
We want to take that $95,250 and we can put it in our spreadsheet.
So we have our job title that we're benchmarking against, Compensation and
Benefits Managers.
We have the source of that data, and we have the median pay.
And since the Bureau of Labor Statistics isn't the only resource that we want to
use, we can also do the same thing with many other resources.
We might have a local survey with of HR managers that will tell us they make about
$90,000 a year.
We'll have benefit managers from Salary.com, it says that they make,
$95,491 per year.
Professional Association data,
there's Salary.com data for other jobs, and so on.
This isn't to say that all survey data is created equally.
Remember, we want benchmarks that are matched very well in job duties.
That match very well in geographies, and
other kind of ways that our data can be comparable.
So that being said, we might like the Bureau of Labor Statistics data a lot,
because this is talking about compensation benefits manager specifically.
You might also put a little bit of extra weight on, for example,
a local survey, because it's specific to our geography, or
the Salary.com data because we like their job description.
And so now that we have the weights, we want to calculated a weighted mean.
So to calculate the weighted mean in this case, 94,000 dollars per year,
what we would do is we would take the median pay, we would multiply that
by the weights that we chose, and we would add those all up together.
So for example if we took the median paid times the weight,
we'll generate this third column here.
We'll add those all up together and we get $658,000 and $1 and
then we'll add up the weight, and we'll get 7.
We'll take that $658,000 and divide it by 7.
And that will give us $94,000.
That's our weighted mean.
That's our mean where we put extra emphasis,
we give an extra bump to the benchmarks that we thought were best.
So what do you do with that number?
What do you do with that weighted mean?
Well, that's our benchmark number.
What would we do for matching the market?
That means that our job's middle pay should be the middle of our
benchmark's pay.
So what does that look like?
So eventually this is going to be used to create our salary structure.
So, for example, for administrative salaries,
we'll have compensation benefits managers, and the midpoint of our compensation
managers should be the same as the midpoint for our benchmark data.
So that's where it is, $94,000.
From there, we're also going to want a range.
So for example, if we want to have some flexibility, you might say that the most
that we'll pay our compensation benefits managers is 20% above our benchmark.
That'll bring us to $112,800.
We also need to have a minimum, and so we might also take our benchmark and
subtract 20% to give us kind of our entry-level compensation for
our compensation benefits managers.
In that case, that's a benchmark minus 20% will be $75,200.
So here we essentially our basic building block for building a salary structure.
We'll have our benchmark data, which will give us $94,000,
plus or minus, are some value to give us our pay range.
So, what if you can't find a good benchmark.
Well, that's why it will be important to understand surveys in greater details in
how the labor market works, so we can figure out how to adjust our pay.
All right, see you next time.
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