For an organization to attract and retain talent, it is of utmost importance that it is able to provide an attractive compensation package. Companies providing good compensation packages naturally stir some level of inquisitiveness in the minds of a prospective candidate. Along with the brand value of the organization, for attracting top talent, a well designed compensation package plays a crucial role. But, how does a company go about designing their compensation package? Approaching compensation package from a very conservative point of view could result in not attracting top talent, and being overtly generous could mean wasted money thereby a hit on the company’s profitability. Compensation Benchmarking is a key element in designing a pay package. This article attempts to lay out the different steps involved in the process of compensation benchmarking.

The first step involves categorization of employees on basis of the role performed in the organization. Roles in turn depend on the function that the employee falls into. Typical functions that exist in an organization are Operations, Sales and marketing, management (first level, mid level and top), HR, Finance & Accounting and Administrative functions to name a few. Some organizations define a salary group depending upon the function and the role played. However, more common practice is to define salary groups that would be applicable across all functions. Then they proceed to identify roles in each of the functions that fall into different salary groups. For instance a delivery manager in the operations function could map to a location manager in the admin function and a business development manager in the sales and marketing function. The idea is that as you go up the group hierarchy, competencies expected tend to converge. Thus a senior vice president of operations and that of administration would be more of a business role.

In high growth industries the demand for talent is also high; hence it is sometimes important to distinguish between people within the same function, same salary band and same roles. Thus, there arises a need to have a top, middle and bottom compensation range for a salary group. When hiring a lateral recruit, since the person is yet to prove, often companies introduce him into the lower part of the salary band and then re-position him depending upon the performance. When a company tries to attract the candidate by offering a significantly large pay package, it risks in creating internal dissatisfaction amongst its existing employees along with putting a bet on an unknown quantity.

Any pricing mechanism that is not influenced by market demand is bound to run into problems; compensation packages are no different. Organizations are known to collect competitive intelligence regarding the pay packages to dole out the competition. HR managers then take a call based on what percentile of paymasters they want to belong to. Though it is not necessary to be among the top paying employers to attract right talent, it definitely pays to be in the top 70 percentile.

In knowledge industries the availability or lack of talent pool can virtually make or break a company. Hence, compensation benchmarking is an important tool in the hands of HR managers and executive management to attract and retain talent.