2025 Compensation Benchmarking Guide - Process & Examples

Compensation benchmarking, or salary benchmarking, is the process of comparing a company’s pay for specific roles to market rates. This involves analyzing compensation data from competitors and industry peers to ensure salaries are competitive while aligning with the company’s budget and pay philosophy.

This practice is essential for attracting and retaining talent, as competitive pay helps companies stand out in the job market and boosts employee satisfaction. It also supports compliance with pay equity laws and promotes transparency by reducing bias in compensation decisions.

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Beyond hiring, benchmarking helps organizations retain top talent by keeping salaries aligned with market rates. Proactively adjusting pay can prevent valuable employees from leaving for higher offers elsewhere.

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Ultimately, effective compensation benchmarking ensures fair, competitive pay, leading to higher morale, lower turnover, and a stronger ability to recruit top talent. To get the most value from benchmarking, companies must understand the best data sources to use, key steps in the process, and how compensation trends vary across industries.

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Data Sources for Compensation Benchmarking

Gathering accurate compensation data is essential for effective benchmarking. Organizations rely on multiple reputable sources and methods to obtain market pay data, ensuring accuracy and relevance. A combination of sources often works best–an industry survey for core roles, government data for entry-level positions, and platforms like Glassdoor for emerging trends. When multiple sources align, confidence in the benchmark increases.

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It's also crucial to match the data source to the organization's needs. A small local business may prioritize regional salary surveys or BLS data, while a global tech firm might invest in specialized international surveys and real-time tools. The key is to use current, industry-specific, and trustworthy data.

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Below are seven common sources organizations use for benchmarking.

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1. Government Databases

National labor statistics agencies often publish salary data. For example, the The Bureau of Labor Statistics (BLS) provides extensive wage data by occupation and region. Government data is typically free and covers a broad range of jobs, which can be useful for baseline benchmarking, especially for common roles and in industries where public data is robust.

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2. Industry Salary Surveys

Professional compensation surveys are among the most reliable sources. These are often conducted by HR consulting firms or industry associations. Companies like Mercer, Aon (Radford), Willis Towers Watson, and Pearl Meyer run annual salary surveys where participating companies submit their pay data and in return get access to anonymized, aggregated results. 

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Such surveys can be industry-specific or general. For instance, Mercer’s Total Remuneration Survey provides broad data across industries, while specialized surveys (like Mercer’s tech or energy sector surveys) focus on a particular field​.

​Industry associations (e.g., healthcare associations, engineering societies) also publish compensation benchmarks for roles in their domain. These surveys usually provide detailed breakdowns by job title, level, company size, and geography, and are considered highly credible. Many large corporations rely on these benchmarking reports tailored to their industry or region for precision​.

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3. Crowdsourced Data and Salary Websites

Websites like Glassdoor, PayScale, and Levels.fyi (for tech) collect self-reported salary information from employees. These can be quick and free ways to gauge market rates, especially for well-known roles.

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However, data quality can vary since it’s self-reported and may not account for role nuances. Still, they offer a useful pulse on the market, and their large sample sizes can be informative. Some newer platforms even allow real-time comparisons and custom peer group benchmarking using such aggregated data.

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4. Data-Sharing Networks

Sometimes companies form informal networks or participate in data exchange programs where they agree to share anonymous compensation data with each other. For example, a group of startups might share their salary ranges with each other to build a mini-benchmark report. Professional networking forums or HR communities can facilitate this. These networks give more tailored peer comparisons (e.g., similar size companies in the same region).

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5. HRIS and Compensation Software Data

Many modern compensation management software tools come with benchmarking data or integrate with data providers. For example, ADP offers DataCloud which aggregates pay data from millions of workers to provide benchmarking insights​.

Other tools (like salary benchmarking platforms and HR analytics software) might provide on-demand salary benchmarks for given roles and locations, often updated in real-time. These solutions can save time by putting data at a manager’s fingertips within the software.

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6. Consultant and Custom Surveys

For unique or high-level roles, companies might commission a custom survey or use consultants to get very specific data. Executive compensation, for instance, is often benchmarked using specialized surveys or consulting analyses tailored to a handful of comparable organizations. Consultants can also help when standard surveys don’t cover an emerging role or a very niche skill set. They might reach out to targeted peer companies to gather data on your behalf.

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7. Internal Sources and Recruiter Insights

Don’t overlook internal data from recent hires or candidates. The salaries that candidates are asking for or the counteroffers you’ve seen can indicate market movement. Recruiters and hiring managers often collect anecdotal data during interviews on what competing offers candidates have. Additionally, reviewing competitors’ public job postings (some list salary ranges, especially with new pay transparency laws) can yield insights​.

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Process of Compensation Benchmarking

Conducting a compensation benchmarking analysis involves several key steps that ensure a thorough and fair comparison between your internal pay and the external market.

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Below is an outline of the typical process:

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1. Identify and Categorize Roles

Begin by listing all the positions you want to benchmark and ensuring you have clear job descriptions for each. It’s crucial to categorize roles by function, seniority level, and location so that you compare “apples to apples. This way, when you gather data, you’ll be matching each internal role to the equivalent role in the market.

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A solid job analysis upfront (defining responsibilities, required skills, etc.) ensures you find the right market matches for each position, which is the foundation of accurate benchmarking​.

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2. Collect Market Compensation Data

After defining the roles, the next step is to gather reliable market salary data for those positions. Use multiple data sources (detailed in the section above) to obtain information on what similar jobs pay in your industry and region. This can include salary surveys, industry reports, government labor statistics, or compensation databases. Make sure to account for factors like geographic location, company size, and industry in the data, since pay can vary widely with these factors​.

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Also, it’s often helpful to collect data for various percentiles (e.g., 25th, 50th, 75th percentile) to understand the range of pay. For each role, you will end up with a snapshot of the market rate or salary range that competitors offer.

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3. Compare Internal vs. External Pay

Once you have the market data, compare your internal salary data to the external benchmarks. This analysis will show where you stand: are you paying below market, at market, or above market for each role?

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A common approach is to line up each position’s current salary (or salary range) against the market percentile (e.g., see if your pay is near the 50th percentile/median, or the 75th percentile, etc.).

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It’s important to filter and align the data correctly. For instance, compare by similar location or cost-of-living area, and similar company size if possible, since a software engineer in a small firm in a low-cost area shouldn’t be directly compared to one at a large firm in Silicon Valley​.

4. Analyze and Interpret the Data

With the comparisons in hand, dive deeper into what the numbers mean. Identify patterns, such as certain departments or job functions consistently lagging the market. Investigate outliers. For example, if one role is 20% under market, is that due to a fast-rising market trend or perhaps a critical skill shortage?

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Analysis should also include looking at total compensation, not just base salary. Consider bonuses, stock/equity, benefits, and other incentives that are part of the package​.

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5. Develop Salary Ranges and Adjust Compensation

Using the insights from the analysis, create or update your salary ranges or bands for each role or level. This means setting a minimum, midpoint, and maximum for what you will pay for a position, informed by the market data​. For example, if the market median for a job is $50,000, a company might set a range around that (e.g., $45,000–$55,000 for mid-level roles, depending on strategy).

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Decide where your organization wants to position itself in the market. Some companies choose to pay at the 50th percentile (meeting the average market rate), while others aim higher (75th percentile or “top of market”) to be more competitive.

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Your company’s compensation philosophy (cost leader vs. talent leader) will guide this. If you discover significant under-market salaries, plan how to adjust them. This could involve immediate raises or phased adjustments over time to close the gap. Always balance competitiveness with budget realities.

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6. Document, Implement, and Revisit

Document the benchmarking process and the sources/methodology used. For instance, note which surveys or data cuts were used for each role and any assumptions made​. This creates a repeatable process and transparency for future analyses.

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After that, implement the changes. Update pay structures, communicate any adjustments to leadership (and potentially managers or employees as appropriate), and integrate the new ranges into your recruiting and reward processes.

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It’s equally important to revisit and redo the benchmarking regularly. Best practice is to benchmark key roles annually or at least every couple of years, or whenever you experience rapid growth or enter new markets​.

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Compensation Benchmarking Examples

Many leading companies have well-developed compensation benchmarking and compensation strategies. Here are a few real-world examples and best practices from prominent organizations:

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• Netflix (Top of Market Pay): Netflix is often cited for its unique compensation philosophy of paying top-of-market for every employee. The company’s strategy is to offer the highest compensation the company believes that person could get elsewhere, effectively removing pay as a reason for the employee to leave. Netflix explicitly delinks pay from traditional performance reviews and doesn’t use bonuses or equity grants the way other companies do; instead, they give very high cash compensation and let employees decide if they want to purchase stock​.

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• Buffer (Pay Transparency and Formula): Buffer, a social media software company, has become famous for its open salary policy. They publicly share everyone’s salaries and even the formula they use to derive pay. Buffer’s salaries are benchmarked using a formula that starts with market data (they use industry salary data, pegged at around the 50th percentile of market for their size) and then adjusts for cost of living and experience. For example, they might benchmark a software engineer role at a certain market rate and then apply a multiplier for San Francisco vs. a lower-cost location​.
  
  
• Google (Structured Benchmarks and Leveling): Google and other large tech companies use extensive benchmarking and have very structured leveling systems for jobs. Google participates in many salary surveys (often exchanging data with other tech firms) to gather market intel. They combine this with an internal job leveling system (e.g., Software Engineer Level 3 vs. Level 4) that corresponds to a range of market rates. A best practice gleaned from Google’s approach is the granularity of benchmarking: rather than just broad roles, they benchmark at each level/seniority, which ensures new hires and promotions are aligned to appropriate pay ranges.

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• Pearl Meyer Banking Survey (Regional Bank Case): As an illustrative case from the finance world, Pearl Meyer’s 2024 banking compensation survey (covering 660 financial institutions) showed how banks use data to navigate pay decisions​. One bank, for example, might find through the survey that their loan officers are paid 10% below the market median for banks of similar asset size in their region. In response, that bank could decide to adjust those salaries upward to at least meet the median and avoid losing talent to competitors. The case highlights a best practice: breaking benchmark data by relevant peer group (in this case, by asset size and region) so that the comparison is meaningful.

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• Internal Benchmark Adjustments (Example Best Practice): A best practice seen in several leading companies is performing annual market adjustments. For instance, a leading healthcare company might benchmark salaries each year and give targeted increases to roles that fell behind the market. If nurses in their region saw a market pay increase due to high demand, the company might proactively boost its nurses’ pay by a similar percentage even if those nurses weren’t due for a standard raise. This practice, employed by companies like Mayo Clinic or Kaiser Permanente in healthcare and some tech companies for key engineering roles, is essentially a case of “following the market” closely. It underscores the point that benchmarking is not a one-time exercise but a continual practice. 

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Using PerformYard for Compensation Benchmarking

PerformYard is primarily known as performance management software, but it can also play a valuable role in compensation benchmarking and planning. While the act of gathering market data might happen outside PerformYard, the platform helps integrate and analyze compensation information in conjunction with employee performance and HR data, which is crucial for informed pay decisions.

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With PerformYard, HR teams can centralize their compensation-related data and then leverage it alongside performance metrics. For example, PerformYard allows you to import or sync data from your HRIS, such as each employee’s salary, bonuses, and even equity grants​. This means you’ll have a single view of all current compensation elements per employee.

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When you bring in external benchmark data (perhaps as custom fields or reports), you can compare an employee’s current pay to the market benchmarks within the system. The platform’s reporting features enable HR to generate reports that overlay compensation and performance. For instance, you could see if your top performers are paid above, at, or below market, which is a critical insight for retention​.

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PerformYard also facilitates the managerial review process when it comes to compensation. Through a dual-view interface, managers using PerformYard can see an employee’s compensation information right alongside their performance review feedback​. This is incredibly useful during salary review cycles or merit increase discussions. Managers have context on both how the employee is doing and what they are earning (relative to their range or market data). It leads to more informed and fair pay recommendations.

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In summary, PerformYard enables a data-driven approach, integrating external benchmarks with internal performance and pay data, ensuring alignment between pay and performance, and helping managers and HR make informed decisions.