Salary Benchmarking

Looking around online to see what other businesses in your industry are paying employees can be a sobering experience. Small businesses simply may not be in a position to pay talented individuals the same salaries as their counterparts at huge Fortune 500 conglomerates. Whether you’re trying to estimate a salary for a new hire or a raise for a long-time employee, small business owners need to consider unique factors in their salary benchmarking, like training and development benefits offered to employees, the employee’s experience and capabilities, location, industry, and who their biggest competitors are for talent. To gauge the value and influence of these variables, business owners need to find accurate and relevant data, most easily done online, to inform their salary benchmarking and long-term payroll planning.

Define Your Competitive Set

Collecting salary information about your competitors with some of the online tools we’re about to go over, like LinkedIn or Indeed, can not only inform you that you need to pay more or less, it can also be valuable information to share with employees so they know how and why decisions about their pay are being made.

Make a list of your biggest competitors. This is your competitive set—the businesses you need to market and recruit against. Maybe there are some huge multinational companies on the list, but it’s also likely there are other businesses of a size similar to your own. Just over half of American workers believe they are being paid fairly compared to others in their industry at different companies.1

Find the Right Sources

Salary surveys conducted by industry leaders like Payscale.com and Salary.com can provide a good starting point for understanding what a professional needs to be paid. Payscale.com collects their information from employers, while Salary.com gets their data from employees. But those numbers tend to be biased toward larger companies, and the fact that a company must pay to access the data can itself be prohibitive to a business making only a few hires each year.2 LinkedIn is one of the hubs for both recruiters and job seekers today, and for small businesses looking to set a salary range for an open position, it’s a great tool. With a paid business account, those posting jobs can see what similar jobs in their area or their industry are paying, so they know where their salary offer falls on the spectrum. Job seekers and posters alike also have access to a free function called LinkedIn Salary, where they can see how salary expectations should be affected by factors like experience and location.

Indeed.com also offers a free salary search tool that provides an average salary based on both job title and the city, state, or even zip code entered. This is great for small businesses, but it might also require some more due diligence. If you have big Fortune 500 level competitors in your backyard, their ability to pay more to employees might skew the findings. Glassdoor.com offers job seekers a personalized salary estimate based on factors like education, location, and experience. A curious employer could enter the characteristics of their ideal employee to see what comes back. You could also ask peers what they consider a good range of salary, especially for middle management, the group often shown in surveys to be least satisfied with their pay-to-work ratio.3, 4

Key Considerations During Research

Key Considerations in Salary Benchmarking

Free annual salary surveys by geographic area can be obtained from the US Bureau of Labor Statistics. This can at least give business owners in metropolitan or rural areas an idea of what people are generally paid in their region. Business owners need to keep these discrepancies in mind when negotiating salary to ensure they aren’t overpaying based on estimates from more expensive areas, or underpaying to an extent that an employee can’t survive. Still, remember the standard can be specific to industry—just because the average salary in your small town is $53,000 a year doesn’t mean that amount will convince top talent to build a career in the suburbs when the big city is calling.

These factors are why it’s important to communicate clearly with both applicants and current employees about projected salary increases in the future. Take the same opportunity to emphasize skills or personal development trainings you offer that they might not find elsewhere. Sure, a big company will pay them more, but will they get to hone as many skills as they will on a small team? What about opportunities for advancement?

Inflation is a constant phenomenon in the economy, but it isn’t always permanent. Temporary spikes in cost may cause employees to feel some dissatisfaction with their pay. However, this isn’t necessarily in and of itself grounds for a long-term increase in salary, or for hiring at a higher salary during those years. Bonuses or incentive programs may be a better short-term solution to ease employees’ sense of insufficiency while ensuring the business doesn’t overextend its resources.5

Deciding A Salary Range

Business owners can adopt several strategies when determining their salaries based on market data. Many aim to “match the market,” meaning they target the middle ground of the salary range, with 50% of their competitors paying less and the other half paying more. Others choose to be “market leaders,” and pay more than 75% of the companies in their industry.

Organizations with less-robust benefits plans or that don’t give raises as often sometimes choose to adopt this position, as do those in competitive industries. Some businesses choose to take a “market lag” position and offer a starting salary in the 25th percentile of their industry, but offset the low pay with benefits packages or variable pay like commission. The “lead-lag” approach is another option—maybe a company leads the market early in the year, but lags near the end, or vice versa. Each of these strategies has benefits and drawbacks, and whichever you adopt for your business, it should be a conscious decision.6

Deciding a Salary Range

Make a Long-Term Plan

It can be tempting to offer an amazing job candidate a big starting salary to get them in the door, but when they want a raise in 18 months, will you be able to provide it? Create a long-term plan for raises and changes in compensation that is in line with your projected growth, and share it with employees. If employees know raises are occurring on a pre-defined schedule in pre-determined amounts, many uncomfortable conversations or frustrated feelings can be avoided. However, this plan and the data that informs it should be re-evaluated on a regular basis. If your industry is growing rapidly, you may find the raise you wanted to offer a year ago doesn’t keep the wage competitive today.

Cultural trends toward data collection and analysis make salary benchmarking a necessity for every small business, whether they’re looking to make a new hire or retain great employees. With salary ranges for every position available online, employees or prospective employees are able to see how their talents could be valued other places. While these online tools provide an excellent jumping-off point, business owners must be able to analyze this salary information through the lens of their own position in the market. With that understanding, they can provide transparency to their new hires and existing employees and make the right long-term decisions for the success of their business.