Everything You Need To Know About Compensation Analysis

What is a compensation analysis? A compensation analysis is a review of employee pay in relation to an organization’s pay philosophy. It often takes into account both internal equity and external competitiveness to ensure fair pay that can attract, engage, and retain talent.

Compensation Analysis for Improved Hiring & Retention

Why is a compensation analysis important?

A company can use a compensation analysis to make sure it is operating responsibly and paying employees. Here are several reasons businesses should consider routine compensation analyses:

What is a compensation analysis?

Businesses use compensation analyses to determine how much they are paying their employees relative to other businesses or in comparison to one another. Businesses can benefit from conducting regular compensation analyses to determine if they are paying a fair salary or if they need to reevaluate pay to keep and attract talented employees because job market trends change frequently. A formal pay structure that businesses use as a roadmap when hiring new employees or adjusting pay is the outcome of a compensation analysis.

How to conduct a market compensation analysis

Understanding your company’s hiring procedures and how they compare to the benefits offered by comparable businesses is necessary for conducting a market compensation analysis. Follow these steps to conduct a comprehensive market compensation analysis:

1. Access salary and wage surveys

Obtaining data is the first step in determining how your company’s pay stacks up against competitors. Businesses typically have to pay labor research companies to access findings. You may receive a discount for these resources by participating in these surveys.

2. Assign responsibility

Think about who in your organization is most qualified to perform a compensation analysis. Smaller businesses may assign the task to a single person, but larger businesses will probably require a team. Business operations, finance, and human resources are frequently the departments tasked with completing compensation analyses.

3. Define job categories

Businesses often define the roles of similarly titled positions differently. For instance, one business might mandate that managers interview candidates and train new hires. Another company might delegate these tasks entirely to human resources. In order to make meaningful comparisons across the market, it’s crucial that you comprehend the duties assigned to each position in your organization.

4. Collect data

Even though there is a formal pay structure, not all employees with the same job titles are paid equally. Companies may want to specify a salary range to take into account factors like a candidate’s level of education or prior work experience. Organizing employee data is necessary to determine whether your intended approach to pay is being used. Data on gender, race, and ethnicity may be crucial in ensuring there are no discriminatory trends in how your company pays its employees.

Other factors that businesses take into account when determining how much to pay various people include the following:

5. Perform analysis

Businesses must “age” their data, which means they must take into account the passage of time since the survey was conducted. Even data collected a short time apart from one another can reflect a market that is distinct from the one you are hiring in. Once finished, choose the metric you’ll use to compare salaries. Typically, percentiles above or below the median pay rate for comparable jobs are used in compensation analyses.

Utilizing different metrics for various job categories may be advantageous. For instance, your business might be able to fill one category of jobs quickly and desire to compensate employees at or near the median for that position. Other positions might be challenging to fill with qualified applicants or crucial to your business model. You might choose to pay these jobs more than the going rate.

6. Compare to market average

Divide the salary you pay for each position by the market average to see how your business stacks up to the competition. If the outcome is greater than one, your business is overpaying. If below one, your company pays less than market rate.

7. Make pay structure decisions

Determine how to approach pay to maximize the growth of your business using the information you have gathered and evaluated. Review the information you gathered on work and educational background, and decide how your company values these characteristics for each role. In order to maintain a company’s competitiveness and provide flexibility to address a range of skill levels, this step typically entails developing pay grades or ranges for job categories. At this point, a business can also review the way it sets up incentives and extra pay, like bonuses.

8. Align with results

Choose a course of action for positions that you believe are being underpaid or overpaid. Changes in pay usually take some time to implement, but the goal is to ensure that you reward deserving employees, safeguard your company’s profitability, and continue to be a desirable employer. Cost-of-living increases, adjusting annual raises, or merit increases are frequently used to address differences between pay structure and current compensation.


What do compensation analysts do?

How to Conduct a Compensation Analysis
  1. Step One: Set Goals. …
  2. Step 2: Review the current pay practices and pay philosophy at your organization
  3. Step Three: Gather the Data. …
  4. Step Four: Put the Data into Action and Set Ranges.
  5. Step Five: Follow Through and Implement Changes. …
  6. Step Six: Determine Your Pay Communication Strategy.

How is compensation determined?

Compensation analysts research, implement, and oversee an organization’s pay structure. They receive specialized training to become knowledgeable about market wages, benefits, and compensation practices, and they counsel senior staff members on how much to pay team members at various stages of their employment.

What are the 3 compensation components?

The Hourly, Salary, Commission, and Bonuses as the Four Major Forms of Direct Compensation The majority of people who inquire about compensation want to know about direct compensation, especially base pay and variable pay.

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