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Benchmarking Plays a Critical Role when Setting Executive Compensation

April 01, 2024

Did you know that benchmarking compensation and developing market-based practices can greatly improve your odds of attracting and retaining high-caliber executives? Read on.

The compensation packages your company offers to prospective and current high-ranking executives are vital to recruitment and retention — and, in turn, in the long-term success of your business. Benchmarking can help you keep up with market trends and develop a team of top-tier talent.

Reasons to Benchmark

Benchmarking involves comparing your company’s compensation practices with those of the companies that you compete with for talent. It helps ensure you don’t undercut yourself with inadequate offers.

Proactive benchmarking saves you from learning the hard way that your company is coming up short with attracting candidates or at risk of losing current executives. It also gives you an opportunity to develop a compensation philosophy — for example, will you pay at, above or below the market median — or revise it if the existing philosophy hasn’t proven effective for your goals. Benchmarking helps align your compensation strategies and tactics with your overall business goals.

Multi-Step Process

Benchmarking compensation is more complicated than it may seem at first glance. You’ll need to do the following:

1. Identify the relevant market(s). This might not necessarily be straightforward in a labor environment where the most prized candidates can pivot into multiple industries. Rather than considering only employers that sell the same goods or services as your company, you should pick comparators based on the skills, experience and expertise companies seek when recruiting.

2. Find position matches. You should take a similarly broad approach to identifying matching positions. In other words, don’t rely simply on job titles or descriptions, which can mean different things in different companies, specialties or industries. Look for those jobs in the relevant market that have comparable duties, responsibilities and qualifications.

3. Evaluate data sources. The potential sources of data are numerous, including:

  • Jobs surveys and reports,
  • Job listings,
  • Employment databases,
  • Securities and Exchange Commission listings,
  • Individuals who have held or supervised the position,
  • Professional and trade associations, and
  • Compensation consultants.

Consider tapping multiple data sources so you can validate the information. But you’ll find that, while the number of sources can be overwhelming, not every source is equally credible. You’ll need to screen them carefully to understand their varying methodologies and sample sizes.

4. Make appropriate adjustments. It’s rare to find jobs in relevant markets that match up precisely with your position. It may be necessary to adjust for factors such as:

  • Company mission and goals,
  • Compensation philosophies and strategies,
  • Long-term strategic plans,
  • Internal value of the position,
  • Experience,
  • Industry,
  • Company size,
  • Growth, revenue, profitability and other key performance indicators,
  • Market and economic conditions,
  • Geographic location,
  • Specific job duties, and
  • Timeliness of data.

You can apply techniques such as data regression or weighting to account for such factors.

5. Think beyond salary. Bear in mind that salary isn’t necessarily the most important draw for many job candidates. You also need to understand market trends when it comes to compensation components like benefits, performance incentives and, if applicable, equity that candidates could obtain from your competitors. Although salary certainly ranks high with job seekers, factors related to work-life balance (for example, flexible work arrangements) have become increasingly important.

Take the Time

In today’s competitive job market, benchmarking compensation and developing market-based practices can greatly improve your odds of attracting and retaining high-caliber executives. Contact our executive search group to help you tackle this time-consuming, but essential, process and apply the findings to determine the optimal compensation packages for your organization.

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