How to Do a Compensation Analysis in Five Steps

Are you paying your employees what they truly deserve? In today’s competitive job market, ensuring fair and competitive compensation is foundational for attracting and retaining top talent.  

A well-executed compensation analysis can help you create a successful pay strategy. The process can seem daunting, but it doesn’t have to be!

Whether you're a small business using spreadsheets or a larger enterprise leveraging sophisticated software, the goal remains the same: to establish pay equity and maintain a competitive edge. 

This article delves into the nuts and bolts of conducting a comprehensive compensation analysis. From conducting market surveys to gathering internal data and a step-by-step guide to conducting the analysis, you’ll be ready to create a compensation strategy that advances your organization’ goals. 

What is a Compensation Analysis?

A compensation analysis is a comprehensive evaluation of an employer's pay and benefits structure. It uses internal and external data to determine whether the current compensation structure is fair, or if it needs improvement to remain competitive. The goal of the analysis is to ensure that all employees receive equitable pay based on their responsibilities, experience, and education.

Most compensation analyses include four different components:

• External data: The HR team uses compensation information from other companies with similar roles to assess pay and benefits differences.
• Internal data: Using current pay information for company employees, HR leaders determine whether workers receive fair pay for their contributions.
• Region: Pay can vary significantly depending on where employees live. For instance, a worker living in New York City will likely receive much more than someone living in a small Idaho town.
• Level: Typically, entry-level positions pay less than mid-, senior-, or executive-level roles.

While salary is the focal point of most compensation analyses, a comprehensive evaluation will also consider employee benefits such as health care, dental care, retirement plans, vacation and sick leave, and other benefits.

It's good practice to perform a compensation analysis annually. Larger companies with substantial workforces or multiple locations might consider performing the analysis more frequently, especially as they add new roles.

How to Conduct a Compensation Analysis

Step 1: Define the Purpose of the Analysis

Establishing the 'why' before you begin helps you align your compensation analysis with your organizational goals. This motivation will shape which data is collected, how it's analyzed, and the overall goals of the exercise.

The purpose of your compensation analysis could be multifold, and may resemble:

• Ensuring internal pay equity.
• Attracting and retaining top talent. 
• Remaining competitive within your industry or region. 
• Ensure your compensation strategy is cost-effective and sustainable. 

Your aims could also be a combination of these factors. For instance, say an organization is facing a high employee turnover rate and has received feedback that compensation is a significant factor leading to employee exits. In this case, the purpose of the compensation analysis would be twofold: 

1. Attract and retain top talent by offering competitive compensation
2. Ensure internal pay equity to maintain employee satisfaction and morale

Step 2: Job Evaluation

During a job evaluation, each role within your organization is comprehensively examined. This review can encompass not only job titles but also the nature and requirements of the job. Key elements include: 

• The responsibilities and skills required. 
• The effort and time commitment needed. 
• The conditions under which the work is performed.  
• The overall impact of the job on the organization.
• The potential for job progression. 
• The value of each job in terms of attracting and retaining talent. 

Once all relevant information is collected, jobs can be ranked or classified according to their relative worth. 

For example, let's say your organization has a role titled "Marketing Coordinator." During the job evaluation process, you would analyze this position to understand its responsibilities, such as running marketing campaigns and overseeing social media accounts. Additionally, you'd take into account the necessary skills for the role, like digital marketing knowledge, project management, and proficiency in certain software tools. 

This evaluation could reveal that while the title is "Marketing Coordinator," the level of responsibility and required skills are more similar to a "Marketing Manager" at other organizations. This insight would be important when comparing your compensation for this role to market rates. 

Step 3: Market Survey

In this phase, you collect and analyze data from the marketplace to understand the competitive rate for each job position within your organization. This helps you gain a comprehensive picture of what similar roles in comparable organizations are paying. 

Market survey data can be obtained through various sources such as online databases, industry-specific reports, or salary survey agencies. 

When collecting data, try to:

• Gather data that matches as closely as possible to the job descriptions and responsibilities identified in your job evaluation phase.
• Look for each role’s base salary ranges, bonus structures, and other benefits. 
• Focus on industries, organizations, and geographic locations similar to yours. 

For instance, thinking about that "Marketing Coordinator" role, you would look for salary data for titles like Marketing Manager in companies of similar size, industry, and location. Perhaps you find that the average salary for this role is $70,000 in your city, but you are currently paying your Marketing Coordinator $60,000. This discrepancy suggests that you might need to adjust your compensation for this role to remain competitive and retain talent.

Step 4: Gather Internal Data

This involves accumulating information about your current compensation packages for all roles within your organization. During this process, you may need to collaborate with various departments within your organization and survey employees. 

When doing this, it can help to:

• Team up with the finance department to get accurate information about the current pay structure. 
• Involve department heads or managers to understand more about job roles and their compensation details. 
• Gather data on base salaries, variable pay such as bonuses or commissions, and indirect compensation like benefits and perks. 

To return to our example, let’s say you find that the Marketing Coordinator earns a base salary of $60,000, with an annual bonus potential of $5,000. On top of that, they receive a benefits package valued at approximately $7,000 per year. The total compensation package comes to $72,000. 

Step 5: Data Analysis and Drawing Conclusions   

The purpose here is to compare your organization's current compensation packages to the market rate for each position. When you have all the information, you can come to a conclusion on whether you need to make any salary adjustments.

When analyzing, make sure you:

• Use appropriate statistical measures such as mean, median, ranges, and percentiles.
• Assess whether your compensation packages are attractive enough to retain current employees and attract prospective talent. 
• Consider whether the compensation is fair across all roles within the organization. 
• Identify any internal pay discrepancies or inequities that may exist. 

Think about our Marketing Coordinator. If the market rate for a similar role (in this case, the "Marketing Manager") is $70,000 base salary, but typically doesn't include a bonus, your total compensation is competitive, despite the lower base salary. 

However, during the analysis, you also notice that within your organization, another role with similar responsibilities and requirements - the "Sales Coordinator" - has a total compensation package of only $65,000. This discrepancy might suggest an internal pay inequity that needs to be addressed. The data analysis phase is crucial for uncovering such issues and informing your compensation strategy to ensure it is both competitive and equitable.

Compensation Analysis Tools and Softwares

If you have a small staff, you can perform a compensation analysis using Excel or another spreadsheet software. You probably already have spreadsheet tools available in your organization, so it's a budget-friendly option for companies seeking to minimize costs.

Spreadsheets allow you to slice and dice your compensation analysis data any way you like. For example, you might categorize your employees by their departments, current salaries, roles, and location, then add external data like the average compensation paid for similar roles in your region. 

However, spreadsheet tools have disadvantages to consider. For one, they have few error safeguards. Simple formula mistakes can result in a miscalculation, leading to inaccurate results. They also require a lot of manual effort, which can be a time drain.

If you're a larger employer or one with complex work structures, your organization may benefit from dedicated compensation analysis software. A dedicated solution contains the features necessary to perform extensive compensation analysis. 

Here are a few options to consider:

Deel

Deel is a global payroll software program offering various features, including hiring support, compensation benchmark tools, and payroll services for over 100 countries. It has extensive integrations, plugins, and an API you can use to connect with your ERP or HRIS system.

Aeqium

Aeqium offers various tools for compensation analysis, including Total Compensation Management, Compensation Band Management, and Compensation Planning. With Aeqium, you can analyze compensation across your team, establish fair and consistent pay practices, and plan your compensation strategy.

Barley

Barley is a comprehensive compensation analysis platform that includes comp reviews, pay equity, benchmarking, and pay band evaluation functions. It allows employers to centralize all their compensation processes in one place. You can also use it to communicate the total value of your company's pay and benefits to your employees.

Using Wellness Benefits to Boost Your Competitive Edge 

When conducting a compensation analysis and developing a compensation strategy, consider as well the impact of your benefits package. Benefits like wellbeing programs can differentiate your organization from others — 93% workers only consider companies that emphasize employee wellbeing when changing jobs.

Research consistently shows that when employees feel their organization cares for their wellbeing, their engagement and productivity increases. There’s a reason 9 out of ten CHROs say that wellness programs help attract candidates and retain current employees.

Employee wellness is no longer nice-to-have — it’s a strategic tool to maintain a competitive edge in today's dynamic job market. If you want to learn more about boosting your workforce with wellness benefits, reach out to a Wellbeing Specialist today! 

References

• A Guide to Compensation Analysis. Academy to Innovate HR. Retrieved March 21, 2024, from https://www.aihr.com/blog/compensation-analysis/
• An Essential Guide to Compensation Analysis + 5-Step Process Explained. Retrieved March 21, 2024, from https://www.chrmp.com/compensation-analysis/
• Employee Wellbeing Is Key for Workplace Productivity. Gallup. Retrieved March 21, 2024 from https://www.gallup.com/workplace/215924/well-being.aspx