Salary benchmarking explained: What it is and how to do it

Salary benchmarking is a vital part of any organisation’s compensation strategy. It helps People and Reward teams, HR professionals, and business leaders determine competitive pay by analysing market rates based on location, role, industry, and level.

Beyond setting salaries, salary benchmarking underpins critical aspects of compensation management. With accurate benchmarking data, teams can build salary bands, target specific market percentiles, and ensure compliance with regulations like the EU Pay Transparency Directive.

There are two main ways to access salary benchmarks: traditional salary surveys (like those from Radford or Mercer) or modern salary benchmarking tools like Ravio. While salary surveys require a highly manual process and often provide outdated data, real-time tools offer a faster, more accurate view of the market, enabling a better comparison between external benchmarks and internal salary data. 

Whatever process you choose, one thing remains the same: without reliable salary benchmarks, companies risk underpaying employees and losing talent, or overpaying employees and struggling to control budgets and scale sustainably.

What is salary benchmarking?

Salary benchmarking is the process of comparing employee pay to the broader market to ensure fair and competitive compensation. The goal is to align what you pay your employees with what the market pays, which involves analysing salary data for similar roles, job levels, and industries, filtered by factors such as location and company size.

Depending on your compensation philosophy, this might be simply aligning with the market and targeting the 50th percentile, or leading the market and targeting the 75th percentile. Regardless of where on the benchmarking scale you want to pay, benchmarking is critical for bringing your strategy to life and enabling your organisation to attract and retain top talent.

With salary benchmark data, People and HR teams can build salary band structures tailored to roles, locations, and levels. They can also calculate key percentiles such as the 25th, 50th (median), and 75th percentiles and ensure pay equity by aligning employees salaries with fair market rates.

Why is salary benchmarking important?

Salary benchmarking isn’t just a nice-to-have – it’s a necessity for companies looking to remain competitive in today’s market. Without accurate benchmarks, organisations risk underpaying employees, leading to attrition and reputational damage, or overpaying, which can inflate costs and strain budgets.

Here’s why it’s a must-have for every business.

1. Benchmarking helps you retain talent

Dissatisfaction with pay consistently ranks as the number one reason employees leave their jobs. If your company doesn’t pay employees at or above their market value, they’re likely to seek better opportunities elsewhere – often with your competitors.

This is where salary benchmarking becomes critical. It gives you a clear, data-driven understanding of what competitive compensation looks like for roles across your organisation. Think of it as a market compass, showing you how similar companies compensate employees in comparable positions, helping you to foster loyalty and retention amongst your employees.

However, maintaining competitive salaries isn’t always straightforward. Budgets, economic conditions, and talent market shifts can quickly render old benchmarks obsolete. Companies that don’t revisit benchmarks regularly may struggle to stay within desired percentiles, like the 50th or 75th.

In fact, according to Ravio’s Compensation Trends report, 61% of companies cite cash compensation as the main challenge to retaining talent.

2. Benchmarking lowers your attrition costs

Replacing an employee is far more costly than most organisations realise. The total cost of attrition, including recruitment, onboarding, and lost productivity, typically amounts to 6-9 months of the employee’s annual salary. For specialised or senior roles, these costs can escalate even further.

By using salary benchmarking to align employee compensation with market rates, you can reduce turnover and minimise the financial impact of attrition. 

💰The cost of attrition:

Let’s say your company employs a P3 Software Engineer in London who earns £66,700 at the market median (50th percentile).

If software engineers make up 25% of your workforce in a 500-person organisation with a 5% attrition rate, you could lose over £600,000 annually just replacing software engineers. And that’s before accounting for other roles across your business!

3. Benchmarking avoids overpaying employees

While underpaying employees can lead to attrition, overpaying comes with its own set of challenges – particularly for businesses with tight margins or ambitious growth plans. Without accurate salary benchmarks, it’s easy to overspend on payroll, which often makes up around 70% of total operating expenses.

Salary benchmarking provides a data-driven framework for managing payroll costs effectively. By aligning salaries with market rates and targeting specific percentiles, you can strike a balance between offering competitive pay and maintaining financial sustainability – something that is particularly important for tech companies, where people costs represent the largest line item on the P&L.

Pay transparency is no longer just a competitive advantage – it’s becoming a legal requirement. 

The upcoming EU Pay Transparency Directive, set to take effect in 2026, will make compliance with pay equity legislation mandatory for all employers with European-based employees.

Salary benchmarking will be instrumental in meeting these requirements and ensuring fair pay practices. By providing an objective foundation for pay decisions, benchmarking data removes guesswork and risk of bias – often strong influencers on compensation decisions – and ensures salaries are determined in line with the market rather than subjective judgments.

Here’s what the directive will require from employers:

• Stricter gender pay gap reporting: Companies with over 100 employees must submit gender pay gap reports. If a gap of over 5% exists, employers must conduct a joint pay assessment with employee representatives and create an action plan to close it.
• Employee rights to pay information: Employees can request details about their company’s compensation approach, including job levels, salary bands, and pay progression. They’ll also have the right to request pay information for colleagues performing equal or equivalent work.
• Burden of proof shifts to employers: In pay discrimination complaints, employers—not employees—must prove that no discrimination has occurred.
• Increased pay transparency for job applicants: Employers must disclose salary ranges for all roles before interviews and will no longer be allowed to ask candidates about their salary history.

Different methods of salary benchmarking 

There are several methods for salary benchmarking, but they vary widely in reliability due to differences in data sources and accuracy. According to Ravio's survey results in 2024, the majority (68%) rely on real-time providers like Ravio when determining pay for new hires, while a surprising 60% also rely on candidate salaries.

Ultimately, only two methods are considered consistently reliable: manual benchmarking and automated benchmarking. Each has its own advantages and challenges, and the choice depends on your organisation's specific needs, resources, and goals.

1. Manual salary benchmarking: Relies on spreadsheets and salary surveys from providers like Radford (part of AON), Mercer, or WTW. It involves manually collecting and analysing data from complex spreadsheets, which is often outdated by the time you can access it.
2. Automated salary benchmarking: Uses modern tools like Ravio to access reliable, real-time market data directly through a platform. This eliminates manual work and makes comparing internal salary data to external benchmarks a simple task.

Let's take a closer look at how to do salary benchmarking through different methods.

Manual salary benchmarking (aka salary surveys)

Manual salary benchmarking has traditionally relied on salary surveys from providers like Radford, Mercer, and Willis Towers Watson (WTW). These surveys collect and aggregate compensation data from various organisations, including information on base salaries, bonuses, equity, and benefits.

The process is lengthy and resource-intensive. It begins with companies submitting detailed employee compensation data, which is then compiled and sold as benchmarking datasets. These can be purchased as full datasets that cover all participating companies or as custom peer-group reports tailored to specific locations or industries (often at an additional cost).

While salary surveys provide comprehensive data, they come with significant challenges. The manual nature of the process means:

• Outdated insights: Data can be months old by the time it’s delivered.
• Time-intensive efforts: HR teams must manually align internal roles with the provider’s frameworks and interpret static spreadsheets.
• Broad datasets: Often, the data is too general, making it less relevant for startups or companies in niche industries.

Here’s a step-by-step on how to salary benchmarking through using salary survey providers:

Step 1: Define your compensation philosophy

Before starting the salary benchmarking process, it’s essential to establish a clear compensation philosophy. This philosophy acts as the foundation for all benchmarking activities, ensuring consistency in how your company sets salaries and communicates its approach to pay. A well-defined philosophy provides direction and builds trust with employees and stakeholders.

Here’s what your compensation philosophy should address:

• Target percentiles: Decide where you want to position your company in the market. Will you pay at the 50th percentile (market median), the 75th percentile for critical talent, or another target to align with hiring and retention goals?
• Equity and bonuses: Determine whether equity or variable pay will be part of your compensation structure, and decide how these elements will be distributed across different levels or roles.
• Pay for performance: Decide if and how performance will influence salary increases or other rewards like bonuses.
• Pay transparency: Consider how transparent you want to be with your compensation approach, ensuring alignment with legal requirements (e.g., salary range disclosures) and company values.

Step 2: Update your job architecture

Accurate salary benchmarking starts with a clear and standardised job architecture. This framework ensures that your internal job titles and descriptions align with the market, making it easier to compare roles against benchmarking data.  A good rule of thumb is to compare employees to job descriptions that have an 80% match, according to the Economic Research Institute.

Here’s how to update your job architecture effectively:

• Group similar roles to reduce complexity (for example, instead of unique titles for each employee, standardise levels like “Software Engineer P3”).
• Align roles with market data by ensuring at least an 80% match in responsibilities and skills.
• Use scalable role structures to support growth (e.g., define broad categories now and refine as your company expands).

This step is critical for accurate job comparisons during the benchmarking process. However, when using a traditional compensation method like salary survey providers, this can be a laborious process.

Step 3: Identify your relevant peer groups

Determine which companies you want to benchmark against. This ensures your salary data reflects your talent competitors and is relevant to your industry and growth stage. Consider factors like:

• Industry: Benchmark against companies in the same field (e.g. SaaS vs. manufacturing will likely alter the benchmarking data you see significantly).
• Geography: Compare roles within the same location to account for cost-of-living differences.
• Company size: Use data from organisations with similar headcounts or funding stages. There’s no point comparing a 50-person company with a 5000-person enterprise!

If you are using a typical salary survey provider, you’ll likely need to complete their global grading system – a framework that evaluates your company based on key metrics such as employee count, revenue, and organisational complexity. This system assigns your organisation a grade, aligning it with similar companies for benchmarking purposes. This process can be time-consuming and inflexible, often relying on outdated tools and methodologies.

Step 5: Map roles to salary survey data

Mapping your internal job roles and levels to a benchmarking dataset is a crucial yet complex step in the salary benchmarking process. Salary surveys use predefined job frameworks that include hundreds of roles and levels, often differing significantly from your company’s structure.

For instance, roles like “Software Engineer P3” in your organisation may not align perfectly with the frameworks in salary surveys, leading to challenges in finding accurate comparisons. These discrepancies can cause inconsistencies in how roles are interpreted by survey participants and ultimately lead to inaccurate benchmarks.

To address these challenges:

• Understand the predefined frameworks: Familiarise yourself with the job families, roles, and levels outlined by the salary survey provider.
• Identify the closest match: Aim to map roles that have at least an 80% overlap in responsibilities and skills with the predefined benchmarks.
• Document and standardise your approach: Keep a consistent methodology for mapping to minimise errors and ensure reliability.

Step 6: Calculate your target market percentiles

Calculating market percentiles is a key step in salary benchmarking, as it provides the foundation for making informed compensation decisions. Percentiles represent the distribution of salaries in the market, helping you identify where your company wants to position itself in relation to competitors.

Here are the key metrics to focus on:

• 25th Percentile: Reflects entry-level pay for the role, suitable for cost-conscious organisations or those targeting junior talent.
• 50th Percentile (Median): Represents the midpoint of the market, where half of companies pay less and half pay more. Often used as a baseline for competitive pay.
• 75th Percentile: Reflects premium pay rates designed to attract top-tier talent or for high-demand roles.

When choosing your target percentile, consider your compensation philosophy, hiring goals, and budget constraints. Aligning with the right percentile ensures your salaries are competitive while remaining sustainable.

Step 7: Build salary bands

Once you have calculated market percentiles, the next step is to create salary bands. Salary bands provide structured pay ranges for roles based on market data and internal compensation philosophy, helping you balance competitiveness and cost control.

Here’s how to approach salary band creation:

1. Start with the target percentile: Use your chosen percentile (e.g., 50th percentile) as the midpoint for each band.
2. Set range spreads: Define upper and lower limits around the midpoint, considering factors like job level, experience, and tenure. For example, a common range might span 80%-120% of the midpoint.
3. Group roles into bands: Organise roles into departments, job families, or functions, ensuring similar positions are grouped within the same band for consistency.

Building salary bands using traditional salary survey providers often involves working with large, complex spreadsheets, which can be time-consuming, require advanced Excel skills, and can lead to errors when interpreting data or aligning roles. Not only that, but People and HR teams must also calculate ranges and adjust for market changes – making it a challenging and frustrating task.

How to do automated salary benchmarking (aka Ravio)

Now you know all the steps to do salary benchmarking through traditional providers like Radford or Mercer, you’ll be glad to know that there are much simpler alternatives.

Automated salary benchmarking offers a simpler and more efficient alternative to traditional methods like salary surveys. Compensation software platforms, such as Ravio, streamline the entire process, eliminating the need for manual data collection and interpretation.  

It works by pulling compensation data directly from your HRIS and automating the process of data collection. They also automatically map your job roles and levels to standardised frameworks, ensuring consistent, reliable comparisons.

Let’s look at a step-by-step of how to do salary benchmarking with Ravio.

Step 1: Connect your HRIS to Ravio

Ravio integrates with over 100 HR tools, enabling real-time benchmarking across its database of 1,000+ companies. Unlike traditional salary surveys, where data becomes outdated by the time it’s delivered, Ravio provides live market data to ensure you’re always working with the most accurate benchmarks.

Step 2: Map to Ravio’s job levelling framework

One of the most time-consuming aspects of manual salary benchmarking is leveling employees to align with benchmarking frameworks. Traditional methods require you to manually map roles, which can take days or even weeks, especially for large teams or companies with unique job structures.

With Ravio, you can map your employees to our job leveling framework or integrate your existing framework using a correlation table. It typically takes just a few working days to complete, and is of course, free!

And that’s it, no further work is required...genuinely!

Once a Ravio customer connects their HRIS, and levelling is done, People & Reward teams can use all of Ravio’s functionality. This includes:

Salary benchmarks

Whether hiring for a new role, running a compensation review, or checking a benchmark for a current employee – you can use automated salary benchmarking tools like Ravio to filter by different roles, levels, geographies, funding stages, industries, and company sizes.

Salary bands

Building and refreshing bands manually can be very painful. The formulae are complex, the spreadsheets are vast, and it’s really difficult to analyse the data to draw out useful information. With automated salary benchmarking tools, you can build salary bands with ease and model different bands scenarios to understand how to stay within budget whilst achieving people objectives.

Pay equity

Once your salary bands are established, analysing internal pay equity becomes significantly more straightforward. Automated tools like Ravio provide detailed insights into employee compensation, helping you identify outliers who fall outside their salary band or roles that lag behind market benchmarks.

These insights can also extend to analysing broader equity concerns, such as assessing the gender pay gap across different functions, levels, or roles.

By leveraging these insights, People and Reward teams can address disparities proactively, ensuring that compensation decisions align with both market trends and internal fairness. This process not only builds trust with employees but also ensures compliance with emerging pay transparency regulations, like the EU Pay Transparency Directive, which mandates reporting and action plans for significant gender pay gaps.

Can you use both salary surveys and compensation benchmarking software together?

Salary surveys and compensation benchmarking software don’t have to be mutually exclusive solutions. In fact, many companies find value in combining both to achieve a more comprehensive approach to salary benchmarking. By leveraging the strengths of each method, organisations can ensure broader coverage and increased confidence in their compensation strategies.

Here are the scenarios where combining both solutions is particularly useful:

1. Large-scale or complex organisations: Established scale-ups or public companies with a large headcount and geographically dispersed teams often benefit from multiple data sources. Salary survey providers like Radford or Mercer may have deeper datasets for specific locations or roles, while tools like Ravio offer real-time, peer-group-specific data for more dynamic insights. Combining both ensures full coverage of a diverse workforce.
2. Niche roles or industries: Companies heavily reliant on niche roles – such as biotech specialists or AI researchers – often face limited benchmarking data. Traditional salary surveys may offer specialised datasets for these roles, while compensation software provides real-time data for broader market trends. Using both allows organisations to cross-reference insights and validate benchmarks.
3. Enhanced compensation management features: Modern benchmarking software goes beyond just providing salary data. Tools like Ravio include additional features like salary band creation, pay equity analysis, and compensation review planning. Combining these functionalities with the broader datasets of salary surveys ensures companies can both access reliable benchmarks and implement them effectively across their organisation.

Example: What does a salary benchmark look like in practice?

Let’s say your company is hiring for two roles: a P3 Software Engineer in London and a P2 Software Engineer in Poland. Both are individual contributor roles (“Professional” level), but the P3 position is more senior, and London’s higher cost of living makes its market benchmark significantly higher than Poland’s.

With a traditional salary survey provider, you’d start by submitting your company’s data. After weeks of waiting, you’d receive a dataset that’s months old. You’d then need to manually align your job roles with the provider’s job codes and interpret static benchmarks.

However, if you used a compensation software provider, you could easily access live market benchmarks tailored to your company’s specific peer group, filtered by location, industry, and company size. 

You’d see that the 50th percentile for a P3 Software Engineer in London is £66,700 while a P2 Software Engineer in Poland is significantly lower at £43,000.

This example highlights why benchmarking by job level, location, and function is so critical. It ensures your offers are competitive and fair, tailored to the nuances of each role and geography.

Accurate salary benchmarks also empower People teams, managers, and executives to have informed conversations with employees and candidates about pay decisions. They can use this data to adjust compensation for market changes, reward performance and progression, and align pay with broader company goals.

By targeting specific percentiles, your company can set a clear compensation philosophy that supports hiring goals and budget management, ensuring you attract and retain the best talent in every market.

You’re ready to go!

Ready to transform the way you approach salary benchmarking? Book a demo with Ravio today and see how real-time compensation data can support your business goals.