A Compensation Analysis Guide (2023)

A Compensation Analysis Guide

Compensation analysis is critical to fair and equitable compensation. Smart companies know that providing the right compensation is one of the cornerstones of attracting and retaining the best talent. A comprehensive compensation analysis provides data and information for critical decisions related to employees' total compensation and benefits.

Labor costs make up the majority of expenses for most organizations. you can count up70% of business expenses. It is therefore important to understand what makes up these costs. While compensation review can be a complex process, it is a necessary tool to ensure fair labor practices and contribute to your employee engagement strategy.

The purpose of this guide is to provide a basic understanding of compensation analysis and the benefits associated with it. It also provides practical steps for conducting a compensation analysis, which you should adapt to the needs of your organization.

What is Compensation Analysis?
Benefits of conducting a compensation analysis
Seven steps to a successful compensation analysis

What is Compensation Analysis?

A compensation analysis uses internal and external data to determine whether or not an employer rewards employees fairly for the work they do.

Here are some key compensation analysis concepts you need to understand:

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  • external competitiveness– Employers align their data and compensation practices with external companies. For example,ForeclosureIt found that its engineers' salaries were comparable to Microsoft engineers. Given the size and geographic spread of both organizations, it was a fair comparison. On the other hand, Slack engineers were paid a lot less, but they're a much smaller organization.
  • internal equity– Employers compare the wages of employees andindirect compensationData to ensure fair compensation for the level and type of work performed.
  • Region– Employers compare the salary data of people with similar jobs in a specific region.
  • Eben– Employers compare the level of employees and the amount of their remuneration.

With all of the above components, it's important to note that while salary data is important, it's only one part of compensation. there is anotherEmployee bonussuch as health care, rebates, cars, stock plans, and housing benefits.

A key feature of compensation is that it is dynamic. This means that it is constantly changing and evolving based on the internal and external environment.

As an an example,free dayEmployees traditionally paid based on referrals in their New York and San Francisco offices. Due to COVID-19, employees have had to transition to remote work. As a result, employees have moved to the cities where their homes are located. Slack then revised its salary ranges based on employees' location.

Benefits of conducting a compensation analysis

Compensation analysis is an essential part of an organization's planning.Talent Management Strategy, as it helps attract and retain the best employees in the market. Let's take a look at other benefits of a compensation analysis:

  • salary comparisonIt gives an unbiased view of competitive salaries and enables companies to make informed decisions. Salary benchmarks provide data points on whether it is worth paying an above-average salary for an employee. It also helps to understand the holistic compensation packages that employers offer.
  • evaluatepay equityenables companies to fairly reward employees who do the same work. Conducting a comprehensive compensation analysis also allows you to correct historical salary discrepancies.
  • Transparent compensation decisionsLeave salary decisions in the hands of accurate and unbiased data. As a result, employees have a higher level of trust in the organization and its leaders.
  • Compensation analysis is dynamic,as mentioned above to enable you to make forecasts based on future needs or staffing levels and how this might impact your compensation strategy.
  • recognize opportunities– A comprehensive compensation analysis allows you to identify where you can improve your compensation strategy. For example, you can find different ways to reward employees.

could be a part of youpersonnel reports.

Seven steps to a successful compensation analysis

Now that you understand what a compensation analysis is and its benefits, let's take a look at the practical steps to conducting a compensation analysis.

1. Examine the current state of compensation

The first step is to collect and consolidate all of the compensation data across your organization. Some companies already have payroll analysis software to help with this, or others use a spreadsheet of their employee data.HRIS. Regardless of your approach, ensure that the information collected includes:

Job descriptionsA current job description for each position in the organization. This should include job titles, roles and responsibilities, level, required experience and education. This step can take six to eight weeks depending on the size of your organization.
Organization's compensation philosophyThis information is usually included in the company handbook, leaving the deeper philosophy to the CEO or HR managers. A compensation philosophy addresses the organization's compensation philosophy and how it rewards employees.
salary referenceThis is typically an annual survey that is completed and includes salary structures and salary information. Compare internal compensation data with the external market. Depending on the time of year, it may be necessary to use data from the previous year or to wait for new data from the clearing market analysis to be released.
Employee InformationIt is necessary to have an accurate count of the number of employees per department. This information must also include the following information:
- Don't
- Ort
- working day
– Incoming/outgoing data

You should also ensure that you collect information from third parties that may be critical to your organization's compensation analysis efforts. Companies like Korn Ferry, Deloitte, and PWC often have large data sets containing global and local payroll and compensation information at scale.

Check with the relevant Human Resources departments in your country for the most reputable and credible companies with these records as they serve as a valuable source of comparative information.

2. Determine the types of analysis you will perform

You should consult with key stakeholders to determine the purpose of your compensation analysis. This will help you determine the type of compensation analysis to perform.

  • Suppose a CEO is interested in why employee salaries are growing disproportionately each year compared to the market. In this case, you may want to conduct a salary analysis of employees who have joined and left the organization.
  • If you need a snapshot to understand per-employee costs, you can perform “headcount analysis” to get an accurate picture of headcount and per-employee compensation.
  • Another example is that you might want to understand why so many talented employees are leaving your company. A customer retention analysis examines salary levels and performance data and compares them to internal and external parities to make sense.

To reiterate, your compensation analysis should always be purposeful. Ultimately, this will help you extract meaningful information and present it in an engaging way.

3.Choose the right technology

To analyze compensation data, you can use an Excel spreadsheet or compensation analysis software. Let's examine these two options in a little more detail:


Microsoft Excel has long been the tool of choice for analyzing compensation data. For an organization that wants to keep their operational costs down, this is a great solution. It is also suitable for small organizations as the necessary calculations should not be that complicated. Even an Excel novice could use it.

On the other hand, Excel is prone to human error. A spreadsheet can be accessed by multiple people, and a misplaced comma can lead to inaccurate results and consequences. It's also not automated. So when an employee leaves the company, someone has to remove them from the spreadsheet. Excel is also not the “best looking format” to present to prospects. It requires manual copying and pasting of information into presentations, which in turn can lead to errors and also means additional work.

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Compensation Analysis Software

Modern compensation analysis software makes managing salary information simple and straightforward. Most companies that offer compensation analytics software are cloud-based. For example, wage and market price surveys are already included in the system and are updated periodically. This makes everything easier and more up-to-date, since the internal wages are constantly compared with the market prices. It also has built-in views and widgets that can be customized, reducing manual effort and enabling faster decision-making.

However, many organizations today are budget conscious and compensation analysis software can be expensive. Convincing key decision makers to invest in compensation analytics software can be difficult. On the other hand, the cost of losing talent is much more consequential, so you can always justify the decision to invest in such software, especially if you are a big company.

4. Do the calculations

Base your calculations on the type of information you need. For example, if you want to understand the average salary by region, you can divide the total employee salary by the number of employees in that region.

One of the most common calculations in most compensation analysis is salary.Compa-System, comparison set. This ratio helps determine if you are rewarding your employees fairly and in accordance with your company's philosophy.

Here is the formula for calculating the comparison ratio:

compare system= (actual salary / midpoint of salary range) x 100

The result is a percentage. A score of 100% means the employee is being paid exactly the midpoint of the current market rate for the job, as defined by the organization. Anything below that means the employee is paid below average, and anything above that means the employee is paid above average.

Another type of analysis could be a pay equity analysis to determine if there is a pay gap when analyzing gender or race/ethnicity.Choose your variables carefullyfor this analysis.

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5. Face challenges

If you had done your analysis in Excel or with trade-off analysis software, you would have turned your information into insights. Therefore, work to turn information into actions to validate the full analysis.

For example, the analysis can indicate that certain employees are underpaid. With the next annual pay rise, you need to make sure these employees are getting competitive wages that match their peers. While it can't retrospectively cut the wages of overpaid workers, it does give you clues as to future wage increases for those workers.

Analytical insights should also inform your future compensation and talent strategies. For example, if you are paying data scientists at your company less, and data science is a rare future skill, you may want to increase the overall compensation of existing data scientists.

6. Communicate the results

Finally, after you've completed your compensation analysis, it's time to share the results with your employees. You need to develop a communications strategy that defines how you will communicate insights to employees, managers and key stakeholders. Here are some tips:

  • Who needs to know?Not everyone needs to know about the results. Determine this based on the objective of the compensation analysis.
  • How is the current weather?If employees are already stressed, you may want to provide more context in your communications. For example,companylike Intel, Adobe and Uber found that employees are more stressed during a pandemic and are less likely to talk to their managers about pay. When employees are expecting a raise, but compensation analysis shows they are overpaid, you can communicate the results with more empathy.
  • What is needed?It is not necessary to share all information. No salary information from external companies or internal employees has to be communicated to the employees. However, you should provide context and information for analysis (e.g. number of participants, overall increases in the company, scope of the study, e.g. using data from internal and external surveys).
    • It is also important to discuss the challenges faced by the organization and the external environment. AKorn Ferry Studio, for example, showed that only 35% of respondents said 100% of employees would be entitled to a raise in 2021. The external environment and market trends can have a major impact on salary increases or decreases.

7. Can carry pigs

In most organizations, managers discuss compensation with employees, not with HR or compensation managers. Managers must be trained in:

  1. How to discuss a fixed salary increase or change for employees.
  2. How to anticipate employee dissatisfaction and how to deal with it.
  3. Things not to say and never make promises you can't keep.

Since managers are always busy, you may want to create a guide and communication plan for managers.

Your communications plan should include clear terms and phrases that should be used in a compensation conversation. Other components you may want to include in your communication plan include:

  • develop a theme– You can create a cartoon or slogan related to compensation in your organization.
  • Project– You can create a consistent brand and theme for all compensation-related communications. This way, you can create a consistent experience for employees regardless of their department, role, or location.
  • multiple channels– While employees primarily engage in compensation and compensation discussions with managers, this should not be the only channel. Employees need to understand that they can speak to HR on any platform and to any member of the leadership team across multiple channels (text, email, private meetings, etc.).

one last word

Getting a competitive salary is thesuperior criterionwhen considering a new job. If organizations want to hire and retain good employees, they must offer fair compensation. Compensation analysis helps you create a data-driven compensation strategy.

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