Not only do salaries account for up to 70% of business costs, but they also impact how easily you can attract and retain talent. Therefore, compensation packages should work in your favor to fairly reward and motivate employees. But, when there isn’t a clear salary structure, you risk discontent among your staff and losing more money to paychecks than necessary.
A clear compensation strategy grounded in reliable compensation data and thoughtful salary analysis helps you offer competitive pay that supports employee retention and long‑term business performance.
What Does Compensation Data Analysis Entail?
Before exploring which metrics you should be monitoring, let’s define compensation analysis:
Compensation analysis is the process companies use to better understand how they pay their employees to create a formal pay structure. A more thorough compensation analysis will also determine whether you’re paying employees a fair rate for their work and skill level and whether your employee’s compensation is biased in any way. It gives a well rounded view of how current employees are rewarded for their usual duties and whether people in the same role are treated equitably.
Several concepts contribute to the compensation data analysis process. So, of course, some will be more important to your business objectives than others. However, by researching each factor, you’ll gain a more holistic impression of your business’s compensation structure in your industry and location’s context, using both internal information and reliable external data.
With that said, compensation analysis considers the following aspects:
- External competition. How do your salaries compare to the market average for your industry and location? How does the size of a company affect compensation? Here, hiring managers and your hr team can use compensation market analysis to understand what top talent and skilled workers expect.
- Internal equity. Are employees in your company who perform the same job paid the same? Are there noteworthy differences between specific cohorts? If certain employees feel underpaid relative to other team members, job satisfaction and employee retention may suffer.
- Region. How do median salaries differ per region? Are you paying fair wages compared to other companies in your state? This is especially important when deciding whether to hire a new employee in another location to fill a vacant position.
- Job grade. Are you compensating employees based on their workload, responsibilities and seniority? Is there a clear pay progression that rewards higher performance? Clear grading also helps you re-evaluate when additional responsibilities from an extended employee absence or extended leave should trigger a promotion or pay change.
Key Inputs for Accurate Compensation Market Analysis
You’ll need to gather compensation data and information to kickstart your compensation analysis. Below are a few key metrics and information sources to consider as you go about executing your analysis and refining your pay structures:
Company Philosophy and Benefits
This is your company’s rules and values surrounding compensation. Some businesses focus on rewarding their employees financially, whereas others throw benefits like flextime, parental leave, maternity leave, and other benefits into the mix to increase employee retention. Understanding this foundation ensures your compensation strategy supports business goals and avoids costly redundancies or costly disruptions when an employee leaves or an absent employee is on long extended leave.
Employee Information and Roles
Accurate data about employees (such as location, working hours, tenure, and performance) helps you see how employee skills and responsibilities connect to pay. It can also reveal when current employees are repeatedly covering a vacant position, taking on short term responsibilities, or stepping in for an underperforming employee. In these typical scenarios, leaders may decide whether to backfill a position, consider an internal transfer, or rely on cross training employees and training subordinates to maintain continuity.
Existing Job Descriptions
You need detailed and accurate existing job descriptions for every role. These clarify the usual duties, expectations, and required employee skills, making it easier for hiring managers to identify suitable candidates and potential candidates during the hiring process. Clear job information is especially valuable when deciding if a role is so position important that you need a permanent replacement, or if you are only backfilling the role temporarily during extended leave.
External Salary Data and Benchmarks
Drawing on third‑party compensation data allows you to establish realistic salary benchmarks. For example, a web development company or a busy sales department may rely on this information to decide whether they can lower costs by using a contract replacement or need a permanent hire because the role is critical to overall productivity. With accurate benchmarks, you can see if a new employee in managerial positions is being paid significantly more than an existing employee in the same role, and adjust accordingly so employers choose the right person and retain their best employees.
Using Compensation Data to Inform Staffing and Backfill Decisions
While the data metrics above are worth analyzing, you might not be looking to revise your entire pay structure. Therefore, before conducting compensation analysis, determine your goals and the data sets that will be relevant to achieving them, including how you manage backfill demand.
When an employee takes parental leave or another extended leave, you may decide to backfill position needs with a qualified replacement or rely on other team members to cover the gap. If a head chef or other highly position important role is open in a small business, poor planning can quickly create costly disruptions. Strong contingency plans that include cross training employees and thoughtful backfill a position strategies help you maintain continuity, protect overall productivity, and ensure your compensation strategy remains fair for both current employees and any new employee you bring on.
Choose the Right Technology for Your Compensation Analysis
Many of the metrics we mentioned require several data sets. Manually, these can be added to a spreadsheet for comparison. However, this process takes a great deal of time, and trends aren’t always immediately visible, especially when you are trying to understand the impact of employee absenteeism, frequent backfill demand, or how employees taking extended leave affect budgets and staffing.
Alternatively, using compensation analysis software can drastically decrease this workload. For instance, LaborIQ unlocks immediate access to compensation data sources from more than 400,000 U.S. businesses and 20,000 job roles. In addition, you can create custom reports in minutes to clearly visualize recommended salary rates by occupation, location and more. This enables your hr team and hiring managers to make more informed decisions about whether to backfill a position, consider an internal transfer, or rely on other team members to cover a role temporarily.
With LaborIQ, you can focus on the metrics most important to you, freeing up your time to focus on other HR-related tasks in need of your attention. Whether you are running a large organization or a small business, these insights help you avoid costly disruptions, support higher overall productivity, and build a more resilient workforce. If this sounds like a good solution, check out a demo today.
