Compensation Analysis: What is it and How it Fits into Your Strategy

One way that Human Resources adds value to an organization is by ensuring that their compensation practices are competitive, fair, and compliant. A tool that helps companies align their pay strategies is called a compensation analysis.  

A compensation analysis plays a key role for companies across all industries and sizes in attracting, motivating, and retaining talent. 

Let’s look at what a compensation analysis is, why it’s important, and how you can effectively incorporate it into your business strategy.  

What is a Compensation Analysis? 

A compensation analysis is a comprehensive review and evaluation of your company’s pay practices. The goal is to confirm that the pay practices are competitive, fair, aligned with the company’s goals and industry standards, and in compliance with applicable pay laws and regulations. The analysis uses both internal and external data, and if any potential disparities or areas for improvement are discovered, they can be proactively addressed by HR.  

Here are some key elements covered by a compensation analysis: 

1. Salary benchmarking: This is the process of comparing your internal pay scales with industry standards by reviewing external market data. Benchmarking helps determine whether your pay levels are competitive for recruiting and retaining top talent. 
2. Pay evaluation: This process evaluates if there is pay equity among employees in comparable roles, regardless of gender, race, and other possible discriminatory factors. Pay equity focuses not only on fairness, but also on compliance - especially with increasing legislation around pay equity.  
3. Internal consistency: This is a review of the company’s overall internal compensation structure and philosophy to make sure it aligns with specific job responsibilities, performance, and experience. 

A compensation analysis allows HR to make data-driven recommendations and decisions that deliver fair and equitable compensation. This ultimately has a positive impact on employee morale, satisfaction, productivity, retention, and long-term business success.  

Why is a Compensation Analysis Important? 

Compensation analyses are important for many reasons. Here are just a few. 

Maintains compliance with laws and regulations 

Regulations around pay equity are increasing, and a compensation analysis is key in complying with applicable laws and regulations, whether at the state or federal level. For example, Title VII of the Civil Rights Act of 1964 and other related laws mandate that employees performing similar work must be paid equitably, regardless of race, gender, or other protected characteristics.  

Failing to proactively check for issues and discrepancies can potentially expose the company to costly legal risks and penalties. 

Mitigating pay disparities and cultivating workplace equity 

Pay disparities can have a significant and negative impact on employee morale, engagement, productivity, and retention.  Job seekers and employees alike are more savvy and educated than ever about pay-related issues, so it’s critical that HR stay ahead of any pay discrepancies and new pay laws and regulations.  

If employees raise questions or concerns about pay-related issues, HR should address them in a timely manner. Conducting thorough and regular compensation analyses allows HR to proactively identify any pay gaps. It also ensures that employees receive competitive wages that are equitable, both internally and when compared to external benchmarks.  

The bottom line is that a transparent and fair compensation philosophy helps cultivate an inclusive work culture and can also help your company become an employer of choice.  

Boosting employee satisfaction and retention  

Competitive, equitable compensation attracts top talent, keeps employees motivated and engaged, and helps companies retain their best employees.  On the flip side, salary dissatisfaction is actually one of the top reasons people leave their jobs.  

Another reason that compensation analyses should be done on a regular basis is because HR can help ensure that pay remains in line with market trends, employee expectations, and cost of living differentials. Again, this not only attracts top-tier candidates but also minimizes turnover, which can be costly to a company, both financially and in terms of lost expertise. 

A thorough compensation analysis helps maintain the balance between competitive salaries and internal equity. This balance is crucial to ensuring that employees feel valued and motivated, which leads to higher productivity and loyalty to the company. 

Identifying cost savings 

Results of a compensation analysis can help companies identify areas where they may be underpaying or overpaying employees. This can lead to changes that will result in cost savings and more efficient use of company resources.  

Steps to conduct a compensation analysis 

The thought of conducting a compensation analysis may be unnerving. Breaking the process down step-by-step helps make the analysis smoother and more manageable. Here are some of the key steps involved: 

1. Data collection: Step one is for HR to gather data. Detailed internal information is needed to have a clear starting point to measure the effectiveness of your salary structure. Internal data will also serve as a baseline for comparing against external market data. Start by pulling employee data like job title, current salary, bonuses, benefits, additional compensation, tenure, and demographics. The data can be organized by role, department or seniority so it supports your analysis. This will help reflect how salaries within each department or team compare and will also highlight trends or outliers.  
2. Salary benchmarking: Next, you need to compare your internal data to external market data. Salary benchmarking includes assessing industry compensation surveys and databases, research reports, competitor pay scales, and even current job listings. This helps make sure that your company’s compensation is in line with your specific industry and region. Keep in mind that salary levels can vary significantly depending on the job type, location, experience level, and state laws or regulations. Benchmarking ultimately allows HR to see if pay levels are competitive and in line with the market or if adjustments need to be considered. It’s also important to note that market data may not always be available or be an exact match for each of your jobs. In those cases, you can establish certain “benchmarking jobs” from which you can gauge your overall competitiveness. Select roles that are similar matches and have the clearest data and use those as markers for the remainder of your findings. 
3. Pay equity analysis and identifying disparities: The evaluation of pay equity is another crucial component of a compensation analysis. This includes making sure that employees with similar experience and qualifications, who are performing similar roles, are fairly compensated. HR should conduct the review and see if there are any major discrepancies in pay, particularly related to race, gender, age or other discriminatory factors.  
4. Action planning and adjustments: After HR gathers all the necessary data and identifies any disparities, an action plan should be developed. The plan should include actions like recommending or making salary adjustments to rectify pay inequities, revising current pay structures, creating or revising corporate compensation policies and procedures, and facilitating a communications and training plan. Communication is imperative—HR should work with leadership to ensure that any changes are clearly explained to employees. 

It’s also recommended that the action plan include ongoing monitoring of compensation practices. Compensation analysis should be an ongoing process as part of HR’s people plan, as opposed to being a one-time event or in reaction to a pay issue.   

The evaluation of budget and financial resources is also an important component in determining the compensation budget and alignment with the company’s strategic financial goals.  

Tools and Services for Compensation Analysis 

Conducting a thorough compensation analysis can be a challenging and complex undertaking, particularly if your company lacks internal resources or expertise. Fortunately, there are many available tools and services that can help. For example, there are software tools that “run the numbers” and automate salary benchmarking, data analysis, and generate reports that HR can analyze.  

Outsourcing compensation analysis to experts is another effective option. Benefits of outsourcing include access to experts who can do all the “legwork” for you, such as making sure your company’s pay practices are fair, competitive, and legally compliant.  Outsourcing also frees up internal HR and legal resources that allows them to focus on other critical HR and legal functions.  

At OutSolve, we can provide expertise and offer comprehensive solutions to your compensation analysis and compensation compliance needs. We will partner with you and provide guidance on market trends, assist with data analysis, and help with creating customized compensation strategies that align with your company’s needs and business objectives. 

What a Compensation Analysis Means for your Organization 

Conducting a compensation analysis is a necessary process for companies to ensure they are offering competitive and fair compensation packages to their workforce. This analysis should be done on a regular basis, and HR can help facilitate the entire process. By proactively reviewing and analyzing both internal and external data and developing a comprehensive compensation strategy, HR can help employers address any issues or discrepancies uncovered in the analysis.  

While there may be challenges and risks discovered along the way, the benefits of a compensation analysis outweigh the risks, including the implementation of a fair and transparent compensation philosophy that increases employee engagement, productivity, retention, and organizational success.  

Take the next step in reviewing and enhancing your compensation strategy and staying in compliance by learning more about OutSolve’s compensation services. Let us help you make all the difference in your company by staying competitive and fostering an engaged and loyal workforce. Contact us today to see how we can help.