Compensation Benchmarking

Overview

When to Use

• Evaluating whether current salaries are competitive with the market
• Designing or updating salary bands and pay structures
• Identifying pay equity gaps across demographics or roles

• For individual performance-based pay decisions (use performance management)
• When no market data is available (need at least survey benchmarks)

Algorithm

IRON LAW: Benchmarking Is Only Valid With COMPARABLE Jobs
Matching by job TITLE alone is unreliable — "Senior Engineer" means
vastly different things at different companies. Match by: job content
(duties, scope), level (IC vs manager, experience band), industry,
geography, and company size. Poor job matching produces misleading
market rates.

Phase 1: Input Validation

Phase 2: Core Algorithm

1. Match internal jobs to market benchmarks by content, level, and scope
2. Age survey data to current date: apply projected market movement rate
3. Compute compa-ratio per employee: actual base / market P50
4. Compute percentile positioning: where does actual pay fall in market distribution
5. Analyze: by department, level, tenure, demographics for equity gaps

Phase 3: Verification

Phase 4: Output

Output Format

{
  "summary": {"avg_compa_ratio": 0.97, "below_band_pct": 12, "above_band_pct": 8},
  "by_role": [{"role": "Software Engineer", "market_p50": 1800000, "avg_actual": 1750000, "compa_ratio": 0.97}],
  "equity_flags": [{"dimension": "gender", "gap_pct": 3.2, "statistically_significant": true}],
  "metadata": {"employees": 500, "survey_source": "Mercer", "survey_date": "2025-H2"}
}

Examples

Sample I/O

Edge Cases

Gotchas

• Total compensation: Base salary benchmarking alone misses equity, bonuses, and benefits. Compare total comp for accurate positioning.
• Survey data lag: Published surveys reflect data collected 6-18 months ago. In fast-moving markets, age the data forward.
• Internal equity vs external competitiveness: Aligning with market may create internal inequities (new hire paid more than tenured employee). Balance both.
• Geographic differentials: Remote work complicates location-based pay. Define a clear policy: pay by HQ location, employee location, or hybrid.
• Pay equity legal risk: Unexplained demographic pay gaps expose legal liability. Conduct regression-based equity analysis controlling for legitimate factors (experience, performance, level).

References

• For salary band design methodology, see

  references/band-design.md

• For pay equity regression analysis, see

  references/pay-equity.md