Compensation Analysis:
Definition, Elements, Comparison & Uses

Compensation analysis is a comprehensive review and evaluation of a company's pay practices to confirm that compensation is competitive, fair, aligned with company goals and industry standards, and in compliance with applicable pay laws and regulations. The analysis uses both internal and external data to identify potential disparities or areas for improvement that HR can proactively address.

A compensation analysis shows how you're paying your employees in comparison to other companies. It plays a key role for companies across all industries and sizes in attracting, motivating, and retaining talent by ensuring pay practices deliver equitable compensation that positively impacts employee morale, satisfaction, productivity, retention, and long-term business success.

Related terms: salary benchmarking, pay equity analysis, market analysis, pay evaluation

A compensation analysis covers 3 key elements that together provide a complete picture of an organization's pay practices:

• Salary benchmarking: Comparing internal pay scales with industry standards by reviewing external market data to determine whether pay levels are competitive for recruiting and retaining top talent
• Pay evaluation: Evaluating if pay equity exists among employees in comparable roles, regardless of gender, race, and other possible discriminatory factors, focusing on both fairness and compliance with increasing pay equity legislation
• Internal consistency: Reviewing the company's overall internal compensation structure and philosophy to ensure it aligns with specific job responsibilities, performance, and experience

These elements work together to allow HR to make data-driven recommendations and decisions that deliver fair and equitable compensation across the organization.

Compensation analysis is important for 4 primary reasons that directly impact organizational success and legal compliance:

• Maintains compliance with laws and regulations: With increasing regulations around pay equity, compensation analysis is key in complying with applicable laws and regulations at the state and federal level, such as Title VII of the Civil Rights Act of 1964, which mandates that employees performing similar work must be paid equitably regardless of race, gender, or other protected characteristics
• Mitigates pay disparities and cultivates workplace equity: Pay disparities negatively impact employee morale, engagement, productivity, and retention, so conducting thorough and regular compensation analyses allows HR to proactively identify pay gaps and ensure employees receive competitive wages that are equitable both internally and externally
• Boosts employee satisfaction and retention: Competitive, equitable compensation attracts top talent, keeps employees motivated and engaged, and helps companies retain their best employees, as salary dissatisfaction is one of the top reasons people leave their jobs
• Identifies cost savings: Results of a compensation analysis help companies identify areas where they may be underpaying or overpaying employees, leading to changes that result in cost savings and more efficient use of company resources

Failing to proactively check for issues and discrepancies can expose the company to costly legal risks and penalties while also damaging employee trust and workplace culture.

Conducting a compensation analysis involves 4 key steps that make the process smoother and more manageable:

1. Data collection: Gather detailed internal information including employee data like job title, current salary, bonuses, benefits, additional compensation, tenure, and demographics, organized by role, department, or seniority to establish a clear starting point and baseline for comparing against external market data
2. Salary benchmarking: Compare internal data to external market data by assessing industry compensation surveys and databases, research reports, competitor pay scales, and current job listings to ensure company compensation is in line with your specific industry and region
3. Pay equity analysis and identifying disparities: Evaluate pay equity to ensure that employees with similar experience and qualifications performing similar roles are fairly compensated, reviewing for major discrepancies in pay related to race, gender, age, or other discriminatory factors
4. Action planning and adjustments: Develop an action plan that includes 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

The action plan should include ongoing monitoring of compensation practices, as compensation analysis should be an ongoing process as part of HR's people plan rather than a one-time event or reaction to a pay issue.

Salary benchmarking is the process of comparing your internal pay scales with industry standards by reviewing external market data. This comparison includes assessing industry compensation surveys and databases, research reports, competitor pay scales, and even current job listings to determine whether your pay levels are competitive for recruiting and retaining top talent.

Benchmarking allows HR to see if pay levels are competitive and in line with the market or if adjustments need to be considered. Keep in mind that salary levels can vary significantly depending on the job type, location, experience level, and state laws or regulations. When market data may not be available or be an exact match for each job, you can establish certain "benchmarking jobs" from which you can gauge your overall competitiveness by selecting roles that are similar matches with the clearest data and using those as markers for the remainder of your findings.

Using a variety of data sources helps you get a more accurate picture of the market. Combining multiple sources helps you avoid skewed results and gives you a well-rounded view of where you stand. The best data sources include 3 main categories:

• Government databases: Government databases like the Occupational Employment and Wage Statistics or the Occupational Outlook Handbook offer reliable information on pay averages
• Crowdsourced data platforms: Crowdsourced data platforms like Payscale's Salary Trends provide insights into what professionals in specific roles are earning
• Industry salary guides: Guides from firms like Robert Half or Willis Towers Watson offer tailored benchmarks by sector or job function

It's important to note that not all data sources are equally reliable. Self-reported data from platforms like salary.com or LinkedIn are not vetted like salary information from established compensation consulting firms such as Willis Towers Watson or Mercer.

A job analysis in compensation considers the responsibilities for a position and the experience required to perform it. Once you've gathered market data on compensation, you need to collect and analyze information about each position in your company to create detailed job descriptions.

You can gather this information by talking to your employees, observing the kinds of duties they perform, and conducting surveys. This information helps you come up with a detailed job description that accurately reflects the role. It's important to use job description versus job title when conducting compensation analysis, as job titles can sometimes be inflated or incorrect compared to the actual duties and responsibilities of the position.

Once you have market data on the different job positions, you can create salary ranges for each position. It's a good idea to have 3 different salary ranges: a minimum, midpoint, and maximum. These ranges account for differences in experience and performance.

Entry-level employees can be brought into a position near the minimum pay range, giving that person an opportunity to develop their skills and earn more money as their performance improves. It's also important to assess pay equity across your entire organization and look for patterns that may indicate gender, racial, or other inequities.

Salary is just one part of the total compensation package you offer your employees. To offer a truly competitive package, consider the value of 5 key non-salary components:

• Bonuses, commissions, and profit-sharing
• Stock options or equity
• Health insurance contributions
• Retirement plan matching
• Paid time off, remote work options, wellness benefits, and tuition assistance

Communicating the full value of these benefits helps candidates and employees understand the complete picture, even if the base pay isn't the highest on the market. If your budget doesn't allow for immediate salary increases across the board, you can strengthen your total compensation package by improving non-salary benefits like remote work or professional development opportunities.

Employee compensation is not static and is constantly changing with the market. You need to re-evaluate your compensation structure every two or three years, at the very least. This ensures your pay scale is in line with what other companies are offering and helps you attract and retain highly qualified employees.

Compensation analysis should be an ongoing process as part of HR's people plan rather than a one-time event or reaction to a pay issue. The action plan should include ongoing monitoring of compensation practices to stay ahead of market trends, employee expectations, and cost of living differentials.

If your analysis shows that your pay is below market, it's important to take action since even small steps can make a difference. Start by identifying the biggest gaps, especially in roles that are hard to fill or experiencing high turnover.

If your budget doesn't allow for immediate salary increases across the board, consider phasing in raises over time or offering one-time retention bonuses. Be transparent with your team about the changes you're making and why. Letting employees know you're aware of the issue and actively working to address it can go a long way toward improving trust.

Conducting a thorough compensation analysis can be challenging and complex, particularly if your company lacks internal resources or expertise. There are 2 main categories of tools and services available to help:

• Software tools: Software tools like CompAnalyst automate salary benchmarking, data analysis, and generate reports that HR can analyze, running the numbers to make the process more efficient
• Outsourcing to experts: 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, while freeing up internal HR and legal resources to focus on other critical functions

Expert consultants can provide guidance on market trends, assist with data analysis, and help create customized compensation strategies that align with your company's needs and business objectives.

Compensation analysis is often compared to 3 related concepts in the HR and workforce analytics space:

Compensation Analysis vs. Wage Gap Analysis

A Wage Gap Analysis is a great first step towards identifying opportunities within your workforce by providing a baseline of how women and men and employees of different races are paid in your organization. It explores how external disparities in our society may be reflected in your organization. Compensation Analysis goes beyond this baseline to conduct a comprehensive review that includes pay equity evaluation, market competitiveness assessment, internal consistency review, and compliance verification across all pay practices.

Compensation Analysis vs. Pay Equity Analysis

Pay Equity Analysis is a crucial component of compensation analysis that uses well-established statistical analyses to identify any unexplained pay disparities among employees based on gender, race, ethnicity, or other protected classes. While Pay Equity Analysis focuses specifically on fairness and legal compliance regarding protected characteristics, Compensation Analysis encompasses pay equity plus salary benchmarking against external market data and evaluation of internal pay structure consistency with job responsibilities and company goals.

Compensation Analysis vs. Market Analysis

A Market Analysis provides organizations with guidance to be competitive in a tough labor market by comparing internal pay to external market data and developing compensation structures like pay grades. While Market Analysis emphasizes external competitiveness and can help understand minimum pay being offered in the market for each job title, Compensation Analysis includes market benchmarking as one element but also evaluates pay equity across protected classes, internal consistency with job responsibilities and performance, and compliance with applicable pay laws and regulations.