Defending salary increases has been one of the principal uses that HR has made of benchmarking, but that’s not the only hook, says Victoria Furness
Who hasn’t wondered how much a colleague’s remuneration package is worth? Or, lets be more candid, whether he or she receives more pay and benefits. But green-eyed jealousy aside, finding out what employees earn in competing organisations and comparing this with an employer’s own benefits package is a vital part of a reward strategy to retain and recruit staff. Over the last ten to 15 years, the benchmarking of benefits against rival firms has become more popular.
Joris Wonders, a consultant at Towers Perrin, says: “The advantage of being able to benchmark is to say ‘this is what the market is doing’, and you can defend decisions on salary increases from a robust point of view rather than just reacting to a situation.”
It also allows organisations to check that they are not paying employees too much. As Mark Thompson, head of reward at HR consulting firm, the Hay Group, says: “You do not want people running out of the HR office punching the air with glee, but on the other hand, you do not want them to feel insulted.” Unlike pay, however, benefits benchmarking tends to be driven by events, rather than form part of an annual exercise. For example, an organisation might want to move from a defined benefit pension scheme to a defined contribution pension plan, implement a flexible benefits scheme or look at ways of taking cost out of its HR operations.
Benchmarking its benefits helps ensure that an employer remains competitive. Alexander Mann Solutions, a specialist in recruitment process outsourcing, decided to benchmark its benefits package a couple of years ago as it grew from a small to medium-sized organisation. John Harris, HR director at Alexander Mann Solutions, explains: “We wanted to understand where we were in the marketplace, and ensure our competitiveness and consistency. Our employees expected us to have this information to help with their career progression.”
To a certain extent, firms have always benchmarked their reward package, whether it is a cursory glance through the job adverts or a more sophisticated industry-wide exercise. But more often than not, the latter form of benchmarking has been restricted to senior executives, whose pay and benefits packages tend to be more complicated. “Now it is the whole shebang and benchmarking is important at all employee levels,” says the Hay Group’s Thompson. Size is also no longer an issue: the Hay Group worked with one company recently that had five staff. But what continues to make benchmarking – an often dry, number crunching exercise – relevant to today’s market?
According to Mike Ashton, principal at Deloitte, the cost cutting of recent years has certainly had an impact: “Now organisations have their core workforce and want to make sure that reward is still delivering what the business wants,” he says. It is also apparent that organisations are no longer looking at benefits and pay in isolation, but benchmarking the whole reward package.
“If benefits are benchmarked on their own, an organisation does not see the full picture. That said, from a benefits manager’s perspective, it is important to know what trends are in their sector. For example, a few years ago in the professional services industry, no one had a flexible benefits scheme. Then one accounting firm launched a scheme and the others followed suit as employees expected it,” he adds.
The bad news is that the process of benchmarking can be fraught with difficulties and is often resource-intensive. As Dr Helen Shipton, lecturer at Aston Business School, points out: “The more you survey and the more detail you get on organisations employing categories similar to you, the better your data will be. However, you have to offset this against the time, effort and cost of carrying out that research.” A good starting point for any organisation is deciding what it wants to find out from benchmarking.
Peter Jauhal, senior remuneration consultant at Hewitt, asks: “Is it about pensions, cars or the whole reward package? Then you need to decide who you want to answer that question, and typically you need 12 companies, although between 20 and 25 is the ideal number.”
Who these companies are depends on the jobs that an organisation is benchmarking, but the simple answer is any firm that employees are recruited from or leave to join. For sector-specific job functions the peer group will be relatively straightforward. But for more generic roles, such as finance, IT and HR, a different peer group might have to be formed using a wider industry mix.
Other criteria to take into account when assembling a peer group are size (turnover and employee numbers) and location (also whether local or global). Dr Shaun Tyson, professor of HR at Cranfield Business School, argues that putting the group in context is also important: “For example, if a company is going through hard times, you will get a different picture of reward compared with a company that is doing well.” Similarly, specificity of a role is crucial. “For example, is the sales director a junior member that has been promoted recently and how many are in his team?” he asks.
It is also important that organisations regularly check the members of the comparative group in case it changes as a result of M&A, poor performance or any other factor. Hewitt’s Jauhal spent 15 years’ benchmarking benefits for car manufacturer Ford and a lot of his time was spent checking which companies had left or joined its benchmarking group.
“One of the things we wanted to do was compare previous years’ results with the current year, so changes to companies or takeovers in the industry would create some issues for us,” he explains. Once the benchmarking group has been allocated, organisations need to start collecting the data by asking everyone in the group to fill out a questionnaire. Some companies are understandably reluctant to give sensitive information to a rival, which is why most offer to share the survey findings with participants on a no-names basis. For ease of use, firms can use external providers to run their surveys, and many consultants argue that business is growing.
Phil Hough, senior consultant at Watson Wyatt Data Services, says: “Most benchmarking is undertaken by external providers because they have experience in making sure like-for-like comparisons are being made, they have general experience in running surveys, they will have the time and the contacts, and [they can give] data confidentiality.” However, this method can be costly. Alternatively, industry forums offer a good way of garnering benchmarking data and benefits trends amongst members of a certain sector. Deborah Rees, director at employee benefits consultancy, Innecto People Consulting, explains how it works: “A club survey is where you are either an invited participant or you invite others to join the group, and only share the benchmarking data with that group.
A specialist provider usually runs them because if a direct competitor is sending you information, you know exactly how it rewards staff. Whereas an external provider will give an average holiday allocation figure for the group.”
Using an external provider also helps organisations comply with competition legislation, such as the Competition Act 1998 and Enterprise Act 2002, which prohibit firms from colluding on price-fixing or using anti-competitive practices. It was feared that such legislation would discourage industry forums, but although it has forced organisations to be a lot more transparent in their dealings, for example, by making sure that any reward information is presented anonymously, it does not appear to have had a noticeable impact on the number of forums in operation.
Falling foul of the law is not the only danger organisations benchmarking benefits need to recognise. Benchmarking reward has inevitably become more complicated with the advent of different share schemes, short-term incentives and so on. This makes comparing like-for-like data – the goal of any benchmarking exercise – much harder. “When you are comparing base salaries it is easy because you are talking pounds, which everyone understands.
But when you are talking share movements, it is trickier,” says Watson Wyatt’s Hough. Similarly, comparing one company that offers a final salary pension plan with another that has replaced it with a form of money purchase scheme will immediately skew the results. It is also easy for organisations to become obsessed with collecting data and to lose sight of their benchmarking goal.
Thompson of the Hay Group knows one retail bank that uses more than 50 different surveys, and other organisations that combine his company’s data with data from other information sources. “This does not make the data any more robust and it would be interesting to know how these companies manage to square them all together,” he says. So given the ambiguity and complexity involved, is benchmarking reward worth it?
Aardman Animations, the studio that created such legendary animation characters as Morph, Wallace and Gromit, has never benchmarked its benefits package and will only consider doing so next summer, when it decides whether to move to a flexible benefits scheme. Paula Newport, head of HR at Aardman, says: “Size is probably one of the reasons why we have not benchmarked our benefits.”
Other factors include the make-up of its workforce – most are on fixed-term contracts and tend to prefer a higher salary to benefits – industry dynamics and the unique nature of Aardman’s business. “People in creative and production roles generally stay with us. Benefits do not actually make a huge difference in how we attract and retain staff,” explains Newport. Aardman might be an unusual case, given that plenty of other organisations seem willing to devote considerable time and resources to benchmarking reward, and claim to see the results. But in order to fully benefit from the exercise, organisations need to consider how they will act on the findings.
Charles Cotton, adviser for reward at the Chartered Institute of Personnel and Development (CIPD), asks: “What will you do if you discover the market provides 25 days annual leave a year but you only offer 20? You could stick with 20 [days] and offer flexible working, home working or any other benefit. But it depends on what people want.”
Herein lies the key to successful benchmarking: while it provides a useful guide to creating a reward package, it should not create a sheep mentality and encourage every company to offer the same reward package. Otherwise, quips Cotton, “we could see every one with 100 days of holiday.”
Why? Internal benchmarking has also become more important, particularly in relation to pay and short-term incentives. Joris Wonders, a consultant at Towers Perrin, says: “We’ve seen internal benchmarking take off in the last two-to-three years because there is publicity around the equal pay gap existing and the potential financial and reputation risk for organisations.”
How? To carry out an internal benchmarking exercise, he recommends taking a representative sample of the workforce – about 10% of both sexes – and comparing each element of the reward package against employees at a similar operational level.
Who? Internal benchmarking also offers benefits managers another communication tool to use – alongside staff satisfaction surveys and focus groups – to gain insight into employees’ views of their reward package.
Case study: Marathon Oil
Alongside 15 other companies, Marathon Oil takes part in a benchmarking survey every two years for the upstream oil industry to produce data relevant for an older workforce.
The firm takes part in Hewitt Associates’ Benefits Index which defines the value of the benefit relative to a set of assumptions and values. David Payne, compensation and benefits manager at Marathon Oil, explains: “It is important because a company could be paying proportionately more money into a pension plan because it has a relatively elderly workforce and an historical deficit. Whereas another company with a younger workforce could deliver the same level of benefit with a lower level of contribution.”
This is in order to achieve proportionality; paid leave is expensive compared to benefits such as life insurance. “So if you compare benefits on an index basis, you avoid getting into a cherry picking situation where an employee could demand we increase our payouts for life insurance to match those of a competitor,” he says.