Ensuring fair compensation is of paramount importance in today's dynamic job market. Internal salary benchmarks ensure fair competitiveness, foster a supportive work environment and provide a yardstick for performance evaluations.
When companies take extra effort to make sure that everyone is receiving the pay they deserve, they will be able to better attract and retain the talent they want to build a dynamic modern workforce.
For the longest time, we have been observing how job seekers’ high salary expectations and employees’ dissatisfaction with salary increments can impact your organisation’s recruitment and retention efforts.
Nobody will ever say that they are paid enough, but the increasing expectation is much more complex than that.
Inflation and increasing cost of goods and services have increased our monthly expenditures. Besides that, we have tuition loans and mortgages to pay every month. Working parents and caregivers will also need to fork out additional expenditures every month to care for the well-being of their loved ones.
Increasing expenditures are motivating people to switch employers, mostly in hope for a salary jump to sustain their expenditures and lifestyle choices. According to the 2023 Randstad Malaysia Employer Brand Research, 35% of respondents said that they are planning to quit their jobs because of low compensation and rising cost of living. The 2023 Randstad Workmonitor research found that 4 in 5 Malaysians said that their financial position is preventing them from retiring as early as they want.
Employers play a life-changing role in a person’s ability to live a comfortable life and achieve their financial goals. Workers would be more content and productive when they feel that they are paid their worth. At the same time, organisations get to increase their retention rate and attract more top talent to work for them.
In this article, we explore in-depth the purpose of internal salary benchmarking and how relevant they are in today’s constantly changing working world.
what are internal salary benchmarks?
Internal salary benchmarks are a table of salary bands to ensure that employees are paid competitively for their skills, experience and performance within an approved range.
These figures are rarely calculated with a complex mathematical formula to derive an exact amount based on economic data. Rather, they are often calculated based on market data from competing companies that are hiring for the same position. The calculations also include other basic benefits that you are eligible to receive as an employee, such as paid time off and medical insurance.
By doing so, companies are able to stay competitive by offering similar salaries as their competitors, without underpaying or overpaying the talent. Furthermore, internal salary benchmarking also serves as a transparent measure to reduce the risk of pay discrimination.
3 disadvantages of salary benchmarks
Despite the many benefits of having structured internal salary bands, there are some drawbacks to using them as well as the many positives.
1. salary benchmark can lead to unconscious bias
Employers relying on salary benchmarks may inadvertently favour employees similar to them and pay them a higher salary that is still within the approved salary band. This can result in unjust pay disparities where individuals who are paid less than they deserve may quiet quit to deliver just the bare minimum at work as they lose the motivation and purpose. In Malaysia, 15% of respondents said that their employers do not have an equal pay policy as their salary still reflects gender or ethnicity differences.
Working mothers, racial and ethnic minorities, older workers and individuals with disabilities may encounter workplace discrimination. They may be offered a lower income, simply based on their identity. The World Economic Forum’s 2023 Global Gender Gap Report shows that it will take a staggering 131 years to achieve equal gender pay.
2. salary benchmarks can quickly become outdated
Because the labour market is constantly changing, salary benchmarks can quickly become outdated. Neglecting to update them can result in employees being either underpaid or overpaid in the long run, leading to morale issues which will make it more difficult for the organisation to attract and retain top talent.
Moreover, benchmarking salaries have often been criticised for being too rigid, as they often fail to account for individual performance variations, economic fluctuations and inflation rates. Consequently, salary benchmarks based on outdated data or market trends quickly lose relevance and effectiveness, leading to higher attrition rate.
3. salary benchmarks can be used to justify low salaries
Employers sometimes may exploit salary benchmarks as an excuse to pay their employees the lower end of the band. They may also contend that the compensation benchmark is aligned with the market rate for the position, even if it is below what the employee is worth.
As a result, employees with exceptional skills or high performance may feel constrained by benchmarked salaries, which could lead to ‘quiet quitting’ or resignation. As employees' skills progress and become more specialised over time, workers may find their compensation inadequate, resulting in growing dissatisfaction and higher turnover rates.
5 key benefits of reviewing and revising your internal equity
Even though companies are offering competitive salaries, job candidates may still turn down the offer because it does not match inflation rates or when they don’t feel that it reflects their worth. Candidates are also highly motivated to switch employers if they can receive a significantly higher salary after the change. A salary survey conducted by Randstad Malaysia found that 49% of those who switched employers in the past 12 months received a 20% increase in salary.
Here are some of the specific advantages of reviewing and revising your internal salary equity:
1. help to set realistic expectations
Revising your internal salary bands can help meet employees’ expectations and help managers conduct meaningful salary reviews with their staff. Employees will feel more confident negotiating their salaries knowing that their employers will pay them their worth.
2. provide a basis for negotiation
Having updated salary benchmarks can help employers with salary negotiations as they are able to clearly explain how the employee’s salary will change based on the current market rate. Managers will also be able to reward high performance employees with a higher salary bump to reflect their contributions and capabilities.
3. reduce turnover rates
Companies that revise their salaries regularly and ensure that employees are paid in line with the industry standards are more likely to experience lower employee turnover rate. The existing employees will also feel more satisfied with their reward, which can positively result in higher productivity and better morale across the organisation.
4. promote fairness
New salary benchmarks help to ensure fair pay practices within the company as every employee will be paid based on their experience, skills and potential. People who have been underpaid because of their gender or race can receive a boost in their salaries when their salaries are revised against new market rates. This can help to reduce workplace discrimination based on gender, nationality or race.
5. identify areas for improvement
When revising salary benchmarks, employers can identify areas where they may lack talent and skills, as well as make improvements to their wage structure and total rewards package to remain competitive. This enables companies to effectively recruit and retain exceptional talent to fill those gaps while fostering a positive organisational culture with a more dynamic workforce.
By reviewing and revising salary benchmarks regularly, organisations can stand a better chance at securing talent. Conducting a regular salary review can also increase job satisfaction and create a more positive work environment, reduce employee turnover and eliminate legal risks. Your proactive approach towards salary will also help to retain your employees and motivate them to be more productive at work.
factors to consider during salary benchmark reviews
There is no simple way to revise the salary benchmarks in your organisation every year. However, there are some small steps that you can take throughout the year to ensure that you’re an equitable employer for your existing and future employees.
1. industry standards and market trends
Keeping up with the industry standards and market trends will give you an idea of the salaries or market pay range that are being offered. It will also help you determine whether your organisation’s salaries are still competitive.
Studies conducted by government bodies or non-for-profit companies are particularly useful in this case. Additionally, you can adopt a strategic approach to employee compensation by partnering with consulting firms like Randstad Malaysia to conduct research on the job market for you. As a third-party partner, we are able to connect with companies in the same industry on your behalf to conduct in-depth interviews with professionals working in similar positions to help map talent demand and salary recommendations specific to your company’s needs and objectives.
2. job responsibilities and requirements
Salaries should always reflect the employee’s most recent job responsibilities and requirements, as well as account for the level of experience, skills and education required.
Some jobs may be paid higher if the person is required to manage a large team, or is equipped with highly technical skills or client networks that are difficult to find in the market. For example, research and development scientists for alternative proteins or cybersecurity officers who have an in-depth understanding of the processes in a digital bank would be able to command a higher salary.
3. internal equity
Internal equity simply refers to equal compensation for equal work performed by employees. To promote uniformity and equity within the business, employee salaries should be reviewed on a regular basis while taking into consideration job grades, seniority and performance.
Companies adjusting salaries for male employees should also make the same adjustments for female workers in the same position too.
Similarly, if salaries for fresh graduates increase significantly, so should the remuneration for all other individual employees within the organisation. Fresh graduates should not be receiving the same salary as an employee who has already been two years into the job with good growth potential. This discrepancy in internal pay equity could lead to existing employees feeling undervalued and seeking higher salaries elsewhere to make up for the difference.
4. budget constraints
Salary adjustments should be made within the organisation's budget constraints. As much as we want to promote our best employees and offer them a higher salary, it is not always possible.
Companies are typically constrained by financial budgets, which is tied to business performance and external economic conditions.
During these times, employers should look at offering non-financial benefits such as flexible work arrangements, professional development opportunities, and health and wellness programmes. Such non-financial benefits are increasingly valued by job seekers and can help improve employee experience.
When offering non-financial benefits, it is important to consider the different needs and preferences of your employees, particularly in a diverse workforce.
the importance of communicating salary changes tactfully
Communicating salary changes in a respectful and considerate manner is crucial to ensure transparency and avoid misunderstandings. This can be done through one-to-one meetings and emails.
When communicating salary changes, it is important to provide clear and concise information about the changes and the reasons behind them. Employees should also be given a safe platform to ask questions and provide constructive feedback to the management team about how they feel towards their revised salary and how it reflects their work contributions.
partner with us to ensure competitive and fair salary for your talent
In today’s world, it is critical for companies to revise their internal salary structure regularly to keep up with current salary trends and market demands.
Although this will increase the organisation’s overall workforce expenses, remember that your employees are your best assets. By considering industry standards, internal equity and talent expectations, organisations can ensure that their salaries are always fair, competitive and in line with their business goals.
If you require assistance in conducting market maps to collect data on the current talent supply and demand as well as salary trends in the market, feel free to contact us. Our dedicated team of specialised recruitment consultants are equipped with the necessary expertise and resources they need to guide your salary reviews, ensuring your organisation remains competitive and up-to-date in the ever-changing job market. With our support, you can be certain that your approach to compensation will always stay relevant and effective.
Alternatively, if you’re looking for a new role with higher compensation, you can start by registering a MyRandstad account and apply for a job on our website. This will provide you with access to exciting opportunities that match your aspirations and salary expectations.