What is a compensation analysis and how to run one (+ FREE downloadable template)

Three out of every four employees cite dissatisfaction with compensation and benefits as one of the top reasons for planning to leave their jobs.* That means a sizable proportion of your team may be thinking of heading elsewhere because of your salary package.

Thankfully, you can get ahead of this potential turnover tide and keep your best people by conducting regular compensation analyses.

This proactive approach provides insights into pay disparities and helps make sure that compensation aligns with employee skills, experience, and performance. When teams feel they’re being fairly compensated for their work, you’ll see a positive work environment, which is essential for long-term company success.

In this article, you’ll read about the key benefits of compensation analyses and learn exactly how to run a successful one. We’ve also included a free, downloadable compensation analysis template you can customize or use as inspiration for your own team.

*Leapsome’s State of People Enablement Report, 2023
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What is a compensation analysis?

A compensation analysis is a focused examination of how your company compensates its employees. 

It involves a multi-stage process of evaluating the various components of compensation — like base salaries, bonuses, and other benefits — and comparing these with industry standards and internal benchmarks to make sure they’re competitive and fair.

A well-executed analysis will help you attract and retain top talent, maintain pay equity, and motivate your people to reach their potential.

That’s because taking a data-driven approach makes sure your people are compensated in a way that reflects their skills, experience, and contributions, fostering a positive and productive work environment.

While there’s no universal answer to when you should conduct a compensation analysis, some signs it’s time to revise your approach include:

• High employee turnover
• Difficulty in attracting top talent
• Inconsistent or unclear pay practices
• Negative employee feedback about compensation
• Market shifts impacting salary competitiveness
• Mergers, acquisitions, or organizational changes
• Rapid company growth or downsizing
• Regulatory changes risking legal compliance
• Evolving best practices for pay equity and fairness
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What are the benefits of analyzing compensation data?

Compensation analysis empowers your organization to make more informed, objective decisions on pay structures and policies. That’s because it gives you the insights you need to ensure fair and competitive compensation practices.

Compensation analysis can also help you:

1. Identify disparities. Analyzing compensation data reveals potential pay inequalities, ensuring that employees are fairly compensated.
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2. Attract top talent. By benchmarking against industry standards you can offer competitive salaries that attract and retain the best people for your organization.
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3. Enhance employee satisfaction. Fair pay practices foster a positive work environment, boosting morale, engagement, and overall job satisfaction.
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4. Improve retention. Identifying and addressing pay disparities can reduce turnover rates and retain key employees.
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5. Foster a culture of transparency. By showing how pay decisions are made and outlining how employees can advance in their careers, sharing compensation analyses is a powerful way to encourage open dialogue and trust within your organization.

🚀 Create a winning compensation strategy

Use Leapsome’s tools to build team trust and provide a consistent compensation experience for your people.

👉 Learn more

Free download: Compensation analysis template

Effective compensation analysis is about more than crunching numbers: It’s an important way to help your workforce reach their full potential, retain top talent, and drive sustainable growth. 

This template is your guide to achieving these goals.

Start by gathering essential employee information, like demographics, job specifics, and current compensation. This helps you build a baseline and make sure no one is experiencing pay discrimination. By understanding current compensation across your teams, you’ll be better equipped to make fair and informed decisions that benefit both your employees and your organization.

Next, dive into internal and industry benchmarks to gauge how your compensation measures up over time and compared to industry standards. Look for patterns, outliers, and areas where disparities may exist. This will empower you to pinpoint areas for adjustment and ensure your compensation strategy remains competitive and people-first.

Finally, create your implementation plan and set measurable KPIs to help you track their impact over time.

🔥 Use compensation analysis to increase your team satisfaction 

Unlock the power of fair and competitive compensation practices with Leapsome’s free template.

👉 Download template here

How to perform a salary analysis in 4 steps

Whether you’re working from a template or starting from scratch, you can use these four steps to structure a successful compensation analysis process. 
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1. Define your job roles

Clearly define roles and responsibilities so you can benchmark each job in your organization against positions elsewhere and check how competitive your wages are. Effective role descriptions can also minimize wage inequalities within your company as you can check that similar jobs receive similar base salaries and supplemental pay.

Start by examining the following aspects of each position:

• Duties
• Responsibilities
• Necessary skills
• Qualifications
• Experience

The goal here is to make sure that job descriptions match what employees actually do — role titles alone can be misleading or too generic.

Next, collect existing job descriptions and verify and update them as necessary by interviewing employees as well as their managers. Make sure you include any specific certifications or technical skills that are essential for the job in the description, along with the personal and interpersonal skills necessary to excel in the role.

Ask teams to check and fine-tune your job descriptions before you finalize them. This builds a feedback loop with employees and ensures accuracy and buy-in. 

💡 Pro tip: Implement a transparent competency framework for consistency in defining job roles across the company. This framework should capture the unique responsibilities and skill sets required at every level and act as a guide for evaluating each position fairly and accurately.

2. Gather internal data

Without detailed internal information, you won’t have a clear starting point to measure the effectiveness of your salary structure. Your internal data also serves as a baseline for comparing against external market data.

Start by pulling together detailed information on each employee. This should include their job title, current salary, bonuses, benefits, additional compensation, and tenure.

Organize this data by role, department, or seniority level, so it supports your analysis. This will help you understand how salaries within each department and team compare to each other. It also helps you identify any trends or outliers in your data. 

For example, you might notice that the Sales department has lower starting salaries compared to another team, but this may just be due to a higher amount of variable pay. Other salary differences could be down to market demands for specialized skills, or they could actually highlight a discrepancy in pay structures.

To determine this, also look at seniority levels — does pay for managers with similar tenure vary significantly across different departments? These patterns signal the need to re-evaluate your compensation strategy for fairness and competitiveness.
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3. Gather market insights

External data contextualizes your organizational compensation within the broader industry landscape. 

Use salary surveys and compensation databases that align with your sector, region, and company size for the most relevant insights. Look for data from reputable data providers like SHRM or Mercer and cross-reference multiple sources for a more well-rounded view.

👀 Did you know?

Leapsome’s new partnership with Mercer, the leading provider in compensation benchmarking, gives Leapsome users an edge in making informed and strategic pay decisions.

Mercer’s trusted compensation data is now integrated into Leapsome’s platform, creating a powerhouse for precise salary benchmarking. Plus, all HR job function benchmarks are free for all admins in Leapsome.

As you’re gathering industry insights, make sure to match exact job functions, not just titles. That’s because responsibilities often vary significantly between companies, even within the same role and seniority level.

Accurate market insights will be crucial in identifying if your pay scales are above, below, or at par with the industry standard. That’s the first step to making informed decisions on salary adjustments and retaining top talent.

“Having structured leveling and a well-defined salary structure in place allows us to prevent any systemic differences, e.g. based on gender or ethnicity, which is a fundamental basis for ensuring diversity, inclusion, equality, and equity.
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We have committed to paying salaries at the 75% percentile of median in the market, and this has been working well to help us attract and onboard candidates that align with our equitable philosophy — with our offer acceptance rate currently standing at 94%. Additionally, only 0,03% of our voluntary leavers mention compensation as a reason why they left.”

— Claire Rosenthal, Head of People and Culture at Leapsome

4. Adjust pay structures

Based on your analysis, evaluate whether your current pay structure aligns with your compensation strategy and objectives. 

If not, you might need to tweak your salary levels or scales to keep up with market trends and ensure your pay is fair at both organizational and industry levels. 

Handle pay changes carefully to maintain employee trust. Document every change and communicate it clearly and transparently to your people.

This is also a good time to check if your pay philosophy still matches your business aims, your company’s financial capacity, and changes in salary expectations and cost of living. Stay on top of your pay structures with regular reviews and updates to retain your best people and avoid high staff turnover.
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Create competitive and transparent compensation packages with Leapsome

‍A thorough compensation analysis will maintain market competitiveness. But it’s also a deeper commitment to pay equity and employee satisfaction. Evaluating compensation is an ongoing process that reflects your company’s dedication to its most valuable asset — your people.

Our people enablement platform is ideal for creating compensation frameworks that build trust and retain your best employees.

Leapsome’s tools help you:

• Create scalable workflows that let you reward employees equitably across your organization 

• Easily build compensation and promotion review templates for consistent and transparent processes
• Support managers in making data-informed, bias-free compensation and promotion decisions based on objective criteria
  

• Analyze your compensation strategies next to goal and performance data 

• Integrate the latest data from Mercer into your benchmarking and analysis 

In great company cultures, compensation is more than just numbers on a paycheck. It’s about recognition, fairness, and the promise of growth and opportunity. 

Empowering teams through compensation is how you attract the industry’s best talent and, more importantly, keep them.
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💪 Embrace the future of compensation with confidence

Leapsome empowers HR leaders to make better decisions and ensure fair, competitive pay and benefits at every level.

👉 Book a demo