GUIDE 2024

What is Compensation Analysis?

Looking to know about compensation analysis? You’re at the right place.

Compensation analysis is a process organizations use to ensure they pay their employees fairly and competitively. It forms a cornerstone of compensation strategy. The process involves analyzing salary and benefits data to ensure employees receive fair compensation and keep organizations competitive.

In today’s world, compensation analysis is more critical than ever. With the rise of remote work, it’s easier than ever for employees to compare their salaries and benefits to those of their peers in other companies. As a result, organizations that don’t offer fair compensation will struggle to attract and retain top talent.

This article covers the benefits of compensation analysis, how to conduct an effective compensation analysis, best practices, and the challenges you can face during the process.

Benefits of Conducting Compensation Analyses

A comprehensive compensation analysis can provide several benefits for organizations.

1. Attracting and Retaining Talent

One of the primary benefits of employee compensation analysis is that it can help organizations attract and retain top talent. By offering a competitive pay and benefits package, organizations can differentiate themselves from their competitors and attract highly qualified candidates and job seekers. Additionally, by regularly reviewing and adjusting compensation and benefits packages, organizations can ensure that their employees receive fair compensation and remain satisfied with their jobs, reducing turnover rates and associated costs.

2. Ensuring Compliance

Compensation analysis can also help organizations ensure compliance with local, state, and federal laws and regulations. For example, some jurisdictions have minimum wage laws or require employers to provide certain employee benefits. Regular compensation analyses can help organizations meet these requirements and avoid legal issues.

3. Improving Morale and Engagement

Compensation analysis can have a positive impact on employee morale and engagement. Employees who receive fair and competitive salaries will have higher engagement and job satisfaction. In addition, clear and transparent communication about compensation and benefits packages will improve trust and transparency, improving morale and engagement.

4. Transparent Decision-Making

Compensation analysis helps with transparent decision-making by providing objective data and insights that organizations can use to create a fair and transparent compensation structure, benchmark their pay against industry standards, and provide employees with clear and consistent information about their pay.

For example, suppose an organization identifies disparities in pay based on gender, race, or other demographic factors. In that case, it can take steps to address these disparities and ensure that all employees get paid fairly for their work. This promotes transparency and helps build a culture of trust and fairness within the organization.

By benchmarking pay against industry standards and local market rates, organizations can offer competitive compensation packages that align with what other organizations in the same industry and location offer.

By providing employees with clear and consistent information about their pay, organizations can build trust and transparency and promote a culture of open communication.

5. Opportunity Identification

Compensation analysis provides valuable insights that can help organizations make data-driven decisions about their compensation strategy, identify opportunities for improvement, and improve their ability to attract, retain, and motivate their employees.

How to Conduct a Compensation Analysis?

Before conducting a compensation analysis, it’s important to establish a plan and gather the necessary data, which can involve selecting a specific job or group of jobs to analyze, determining the scope of the analysis, and identifying data sources. Here’s a procedure on how to conduct compensation analysis:

1. Analyzing Internal Data

The first step in conducting a compensation analysis is to analyze internal data, which includes reviewing employee salaries, benefits, and job descriptions. It’s crucial to ensure that job titles and descriptions accurately reflect the duties and responsibilities of each position. In addition, it’s essential to review the salary range and structure to identify any discrepancies or inequities in salaries.

2. Gathering External Data

The next step in conducting a compensation analysis is to gather external market data, which involves researching industry trends and compensation practices and reviewing data from other companies in the same industry and geographic region. Organizations can obtain the required information from salary surveys, job boards, and online databases.

3. Conducting Job Analysis

Job analysis involves reviewing the duties and responsibilities of each position and evaluating the required skills and experience. Organizations can use this information to determine the relative value of each job and establish a pay scale.

4. Evaluating Internal Equity

Evaluating internal equity requires evaluating salaries within the organization to ensure employees receive appropriate compensation for their work. The evaluation involves reviewing pay structure, comparing salaries for similar positions, and identifying discrepancies or inequities.

5. Evaluating External Equity

External equity involves evaluating salaries in the broader job market to ensure the organization offers competitive salaries. The evaluation involves reviewing salary data from other companies in the same industry and geographic region and comparing it to the organization’s pay structure.

6. Making Salary Adjustments

Organizations can make salary adjustments based on the results of the compensation analysis. The adjustments can involve increasing salaries for positions below market value or adjusting salaries to reflect job duties or responsibilities changes.

7. Communicating Results to Employees

It’s important to communicate the results of the compensation analysis to employees, as doing so will help to increase transparency and build trust with employees. It’s also important to explain the reasons for changes to the compensation plan and allow employees to ask questions or provide feedback.

8. Monitoring and Updating Compensation Plans

Organizations must regularly review and update compensation plans to ensure that they continue to meet the organization’s and its employees’ needs. The review can involve conducting regular salary surveys, evaluating the effectiveness of the employee pay structure, and making adjustments as needed.

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Best Practices for Compensation Analysis

Here are the best practices to derive the maximum benefit from your compensation analysis.

1. Consider the Complete Compensation Package

To arrive at a comprehensive and accurate analysis, organizations must consider all aspects of the compensation package, including benefits, bonuses, and stock options.

By considering the complete compensation package, organizations can ensure that their compensation practices are competitive and attract and retain top talent.

A complete compensation package can be more cost-effective than providing higher base salaries or wages. By considering the complete compensation package, organizations can ensure that their compensation practices are attractive to employees and cost-effective at the same time.

2. Involve Stakeholders

Involving stakeholders in compensation analysis offers multiple benefits, including:

  • Transparency: Involving stakeholders can increase transparency in the compensation process, making it easier for employees to understand how the organization determines their compensation.
  • Buy-in: Stakeholder involvement will help them understand and accept the results, improving buy-in and support for compensation practices.
  • Accuracy: Stakeholders can provide valuable input and insights into job roles, responsibilities, and performance, which can improve the accuracy of compensation analysis.
  • Communication: Involving stakeholders can facilitate better communication and collaboration between departments, improving overall organizational performance.

3. Use Technology

Using technology for compensation analysis offers numerous benefits, including:

  • Efficiency: Compensation analysis software can automate data collection, analysis, and reporting, which can save time and reduce errors.
  • Accuracy: Automation can reduce the likelihood of errors, improving the accuracy of the results.
  • Scalability: Software can handle large amounts of data, making analyzing compensation for a large number of employees easier.
  • Visualization: The ability to create visual data representations, such as charts and graphs, makes understanding and communicating the analysis results easier and more effective.
  • Flexibility: Software enables more complex analysis, including scenario planning and predictive modeling.

Common Challenges with Compensation Analysis

Here are some of the common challenges you can face during compensation analysis.

1. Ensuring Data Accuracy

One of the most significant challenges of a data-driven compensation strategy is ensuring data accuracy. The analysis is only as good as the data quality; incorrect data will lead to erroneous analyses. Organizations must ensure they have access to accurate and up-to-date data. Obtaining accurate data can be challenging as data sources vary widely in reliability and can be costly.

To overcome this challenge, organizations must develop a data strategy that includes identifying reliable data sources and establishing processes for collecting, validating, and maintaining the data.

2. Keeping Up with Market Trends and Changes

The labor market is constantly evolving, and organizations must stay up-to-date with changes in compensation and benefits practices to remain competitive. Failure to keep up with compensation trends can lead to a competitive disadvantage, as employees can choose to work for other organizations that offer better compensation and benefits packages.

To address this challenge, organizations must regularly conduct compensation and benefits benchmarking to compare their offerings with those of other organizations in the market. Benchmarking will help them identify emerging trends and changes in the market and adjust their compensation and benefits packages accordingly.

3. Balancing Internal Equity with External Market Forces

Finally, organizations must balance internal equity with external market forces when conducting compensation analysis. Internal equity refers to the fair and equitable distribution of compensation within an organization, while external market forces refer to the competitive pressures of the labor market. Balancing these two factors can be challenging, as they can sometimes conflict with one another.

To address this challenge, organizations must establish a compensation philosophy outlining their compensation and benefits approach. The philosophy must consider internal equity and external market forces and provide guidelines for making compensation decisions that balance these two factors.


Compensation analysis is critical for ensuring employees receive fair and competitive compensation. Organizations can improve employee satisfaction, attract top talent, and remain competitive by analyzing internal and external data, evaluating equity, and making salary adjustments.


Here are some of the most frequently asked questions about compensation analysis.

What sources of data are used for compensation analysis?

Data used for compensation analysis can come from several sources, including industry surveys, government reports, and internal data on employee salaries and benefits.

How often should organizations conduct compensation analysis?

Organizations must conduct compensation analyses regularly, typically every 1-2 years, to ensure that the company’s pay practices remain fair and competitive.

How does compensation analysis impact employee morale?

Fair and competitive compensation is critical for maintaining positive employee morale. If employees feel that they are being underpaid or that their compensation packages are not competitive, they may become dissatisfied and disengaged.

What are common compensation packages offered by employers?

Common compensation packages include salary, health insurance, retirement plans, paid time off, and bonuses.


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Josh Fechter
Josh Fechter is the founder of HR.University. He's a certified HR professional and has managed global teams across 5 different continents including their benefits and payroll. You can connect with him on LinkedIn here.