Benchmarking to market is standard practice for any compensation team because it gives you a baseline to guide and defend your decisions with internal stakeholders. But if market data is the only input shaping your pay strategy, you may be optimizing for the wrong things.
Hitting an intended target market percentile isn’t going to build a high-performing compensation program on its own. The real sign of success is your company’s sustained ability to attract the talent you need, retain your most critical employees, and prove that every dollar spent is moving the business forward.
Most companies aren’t there yet. And often, it’s because they’re expecting market benchmarks to answer questions that only their internal data can solve.
Market Data Is Just the Starting Point
Market data can provide you with two primary pieces of information: where your employees’ pay falls relative to market benchmarks, and where your program targets land compared to those same benchmarks. Used well, market data gives you a defensible framework for setting pay ranges and a common language for talking to candidates, employees, and leadership about compensation.
The scope you apply to your market data is just as important as where you want to target within the market, and different scopes can lead to very different outcomes. At the non-executive level, industry and location are the primary drivers of salary benchmarking. At the executive level, industry and company size — whether measured by valuation, capital raised, or revenue — becomes more important, and location is less of a factor. For incentive programs like bonus and equity, industry, size, and stage are the variables that matter most.
Done right, market benchmarking gives you a solid foundation. The problem is when it becomes the ending point, too. It should be more of a guidepost than the end goal.
When to Move Beyond the Market Data
Market data has real limitations that are worth understanding before placing too much weight on it.
An increasingly constant challenge in the market is survey data quality. Any market survey is going to have discrepancies due to low participant counts for specific roles, gaps created by granular filter combinations, and survey mapping errors that can distort your ranges if you’re not looking closely.
This is why anchoring too tightly to market data, without having other levers in your data toolkit, can become a risk for your compensation programs. One of the biggest risks is throwing money at problems that compensation won’t solve.
Often, if turnover is high in a particular department, the instinct is to move up the pay range. But if the real issue is a difficult manager, an unsustainable workload, or a bonus structure that nobody believes is attainable, increasing the target market percentile won’t move the needle on your desired outcomes. It will just cost more.
3 Metrics That Matter More Than Your Percentile
The strongest compensation teams track whether their programs are delivering the right business outcomes, without hyper-focusing on matching the market precisely. That means looking closely at three areas: program ROI, talent attraction, and retention.
For program ROI, the metrics to track can include ongoing spend relative to initial budgets, revenue or valuation per employee over time, employee satisfaction scores related to compensation, and whether performance scores correlate with incentive payouts year over year. If you’re running a pay-for-performance program, are the people who consistently hit their goals staying and continuing to perform? If not, something in the design could be misaligned.
For attraction, your offer acceptance rate, whether too high or too low, is the most telling number. A low acceptance rate may mean your compensation isn’t competitive. A very high acceptance rate can mean you’re overpaying.
You should also look at where new hires are landing within your pay bands. If most new employees are coming in at the top of the range, that’s a signal worth paying attention to.
For retention, turnover rate is the most apparent metric. Deeper insights, however, can come from comparing various compensation metrics, such as compa ratios, between departed and retained employees. If departed employees consistently show a pattern in range placement or compensation sentiment, pay may be a factor. But if they’re spread across the range or not showing deviation from the population who sticks around, something else might be driving the exits.
When internal data shows that compensation-adjacent problems are persisting despite competitive pay, that’s often a signal to look at other variables, such as departments with high turnover, managers with recurring complaints, or program structures that aren’t functioning as intended.
These aren’t metrics you can get from a market survey. They come from your own HRIS, ATS, performance data, and engagement scores, all brought together in a way that monitors and tells a cohesive story about how your program is performing.
Synthesizing Market Benchmarks and Internal Data
Market data and internal data serve different purposes, and the most strategic leaders and advisors use both data sources to their strengths.
Market data provides credibility. It gives you a way to say here’s where we stand relative to the broader market and here’s why. Without it, it’s hard to make the case for any compensation decision with confidence.
Internal data tells you whether your compensation program is doing its job and if your market position is the right one to target against. When the picture painted by internal outcomes doesn’t line up with market benchmarks, you give yourself the justification to move away from constantly chasing market data to prove your compensation programs are a success.
The confidence to move away from market benchmarks when needed comes from understanding both inputs and knowing where each one falls short. This allows you to design a compensation program where tangible business outcomes are the output.
See How Sequoia Tracks Everything That Matters
If you’re ready to build a compensation strategy around your business outcomes, not just your benchmarks, connect with a Sequoia advisor to learn more.
