Why pay benchmarking fails (and how to fix it)

Compensation benchmarking should help you pay people fairly and competitively. Done right, it ensures you attract great talent, keep them motivated, and avoid unnecessary turnover.

In practice, many companies treat benchmarking as a box-ticking exercise.

They copy salary bands from big-company surveys, lean on outdated data, or ignore the impact of equity and remote work. The result is a pay strategy that looks credible on paper but fails in real life.

In this article, we’ll call out the most common mistakes, show why they hurt retention and culture, and give you a smarter path to compensation benchmarking that actually works for SMEs and startups.

The false comfort of averages

One of the biggest pitfalls in benchmarking is an obsession with averages.

Companies latch onto a single figure, perhaps the average salary for a software engineer in London, and treat it as gospel. 

However, averages hide more than they reveal. They flatten differences between industries, company stages, and skill levels.

As Josh Bersin puts it:

“Pay data is only as good as the context behind it”.

Paying at the median may seem sensible, but averages blur reality. You could end up short-changing specialists while overspending on entry-level roles.

Benchmarking is about understanding where you want to position your business in the talent market.

Copying pay bands

A common mistake is copying pay bands from large corporations.

Startups and SMEs rarely have the same budgets, or the same value proposition, as a multinational. 

Offering Google-level salaries isn’t realistic, but competing purely on cash misses the point. You have other levers, like equity, flexibility, and culture.

Copying big-company numbers also risks skewing internal fairness. 

If you import salary bands without tailoring them to your structure, you can end up with pay compression (where new hires earn more than loyal staff) or distorted hierarchies.

Don’t blindly follow third party pay bands. Design a pay framework that reflects your stage, values, and growth potential.

"Pay practices simply have not kept up with the new world of work. Companies are facing a myriad of new challenges. And what are we using to manage this? A set of old salary bands and job levels designed in the 1930’s and 1940’s.” - Josh Bersin

Ignoring equity and benefits

Benchmarking often focuses narrowly on base pay. That’s a mistake.

Today’s employees think about total compensation: salary, equity, bonuses, pensions, healthcare, flexibility, and perks. Ignoring this bigger picture means your benchmarking only tells half the story.

Equity, in particular, is a game-changer for SMEs. It’s about creating genuine alignment between employees and company growth.

Benchmark the whole package, not just the salary. Equity and benefits can be decisive in both attracting and retaining talent.

Failing to adjust for remote roles

The rise of remote work has added a new layer of complexity.

Should a developer in Manchester be paid the same as one in London? Should you align pay for remote hires in lower-cost countries with global or local benchmarks?

There’s no one-size-fits-all answer, but ignoring the question is a mistake. Companies that default to location-agnostic pay sometimes overpay unsustainably. 

Those that default to local rates risk resentment and churn if employees feel undervalued compared to global peers.

GitLab, one of the largest fully remote companies, is transparent about its location-based compensation model. 

Whether you agree with their approach or not, the lesson is that you need a conscious policy, not a passive default.

Remote work demands intentional benchmarking policies that balance fairness, sustainability, and competitiveness.

Risks of poor benchmarking

Poor benchmarking has cultural and financial consequences.

• Retention. Employees who discover they’re underpaid compared to peers are 50% more likely to leave, according to PayScale. Replacing them can cost 6–9 months of salary in recruitment and training costs.
• Erosion of trust. If pay feels arbitrary or unfair, people lose confidence in leadership. That mistrust spreads fast, particularly in smaller teams where transparency matters most.
• Pay inequity and legal risk. Inconsistent benchmarking can create unintentional gender or regional pay gaps, leaving you exposed to equal pay claims.
• Hiring struggles. Over- or under-shooting benchmarks can either blow budgets or make roles unappealing. In fast-growth companies, this can mean missing critical hiring targets that stall growth.

Missteps in benchmarking ripple through the business, driving staff turnover, inflating costs, and undermining culture.

A smarter path to compensation benchmarking

So how do you fix it? Here’s a practical approach:

1. Define your pay philosophy. Decide where you want to sit in the market. Are you a median payer across the board, or will you pay above market for mission-critical roles? Having a philosophy gives structure to tough decisions.
2. Use multiple data sources. No single survey is enough. Combine global databases, local surveys, recruiter insights, and peer networks. The richer the mix, the more accurate your benchmarks.
3. Benchmark total compensation. Look beyond salary. Factor in equity schemes, pensions, healthcare, and flexibility. A slightly lower salary can still be competitive if the package is compelling.
4. Tailor to your stage. Early-stage startups may lean more on equity; later-stage SMEs may offer stronger benefits. Align benchmarks to your maturity and funding position.
5. Review regularly. Pay benchmarks age fast, sometimes within months in competitive markets. Schedule annual or biannual reviews, and update ranges before they become outdated.
6. Communicate transparently. Share how ranges are set and what employees can expect. Even if you can’t always pay at the top of the market, explaining your rationale builds trust and reduces gossip-driven frustration.
7. Test against reality. If a role stays unfilled or turnover spikes, it’s a sign your benchmarking may be off. Use live data from hiring and exits to adjust.

Benchmarking should become an ongoing process of alignment between market realities, company stage, and employee expectations.

Conclusion

Compensation benchmarking goes wrong when it’s treated as a shortcut. 

Copying averages, chasing big-company scales, or ignoring the full package can result in pay structures that frustrate employees and hold back growth.

By defining your philosophy, using multiple data sources, and focusing on total compensation, you can turn benchmarking into a powerful tool for retention, fairness, and culture.

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