Latest / Hiring & Firing with Fexingo: Recruitment, Performance, and Workforce Decisions / How a Salary Benchmarking Audit Equalized Pay
Transcript
- Lucas: So there's a stat that's been stuck in my head all week. A mid-sized tech company in Austin, around four hundred employees, ran a salary benchmarking audit and found they were underpaying a third of their workforce, mostly women and people of color, by as much as twenty-two percent. And the kicker? They had no idea. Luna: Twenty-two percent is massive. How do you miss that? Lucas: Well, they had never actually benchmarked their salaries against the market. They set pay based on what people asked for in interviews, plus a six percent annual bump. So the people who negotiated harder started higher, and the gap just compounded over time. Luna: So it wasn't malicious, it was just… inertia. Lucas: Exactly. And that's what makes it so common. We're in the middle of this big push toward pay transparency, with laws in the EU and several states now requiring salary ranges on job postings. But a lot of companies still don't have the internal data to back those numbers up. Luna: So what did they do? Did they just jack up everyone's salary to match the market? Lucas: They couldn't. That would have blown the budget. Instead, they prioritized. They looked at which roles were most critical to hitting their product roadmap, and they corrected the biggest outliers in those teams first. Then they set a twelve-month timeline to bring everyone else up to at least the bottom of the market range. Luna: So a phased approach. But I'm curious about how they communicated that to employees. Because if you're someone who's underpaid and you find out your company knew about it, that's a trust issue. Lucas: That's the hard part. They decided to be upfront. They told every employee their own market range, and they explained the go-forward plan. The CEO actually said, quote, 'We're not doing this to pat ourselves on the back. We're doing this because it's fair, and it's how we keep people.' Luna: That's a brave move. But didn't some people get angry that they were underpaid for years? Lucas: Yeah, a few did. But interestingly, the turnover among the underpaid group dropped by half over the next six months. People appreciated the honesty more than the back pay. They did give some back pay for the most egregious cases, but the real win was trust. Luna: I love that. But I got to ask, how did they actually get the market data? Because that's the part that trips up a lot of smaller companies. Lucas: They used a mix of sources, the big salary data providers like Payscale and Radford, plus some industry-specific surveys. But the real insight was that they didn't just compare titles. They compared job responsibilities. Two 'project managers' can be wildly different. So they built a simple competency matrix. Luna: That's smart. Because otherwise you're comparing apples to oranges. Lucas: Right. And that's where a lot of benchmarking efforts go wrong. They slap the same title on everyone, and then wonder why the data doesn't make sense. This company took the time to level the roles first, and that made all the difference. Luna: So if our listeners are thinking about doing this, what's the first step? Lucas: The first step is to get your data in order. You need a clean list of every employee, their title, their level, their location, and their current base pay. Then you pick a handful of benchmark roles, maybe five or ten, and you compare those against the market. Luna: And if you don't have HR data? What if you're a startup with twenty people? Lucas: You can still do it. You just use a spreadsheet. The key is to do it at all. Even a rough audit with twenty employees can reveal a pattern. And the cost of doing it wrong is much higher than the cost of doing it. Luna: Yeah, I think you're right. And it's interesting, because we've talked about skills-based hiring and structured interviews, but this feels like the final piece of the puzzle. You can hire great people, but if you don't pay them fairly, they'll leave. Lucas: Exactly. And that's the reason we do this show. If these conversations have moved your work forward in some small way, that's awesome. And the reason we can keep doing this ad-free is because listeners like you support us. If you find value in what we do, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's that simple. Luna: Yeah, it genuinely helps us keep the lights on. And every little bit counts. Lucas: So back to the Austin company. They also did something that I think is worth highlighting. They not only benchmarked external market rates, but they also looked at internal equity. That means they compared people doing similar work within the company, and they found that in some cases, two people with the same role and performance rating had a fifteen percent pay gap. Luna: That's the part that's purely internal. It has nothing to do with the market. Lucas: Right. And that's often the first thing people think of when they hear 'equal pay.' But the market benchmarking is the piece that catches the underpayment before it becomes a crisis. Because if you're paying below market, you're going to lose people to competitors who are willing to pay more. Luna: And it's not just about attracting talent, it's about retaining the talent you already have. Lucas: Exactly. And that's where the ROI comes in. This company spent about two hundred thousand dollars on the pay adjustments. But they calculated that the cost of replacing just three senior engineers would have been over a million dollars. So it paid for itself many times over. Luna: That's a nice number to put on it. So what's the catch? I mean, there has to be a downside to all this. Lucas: Well, the downside is that pay transparency can create its own set of issues. If you publish salary bands, you might anchor employees into thinking they can't get more, even if they're high performers. And there's also the risk that you'll have to deal with 'band narrowers' — people who demand to be at the top of the range just because it's there. Luna: So it's not a silver bullet. But it's better than the alternative. Lucas: Way better. And honestly, the companies that are doing this well are treating it as an ongoing process, not a one-time fix. They review their pay structure every year, they update their market data, and they communicate changes clearly. Luna: I mean, that's a lot of work, but it's the kind of work that makes people trust you. Lucas: Yeah, and that trust translates into lower turnover, higher engagement, and better quality of hire. It's one of those investments that has a compound effect on your workforce. Luna: So if someone wants to do this, what's the biggest mistake they could make? Lucas: The biggest mistake is to benchmark salaries and then do nothing with the data. We've seen companies that run the audit, find the gaps, and then get cold feet because they're worried about the budget. They file the report and go back to business as usual. That's worse than not doing it at all. Luna: Because now you've raised expectations, and you've broken trust. Lucas: Exactly. So if you're not ready to act on the findings, don't start the audit. Wait until you have buy-in from the C-suite and a budget set aside for adjustments. Otherwise, you're just creating a liability. Luna: So what does the future look like? Are we moving toward full transparency, like publishing every salary? Lucas: I think we're moving toward more transparency, but not full transparency. The EU pay transparency directive is a big step, and it's going to force a lot of companies to get serious about this. But I don't think we'll see public salary lists for every employee. The tension is between fairness and privacy. Luna: Interesting. So it's not just about paying people more, it's about being able to defend your pay decisions. Lucas: Right. And that's the real takeaway from this episode. Salary benchmarking isn't just a legal exercise or a way to avoid lawsuits. It's a strategic tool that helps you attract, retain, and motivate your best people. And with the Austin company, it turned a potential crisis into a competitive advantage. Luna: So what's the one thing you'd want a listener to remember three months from now? Lucas: I'd say this: your salary structure is not a set-it-and-forget-it thing. It needs to be reviewed regularly, just like your product roadmap or your marketing strategy. The cost of not doing it is silent and cumulative. Luna: That's a great way to put it. Thanks for digging into this, Lucas. Lucas: Anytime. And if you enjoyed this conversation, we've got a hundred and fifty episodes in the archive, so there's plenty more where that came from.