Pay Scales

The effects of salary benchmarking

A wave of pay transparency laws aimed at reducing inequities is giving millions of workers access for the first time to information on the pay ranges potential employers will offer.

Yet comparing salary information is nothing new for employers. While U.S. antitrust law prohibits employers from directly sharing salary information with each other, most mid-sized and large companies routinely use aggregated data from third parties to get a read on the going rates.

The effects of this widespread practice, known as salary benchmarking, have never been systematically studied—until now. Following White House concerns that benchmarking may be used to suppress wages and benefits, a new study offers the first evidence on its impact on workers.

The study, which began in 2019, looked at starting pay offered to new hires at 586 firms that gained access to a benchmarking tool between January 2017 and March 2020. The online tool is easily searchable by job title and is based on real, aggregated, and anonymized payroll records of many millions of employees.

The conclusion: Benchmarking does not have a negative effect on pay for the average employee. While some salaries decrease and others increase after a company uses a benchmarking tool, salaries overall simply move closer to the benchmark.

“If there was a negative effect on salaries, it would be suggestive of anti-competitive effects,” says Associate Professor Ricardo Perez-Truglia, who authored the new National Bureau of Economic Research working paper with Zoe B. Cullen and Shengwu Li, both of Harvard University. “That’s not what we found. If anything, we see some small salary gains for low-skill
occupations.”

The researchers used aggregated data from the nation’s largest payroll processing firm to see how much employers paid new hires in hundreds of job categories before and after they used the payroll firm’s salary benchmarking tool. They found that employers paid new hires much closer to the median wage after searching the market rates for those job titles.

As a result, some new employees earned more and some earned less than they would have otherwise. “For the most part, they sort of cancel each other out,” says Perez-Truglia.