What’s My Employee Worth? The Effects of Salary Benchmarking

Abstract Firms are allowed to use aggregate data on market salaries to set pay, a practice known as salary benchmarking. Using national payroll data, we study firms that gain access to a tool that reveals market benchmarks for each job title. Using a difference-in-differences design, we find that the benchmark information reduces salary dispersion by 25%. Thus, salary dispersion must stem partly from aggregate uncertainty about the salaries offered by other firms. Our model formalizes how salary dispersion can arise even in competitive labour markets for identical workers when such uncertainty exists, and we discuss implications for an ongoing policy debate.