Your company’s compensation plan should be a well-oiled machine built to attract, retain, and reward the best talent — but it needs routine maintenance. That’s where the compensation review process comes in, and it’s why more and more companies are moving from annual to biannual and even quarterly compensation reviews* to stay ahead of the curve as the demand for talent continues to rise.
Regular compensation reviews (or salary reviews) ensure a company’s compensation plan still reflects its compensation philosophy and is up-to-date with shifting markets. In this comprehensive guide, we’ll take an in-depth look at the steps you should take during the salary review process; we’ll also share best-practice tips for your next compensation review cycle.
*The Wall Street Journal, 2022
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6 steps to conducting a fair compensation review
Compensation reviews exist to ensure your compensation plan is doing what you designed it to do — and to make sure your employees are paid fairly. Here are our six recommendations for getting it right:
1. Determine who should lead your compensation review
This will largely depend on your company’s size. As an example, for larger enterprises, the review may be best managed by C-level leadership who deal with budgeting, forecasting, benefits, and other financial issues; they should also collaborate with HR team members who deal with performance reviews and compensation planning.
For startups and growing companies that may not yet have an HR manager, set up a cross-functional compensation review team. Your head of finance shouldn’t handle compensation reviews alone — you’ll want to bring in anyone responsible for ensuring your annual review process is equitable and transparent.
2. Identify your objectives for the review
For the most effective compensation review process — and to ensure employees feel your company’s compensation reviews are fair — you want to narrow down your review objectives.
Depending on your compensation philosophy, you might run an annual compensation review process or analyze and amend your compensation packages every six months in regular performance review cycles.
Whatever your approach, it’s also important to assess how compensation might connect to broader company issues. For example, you might look at ways that your salary and benefits package might be contributing to a higher employee churn rate. Or you might want to find out why your company’s salaries and cost per employee have increased significantly and adjust your total compensation package so that you can reward high-performing staff without exceeding your budget.
💡 It’s worth noting: Tying compensation reviews to performance reviews is an acceptable, and even recommended practice today, as it assures your people that salary increases and compensation updates aren’t arbitrary.
Connecting salary reviews to performance reviews may raise alarm bells for some leaders, especially given the controversial way some companies have approached this in the past. But it doesn’t have to be something to fear.
⭐ Not sure what goes into a successful performance review? Take a look at our step-by-step playbook on how to write a performance review.
As long as employees feel that managers are honest with them, and that they’re empowered to offer feedback and have ongoing conversations with management about compensation and performance, connecting compensation to performance reviews (and linking those to development frameworks for career growth) can be a powerful tool for motivating your people.
“A few years ago, we implemented biannual performance reviews that are tied to compensation. If a team member receives a positive performance review, they are guaranteed a salary increase.
We have very straightforward KPIs that people need to meet to demonstrate positive performance — and the salary percentage increase is transparent and attractive. We’ve removed any ambiguity around compensation and made the feedback loop between performance and compensation fast.
No one likes asking for a salary increase, so our biannual reviews remove this awkwardness and give team members a clear path to earning more.”
— Mark Whitman, CEO of Contentellect
3. Evaluate compensation for market competitiveness
To see how your company’s compensation packages stack against other similarly sized companies in the external job market for your industry and location, compensation benchmarking is a necessity.
In the compensation or salary benchmarking process, you gather market data and salary ranges for all relevant roles and compare them to your internal salary and benefit structures. Make sure your salaries fall within the same market percentile and identify whether anyone is being underpaid for their role and experience level.
And remember, employees don’t always keep their salaries secret, so you want to ensure you identify any internal anomalies to avoid resentment among coworkers.
💡 Conducting internal salary research can be a demanding project
But Leapsome’s compensation management tool makes it easier! It organizes employee information like level, tenure, salary, bonuses, and previous performance review information into user-friendly profiles.
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4. Review your employee benefits package
Your benefits package is a crucial part of your recruitment and retention strategy, so you should evaluate it to make sure it’s still attracting high-quality candidates and keeping valued team members around.
Stakeholders and HR leaders should ask themselves these questions:
- How does our benefits package reflect our organizational values?
- Have we covered basic needs like health insurance, sick leave, and family leave?
- Do our benefits function well in practice, or do we need to make changes (like not requiring a doctor’s note for the first X sick days)?
- Are there any benefits employees haven’t been using?
- Are there extra benefits we should add — like unlimited PTO or tuition reimbursement?
5. Decide on a course of action
If your research reveals any gaps in compensation you’d like to close, decide what steps you’re going to take. For instance, will you raise employee salaries by a certain percentage across the board to address inflation, or will you only offer raises to high achievers? Will you make an update to your benefits package instead, so you can keep base salary, equity, and bonuses within budget? These are big questions, especially during The Great Resignation — and the more decisive your action, the better.
6. Share your results with your people
Even if the updates you’ve made are beneficial to your employees, the way you share these changes matters. Don’t just focus on what, but also on how you communicate changes you’ve made in compensation.
“I have seen wonderful compensation models that no one understands (or uses) except the compensation professionals. So take the time to build context. Explain the purpose of doing compensation reviews. Tell your employees how you created the compensation structure based on internal, external, and individual equity. Let them know the process is fair and open and who to talk to if they have questions about it.
Finally, communicate the value of compensation reviews to the individual. Usually, companies align compensation to performance, so this is about more than ‘just money.’ It’s about the value of your job — and more importantly, your performance — to the organization. It’s about how your career will grow within the company. Without the why, you can have the best model, and no one will value it.”
— Laura Barker, HR expert and founder of Laura Barker Career Coaching
Tips for your compensation review process
Knowing what to prioritize during the review will make for an even fairer, more successful outcome. Here are some of our top suggestions:
Ensure your plan aligns with your compensation philosophy
Your compensation policy outlines how your company approaches all current and future decisions around compensation. It covers how business objectives and salary structure relate, how you approach total compensation and incentive pay, and what you’ll do when certain roles become hard to fill.
At the time of the compensation review, you’ll want to evaluate:
- If your compensation plan has gone off course from your original objectives
- If there have been major changes in your company structure, such as a shift to remote or hybrid work
- If any of the reviewees have in-demand jobs with a scarce amount of qualified professionals to fill them
- If you want to change your system for incentive pay
- If your benefits package still reflects your business values
Be realistic about long-term financial stability and development
Thinking about long-term development is one of the key elements of a performance review, and the same goes for the compensation review process. You know that the market is shifting and trends in compensation are changing, so you have to make decisions that are feasible for your organization’s development.
While your goals and OKRs may be ambitious — and they should be — it’s okay to be practical and cautious in the compensation planning process.
Make pay equity a top priority
The compensation process steps we’ve outlined above should also help you solidify your commitment to pay equity, and analyzing external and internal compensation data should help you stay objective about whether or not to update your compensation plans for individual employees.
But if you tie compensation to performance reviews, which you likely do, you need to know how to avoid unconscious bias that can influence the performance element of the review cycle, impacting an employee’s pay — particularly if they belong to an underrepresented group.
If pay equity is a priority for your company, you need to understand how subtle unconscious bias can be. For example, you may not be aware of:
- Affinity bias — favoring someone who looks like you or comes from a similar background
- Expedience bias — judging someone’s work based on the speed and amount of their output rather than the quality of their work
- Recency bias — making a judgment based on the most recent performance rather than a longer time frame
- Contrast effect — the bias that can form when you have a great review and an average review in succession, making your average review seem less favorable
- Halo/horns effect — judging someone based on arbitrary qualities you deem good or bad
Be open to employee input
Your staff will appreciate the compensation review process more if they know that it’s an open conversation. Remember you’re working with human beings, and encouraging them to share their thoughts and feelings about the process helps build trust in your organization.
“Have an appeals process in place in case employees are not satisfied with the outcome of the salary review. This process should be well-documented and fair. Employees need to know that they have a way to voice their concerns if they feel that they have been treated unfairly.”
— Linda Shaffer, Chief People and Operations Officer at Checkr
Take your compensation management to the next level with Leapsome
Though the compensation review process can be fraught with emotion and stress around fairness, the effort you put into it matters to employees, even more so if you make the experience as transparent and collaborative as possible.
The good news is that compensation management tools like Leapsome can help you streamline the compensation review process and minimize the risk and frustration of doing it manually with an Excel spreadsheet.
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Leapsome offers the insights and data essential for planning and running your compensation reviews.
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