Despite the threat of a global recession, the record-breaking number of unfilled positions in 2022* has pressured employers to increase salaries and stay competitive. Otherwise, they risk employees feeling dissatisfied and losing their top talent to more lucrative offers.
So companies must budget for wages effectively. A smart but fair compensation strategy lets you determine which employees get salary increases — and the beating heart of this kind of strategy is salary reviews.
The salary review process may seem overwhelming, so we’ve researched and put together this article for you. We go over what salary reviews are, why you need them, and the effect they have on company culture. We’ve also added a step-by-step guide on how to successfully implement a salary review.
*US Bureau of Labor Statistics, 2022
What is a salary review?
A salary review assesses whether an employee’s pay accurately reflects their work performance. Companies tend to conduct them once every six to twelve months, and managers may adjust employee salaries based on the review’s outcome.
Effective salary reviews consider the following factors:
- Overall work performance
- Growth potential
- Progression toward goals and achievements
- The value of the specific role in the job market
- Whether the specific role is in demand
The importance of salary reviews
When implemented well, salary reviews have many benefits. Here’s an idea of what you can expect:
- Higher retention rates — According to recent research, 47% of employees who left or plan to leave their jobs did so for higher salaries. Salary reviews identify flight risks and can inform decision regarding retention bonuses before it’s too late, reducing attrition.
- A timeline for raises — Nobody thrives on uncertainty. When you do regular salary reviews, your people know when to expect a potential increase and understand that the topic also matters to your company.
- Improved communication — Studies show that people rarely know how their pay compares to the job market; 57% of people paid at the market rate thought they were underpaid. Salary reviews let managers explain the logic behind the company’s compensation strategy and catch misunderstandings like these.
- Job market insights — Benchmarking is essential for making effective salary and hiring decisions. And the data you collect from your research can also show you what works and what doesn’t for your competitors.
- More trust between leadership and team members — Salary reviews tell employees that their organization values and invests in them. It also encourages workers to discuss pay issues with managers before they escalate to discontent, disengagement, and turnover.
- Identified talent gaps — Salary reviews can help you assess who to promote. Likewise, they can reveal where your business is falling short (e.g., if one department consistently fails to get raises).
- Increased motivation — Fair compensation is critical to employee engagement and productivity, and salary reviews support this. If your people are dissatisfied with your current compensation management, consider making salary reviews a part of your employee engagement action plan.
How salary reviews affect company culture
Compensation management impacts company culture — and salary reviews are a vital part of that. Effective salary reviews lead to frank discussions about pay and performance, sparking more honesty and openness between employees and leaders.
Salary reviews are also an excellent motivational tool. Managers can use them to discuss how an employee achieved a salary increase or what individuals need to improve upon to get there. And when employees know what gets results, they become more productive.
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How to implement an effective salary review
Successful salary reviews require a clearly defined plan. They should also fit into your broader compensation management plan, so all the parts of your strategy are consistent.
Remember that every company is different, so use the following steps as a rough guide.
1. Analyze the job market
The first step is researching the external job market by collecting data on your competitors and other companies in your industry. Be as thorough as possible to get a complete picture. Make sure you look into:
- Salary bands and individual pay
- Job titles and descriptions
- Extra benefits
- Overall compensation plans
- Other factors that may affect pay, like work times, hours, and remote work
Don’t blindly copy your competitors’ salaries. Consider differences that may lower or raise their packages. For example, if a competitor has the same positions as you, do the job descriptions match, or do they include more responsibilities? And where are their employees located? Use all the information you collect to gauge what your organization should be paying.
2. Define your objectives
Next, discuss company-wide and individual objectives to determine what you’re working towards. Defining those objectives makes it easier to set everyone’s expectations regarding salary reviews. Consider using a solution like Leapsome’s Goals & OKR management tool to streamline the process.
Also, sit down with your accounting department to better understand your company’s budget — and keep in mind that your budget may shape some of your objectives. Then, calculate how much you can spend on salary increases that year.
3. Consider each role’s internal impact
Using your market data and objectives as a benchmark, decide on a salary band for each position. Consider the impact of the position within the context of your company — and how difficult it may be to fill a similar vacant position if someone decides to leave. Each business is different, and a supporting role in your company could turn out to be your competitor’s star player.
During this part of the salary review process, ensure both management and HR understand why each position was assigned its specific pay band.
For example, is the salary higher because the job is in demand, or it has managerial responsibilities? When leadership has that kind of information, they’re better equipped to explain the logic behind salaries to employees, who will appreciate the extra transparency and feel empowered with additional insights.
4. Evaluate each of your employee’s pay
Consider what factors you want to base employee salaries on and determine what you should pay each team member. For example:
- Job title
- Potential for growth
Make sure that however you assess your employees is part of a holistic feedback culture that involves 360° performance reviews, 1:1 meetings, and continuous feedback (to name but a few crucial people enablement processes).
You can also incorporate salary into a career progression framework that supports employees growing into different levels. That way, employees know what skills to improve to increase their pay, and you have a prebuilt framework for determining salary.
5. Inform your employees
It’s time to inform your people about their salary review and offer feedback. By now, you should be able to tell each employee:
- If there has been a salary increase
- In the case of an increase, the amount
- The reason for an increase — or no increase
- If the salary meets the market percentile your company is aiming for
- When the increase will take effect
- When a new salary review can be expected
- If they haven’t received a salary increase, how they can achieve one
Your employees must understand the reasoning behind their salary increase or lack thereof. They’ll appreciate your transparency, which nurtures employee engagement and advocacy.
6. Review the process
The final step is gathering feedback on your salary review. Ask if employees felt their salary increases met their expectations and, if not, whether they understood the rationale behind the decision. Get feedback using pulse surveys, which ensure anonymity and guarantee honest responses.
And after each annual salary review, go through the process again and keep the feedback you collected in mind. Ideally, you should make researching job market data and setting new goals a continuous habit.
How software can streamline salary reviews
Implementing salary reviews involves analyzing your company, your competitors, and each employee — then creating a strategy and scaling it for hundreds (maybe thousands) of employees. That’s all while keeping your plan fair, consistent, and transparent, so compensation management isn’t an easy task.
But software solutions like Leapsome’s compensation management tool can make the process smoother by letting HR and managers automate workflows and work with reusable templates.
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