Salary reviews haven’t always had positive connotations. However, they can drive motivation and loyalty when they’re done right. And, with some studies telling us that as many as 79% of employed people feel like they can earn better money somewhere else and a further 68% plan to leave their roles in the next year, pay reviews become an even more integral part of the human resources mix.
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What is a Salary Review?
Simply put, a salary review is the structured evaluation of an employee’s performance and compensation to ensure it aligns with their contributions and market standards. Beyond the numbers, it’s a powerful tool to foster a culture of appreciation and keep your talented team engaged.
What are the Benefits of a Salary Review?
Effective salary reviews aren’t just about pennies and pounds; they’re about investing in your greatest asset—your people—and reaping the following benefits.
- Boost Employee Motivation: Beyond the obvious financial boost, these salary reviews convey that hard work and dedication don’t go unnoticed. Logically, we know the connection beween financial compensation and team motivation, but a recent study at Glassdoor found that as many as 45% of employees were motivated to work harder when they received a higher salary. In short, it’s the fuel that keeps things running and leaves employees feeling valued, recognised, and engaged.
- Increased Retention: Talent retention is a game-changer in any business – particularly with the competitive job market and a cost-of-living crisis bubbling away in the background. Regular, predictable salary reviews can be your secret weapon in retaining top performers.When employees see a commitment to fair compensation and can map their pay trajectory because of that transparency, they’re more likely to stick around. On top of this, turnover costs often outweigh the cost of salary increases, and keeping the same dedicated people in your business ensures continuity.
- Increased Productivity: Happy employees are productive employees, and when your team feels their efforts are valued, they’re more likely to feel connected to their role, boosting their job satisfaction and contentment at work.The positive environment this creates can drive productivity and contribute to your team’s and your business’s overall success. Don’t just think about salaries as money spent; a well-executed salary review can help your company show its appreciation to your top performers, which can generate much more than profit.
- Attract Talent: To attract and retain the best talent, you must stay competitive. Regular salary reviews ensure that your compensation packages align with industry standards, helping you attract the best talent and position your business as an employer of choice in a fast-moving market.
- Build a Positive Culture: As we mentioned previously, salary reviews aren’t just about the numbers; in fact, many employees value things like their professional relationships, work-life balance, and job satisfaction over their salary. However, it is essential to remember that a strong salary review strategy will contribute to all those things.Getting it right and prioritising fair compensation will contribute to the fabric of your company culture, fostering a positive work environment where employees feel respected and acknowledged. This positive culture, in turn, becomes an additional magnet for talent and will do wonders for your business’s overall performance.
Pay Review Process Overview
There are three key phases of a pay review process:
Phase 1: Preparation Phase
- Set your objectives: Clearly define the goals and objectives of the salary review process. Determine whether the focus is on merit increases, market competitiveness, performance-related bonuses, or a combination of factors.
- Collect your data: Gather relevant data, including employee performance review metrics, market pay data, salary review data from previous years, and any other information that will influence your decisions.
- Set a budget: Establish a budget for the annual salary review cycle based on the company’s financial health, policies, and external market factors.
Phase 2: Review and Decision-Making Phase
- Evaluate performance: Conduct performance reviews to assess each employee’s contributions, skills, and overall performance. This phase often involves input from managers, HR professionals, and, in some cases, employee self-assessments.
- Benchmark salaries: Compare current salaries with market data to ensure competitiveness. Identify any adjustments needed to bring salaries in line with industry standards.
- Implement a decision-making process: Decide what factors your decisions will be based on – performance evaluations, market data, and budget constraints, and make consistent decisions on salary adjustments, bonuses, or other forms of compensation using the same parameters. This will help you to keep fairness and transparency at the centre of your strategy.
Phase 3: Communication Phase
- Communicate openly and transparently: Communicate the outcomes of the salary review process to employees. Clearly articulate the reasons behind salary decisions in a salary review letter, linking them to performance and market considerations.
- Encourage feedback and discussion: Allow employees to discuss their reviews, ask questions, and seek clarification.
- Plan for the future: Discuss goals, expectations, and growth opportunities. Encourage ongoing communication about career development and performance expectations.
Tips for Creating a Great Salary Review Process
- Focus on collecting robust data: Your data collection process should look internally and externally to paint the most accurate picture on which to base your decisions. Look at industry salary benchmarks and market trends alongside your own salary and performance data and leverage industry surveys, salary reports, and market analyses to anchor your decisions in a real-world context. Remember, its not just a nice to have, salary benchmarking can as much as double the rate you get your salaries ‘right’.
- Be broad and consistent in your performance metrics: This means having a performance management process across the whole business and going beyond quantitative metrics, delving into qualitative aspects like leadership, teamwork, and innovation.
- Plan your communication strategy: Discuss the rationale behind the decisions, emphasising the connection between performance and compensation. This builds trust and helps employees understand the criteria guiding their salary adjustments.
- Always strive to improve your process: Seek feedback at every stage and use it to help you inform your following salary reviews.
- Don’t make it a one-time thing: Salary reviews should be continuous. Regularly revisiting compensation will allow your business to adapt to market changes and evolving business dynamics.
How to Conduct a Salary Review in Five Steps
We’ve created a helpful infographic that simplifies the annual salary review policy and process into five simple steps. Here’s how you can use it in your business:
Step 1: Evaluate your existing process
The first thing you’ll need to do is evaluate your existing pay review process and identify if there are any gaps or areas for improvement.
Why?
Regular evaluation ensures efficiency and identifies areas for enhancement in your pay review process. It helps streamline the process, making it more effective and employee-friendly.
How?
Conduct a comprehensive audit of your current pay review process. Seek feedback from HR professionals, managers, and employees to help identify bottlenecks or areas of confusion. Use this evaluation as a springboard for refining your pay review process.
Step 2: Check contract terms
Before holding a pay review with an employee, ensure you know any employment terms and conditions you may be bound by.
Why?
Understanding employment terms is crucial to ensure fairness and compliance. It prevents potential conflicts and sets the stage for transparent communication during pay reviews.
How?
Review employment contracts thoroughly. Pay attention to clauses related to compensation, bonuses, and any other relevant terms and ensure that you clearly understand the contractual obligations and limitations before initiating pay reviews.
Step 3: Research market pay data
Next, you need to evaluate your employees’ value on the job market to ensure the salaries you offer are competitive and in line with industry standards.
Why?
Aligning salaries with industry standards attracts and retains top talent because it ensures that your compensation packages remain competitive, supporting a positive company culture and employee engagement.
How?
Dive into the data! Identify the average compensation for similar roles in your sector and use this information to benchmark your salaries and make informed decisions during pay reviews.
Step 4: Calculate your budget
Calculate your annual pay review budget and establish a schedule for appraisals. Your budget will depend on the size of your company, your internal policies and other circumstances, and the external job market, including pay scales and market rates.
Why?
Establishing a budget provides financial clarity and sets realistic salary expectations throughout. It helps balance the need for competitive salaries with the financial health of your organisation.
How?
Analyse your company’s financial standing and projections alongside your internal policies, pay scales, and market rates. Based on this, calculate a realistic budget for the pay review cycle and establish a schedule for conducting appraisals and pay increases throughout the year.
Step 5: Conduct performance reviews
Finally, the best way to gather this vital data is through an effective continuous performance management system. Performance reviews are a great way to track, evaluate, and improve employee performance.
Why?
They are the backbone of data-driven decision-making. Reviews provide insights into an employee’s work performance and contributions, making aligning compensation with individual and team achievements easier.
How?
Implement an effective continuous performance management system which regularly collects data to track, evaluate, and improve employee performance. Use this data to inform decisions during pay reviews, ensuring that compensation reflects the value employees bring to the organisation.
