What is a salary review?

A salary review is the evaluation process managers conduct to determine if their teams’ salaries fairly and accurately reflect their work performances and changes in the cost of living.

A thorough salary review depends on these factors:

• Work performance or performance review results
• Position
• Employee value in the external job market
• Designated compensation budget
• Rate of inflation

Why are salary reviews important?

Salary reviews are a win-win, benefitting both employees and employers. Salary reviews encourage a culture of fairness, high performance, and communication between the team and leadership within an organization.

Salary reviews help to:

• Compensate high-performing members of the team.
• Initiate strategies to support and encourage people to reach their full potential.
• Assess whether a team member’s current salary aligns with industry standards.
• Improve morale. The promise of career growth can incentivize high performance and increase staff retention. 
• Provide an opportunity for anyone wishing to express concerns, contest salaries, or ask questions about their pay and role.

Why should HR leaders care about salary reviews?

Salary reviews offer team members the chance to receive compensation that matches their work performance or inflation levels. Salary reviews can also improve:

• Retention
• Engagement
• Productivity
• Performance

How often should you have salary reviews?

While annual salary reviews are common, companies that conduct reviews every six months can stay ahead of the curve. Conducting reviews more often can help you understand your people’s expectations and identify anyone who may be struggling.

Regular salary reviews can help you:

• Obtain a more consistent measure of a person’s value to the organization
• Identify and rectify any aspects of your team’s performance that need improvement
• Keep abreast of external benchmarking
• Make cost-of-living adjustments–if necessary–to combat inflation

Leadership should communicate whether a meeting constitutes a formal salary review–where a salary negotiation is possible–or is simply an informal discussion.

How can you prepare for a salary review?

Salary reviews involve more than just evaluating a team member’s performance. They also include considering compensation benchmarking, current inflation rates, and other relevant information, like the company’s budget. This process typically involves input from various stakeholders within the company and is an integral part of managing your company’s compensation and benefits package. To prepare for a salary review, you should:

• Calculate your budget. Start by reviewing your budget for salaries. This will help you calculate the amount of money you can offer.
• Audit your existing process. Evaluate your salary review process so you can identify if anything is missing or if you can improve any areas.
• Double-check contract terms. Spend time familiarizing yourself with employee contract terms and conditions, so you understand any special clauses or conditions.
• Conduct internal and external salary analyses. Analyze similar roles within your organization and positions on the job market. This will keep your offering competitive and prevent internal pay discrepancies.
• Undertake performance reviews. Gain a greater understanding of how your people are performing. Are they meeting goals and objectives? You may want to reward overperformers when it comes to salary reviews and incentivize those who may be underperforming.
• Involve your team. Things will run smoother if you’re transparent and include your team every step of the way. You should encourage open communication and feedback from your people.

What can HR leaders do to implement effective salary reviews?

For HR leaders, it’s important to ensure that the entire pay-for-performance system aligns not only with team success but the company’s success, values, and goals. You can incorporate the following components to build a salary review system that engages and retains your people:

• Analyze the performance review criteria. HR leaders should audit the performance review criteria to check that it rewards people who qualify for raises and motivates others to boost their work performance.
• Train managers in performance management. Educating managers on how to conduct performance reviews that encourage employee retention is key.  If your company uses performance management software, be sure to teach your managers how to use it and streamline the performance and salary review processes.
• Consistently involve your people in the process. HR leaders and managers should encourage employee feedback. Allowing your people to safely and frequently share their ideas can provide you with valuable insights into how they’re feeling and what needs to be improved. Moreover, employee involvement in the performance and salary review processes shows a company’s appreciation and value for its people.
• Use a merit matrix. Compensation plan managers can build a merit matrix based on internal and external benchmarks. Merit matrixes can guide managers and HR leaders to establish equitable salaries within the company budget.
• Conduct salary reviews consistently. Regular salary reviews can help ensure fair compensation. For example, a notable improvement in a team member’s performance could qualify them for a raise following the yearly salary review. 

What’s the difference between a salary review and salary increase?

A salary review involves evaluating and discussing a team member’s salary, including the potential for a salary increase. On the other hand, a salary increase refers to an actual increase in pay. If a person’s performance meets or exceeds expectations, a salary review may lead to a salary increase. Companies can also use incentives, such as bonuses and added benefits (think more vacation days or other perks), to motivate and reward people during the salary review process.

How can effective salary reviews improve company culture?

Transparent and frequent salary reviews can lead to greater job satisfaction and employee retention. All team members want recognition and fair compensation for their work performance. A company that values its people and shows it through proper compensation can build a thriving company culture composed of enthusiastic and motivated individuals.