What a salary review is & why it’s important for engagement

The current economic climate certainly doesn’t make people leaders’ and managers’ jobs any easier. They need to walk the tightrope between keeping their top performers motivated, engaged, and satisfied while still staying within their established compensation budgets.

Indeed, according to a 2023 Income Data Research study, two-thirds of UK employers* are forecasting lower median pay raises in 2024 than they were able to offer in 2023.

That means it’s more crucial than ever for companies to use wise compensation processes to make the best possible use of the financial resources they do have. The best way to do this is by implementing and maintaining a consistent compensation strategy that empowers decision-makers to determine which team members get salary increases. 

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.

*Income Data Research, 2023

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What is a salary review?

You may be wondering, ‘What is a salary review?’ and ‘What does it encompass?’ Well, a salary review, also known as a pay review, assesses whether an employee’s pay accurately reflects their work performance. Companies conduct pay reviews once every six to twelve months, and managers may increment team members’ salaries based on their outcomes.

Effective salary evaluations 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
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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 are planning to leave their jobs did so for higher salaries. Salary reviews identify flight risks and can inform decisions 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 better understand the compensation review process, know when to expect a potential increase, and feel assured that employee salaries matter to your company. 

• Better communication — Studies show that people rarely know how their pay compares to the job market. In fact, 57% of people paid at the market rate thought they were underpaid. Salary reviews let managers explain the logic behind the company’s compensation management strategy and catch these kinds of misunderstandings. They also involve employees in pay discussions and ensure their voices are heard.

• Job market insights — Benchmarking is essential for making effective salary and hiring decisions. With compensation management software like Leapsome, you can access Mercer compensation benchmarking data to help you develop fair, competitive benefits packages for the current job market.

• More trust between leadership and team members — Salary reviews tell employees that their organization values and invests in them. They also encourage managers to be proactive about job reviews and salary talks before any issues escalate to discontent, disengagement, and turnover.

• Identified talent gaps — Salary reviews give managers the opportunity to discuss where team members are at and what skills they should prioritize to move forward in their careers. These conversations can also work as part of your promotion policy to inform promotion decisions.

• Increased motivation — Fair pay is critical to employee engagement and productivity, and salary reviews support this. If your people are dissatisfied with your current approach to compensation planning, consider making salary reviews a part of your employee engagement action plan.
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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 an increase to their fixed pay or landed some incentive compensation, or what individuals need to improve upon to get there. And when team members know what to do to get results, they become more productive.
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How to implement an effective salary review

An effective salary review process requires clearly defined plans. It should also fit into your broader compensation management plan so that all the parts of your strategy are consistent.

Remember that every company is different, so use the following steps as a rough guide.
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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.
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Pro tip💡

Need help with salary benchmarking? Leapsome has partnered up with Mercer — one of the world’s leading providers of compensation benchmarking data. Making generous, data-driven pay decisions has never been easier.

2. Define your objectives

Next, discuss company-wide and individual objectives to determine what you’re working toward. Defining those objectives makes it easier to set everyone’s expectations regarding salary reviews. Consider using a solution like Leapsome Goals 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.
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3. Consider each role’s internal impact

Using your market data and objectives as a benchmark, formulate a salary structure by deciding 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 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.
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4. Evaluate each of your employee’s pay

Consider what factors you want to base team members’ salaries on and determine what you should pay each of them. For example:

• Job title
• Job requirements and experience
• Qualifications
• Employee performance
• Potential for growth

Make sure your approach to employee assessment involves a holistic feedback culture that encompasses 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 team members 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.
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5. Inform employees

It’s time to inform your people about their salary reviews 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

To ensure fair compensation, it’s essential that team members understand the reasoning behind their salary increase or lack thereof. They’ll appreciate your transparency, which nurtures employee engagement and advocacy.
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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 quick pulse surveys, which should ensure anonymity to guarantee honest responses. 

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.
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Leapsome can streamline & simplify the salary review process

Implementing salary reviews involves analyzing your company, your competitors, and each team member — and 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.

However, 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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