I know that both employees and managers dread compensation reviews, probably equally but in different ways. I get it. They’re time consuming for managers and can be anxiety producing for employees. But it doesn’t have to be this way.
What Are Compensation Reviews?
Compensation reviews are regular evaluations of company salaries and compensation plans. During the review process, management determines whether salary and other forms of compensation are fair compared to company and market value compensation.
As a result of compensation reviews, employees could receive raises or adjustments in commission structures, bonuses, and other compensation types. Similarly, compensation reviews can identify potential problems, like salary compression or low-performing employees not eligible for pay increases.
Compensation reviews can take time to do right, especially for large organizations, which is why management doesn’t love them. Workers sometimes also become apprehensive about compensation reviews if they believe they don’t get paid fairly or aren’t given the opportunity to give feedback about their pay situation.
Tactics We Use To Manage Compensation Reviews
Before I dig into the steps to take to smooth the process of compensation reviews, I want to start with what we do at HR Advice and the team at Stone Press so you can understand where I’m coming from when I recommend specific tactics.
Our compensation reviews occur annually based on an employee’s start date. Doing so ensures that reviews happen throughout the year, allowing a more routine cadence for reviews rather than scrambling to fit them all in during one time of the year. This helps HR and management plan and manage their review load tremendously.
When someone gets promoted within the company, we use the date of the promotion as their new start date for their compensation cycle. This way, we have another full year to monitor their performance and complete their review properly.
An employee’s direct manager is the person responsible for their review. This manager monitors the employee’s performance daily anyway, so they have a good understanding of the worker’s strengths and weaknesses.
That same manager also reviews the employee’s job description to ensure that what they actually do each day matches with their expected responsibilities. Combining all this information, the manager can make an objective case for whether the employee receives a raise.
Our raise guidelines are simple:
- Workers who meet expectations don’t receive a raise
- Employees who exceed expectations get a 5% raise
- Top performers who go above and beyond their expected duties get a 10% raise
During the process, we expect and encourage managers to be open with their employees. If an employee wants to know where they stand mid-way through their compensation cycle to have an opportunity to improve, they can get that beneficial feedback from their manager.
In other words, there’s absolutely no space for sweeping things under the rug until their review.
The Keys To Running Smooth Compensation Reviews
If you asked me what the number one factor is for smooth compensation reviews, I’d say predictability. Both managers and employees want to know what to expect when it comes to the compensation review process, and rightfully so.
When compensation reviews line up with expectations for both parties, everyone benefits. Here’s how to make that happen.
Set Clear Compensation Review Policies
First, lay the groundwork for successful compensation reviews. This starts with rules and policies that outline the what, where, when, why, and how compensation reviews should be conducted.
If you have an HR department, it holds many of the responsibilities in this area. If not, management should work together to reach a decision on necessary policies. On the top of the list to decide:
- Who should be included in salary increase decisions?
- When should reviews be conducted and how frequently?
- Who leads the review process and who is involved in each employee’s review?
- How should feedback be given to employees?
- What happens after the review? How soon should a meeting with each employee be held and subsequent raises be given following a review?
- How should necessary compensation changes be handled?
- Who will be responsible for outlining new goals for employees to reach?
- How frequently will salary data and job descriptions be pulled and analyzed?
- How much involvement should employees have during the compensation review process?
Once the details are ironed out, create a thorough policy that answers each question and outlined expectations for managers and employees. Even better, craft separate policies for management and employees indicating their responsibilities and goals for compensation reviews.
Stress Test the Payroll Budget
Before planning compensation reviews, you need a payroll budget in place. A payroll budget accounts not just for your employees’ current wages or salaries, but also for their future raises. With a set payroll budget, you can always compare what you’re currently paying to what your business can reasonably afford to spend on payroll.
Raises should always be part of the budget. In other words, your current payroll shouldn’t come close to reaching your maximum budget. If it does, you’ll have no wiggle room for raises.
Your budget should consider the maximum pay for each role’s pay range in your company. For the sake of simplicity, let’s say you have 50 employees, and each one makes $50,000 but can earn a maximum of $80,000. Your budget should be able to accommodate the $4 million in payroll if everyone were to receive raises bumping them to their maximum salary potential.
Similarly, proposed raises shouldn’t strain your payroll too much.
A good rule of thumb is to consider how much your revenue increases each year, on average. If you typically experience an 8% revenue increase, your raises should stay under this number, perhaps capping raises at a 4% increase. As your company grows, you should be able to comfortably increase the raise cap.
In the meantime, HR might also find ways to create alternative benefits to raises that benefit employees, including flexible working hours, remote work, compensated professional development, or health insurance benefits.
Give Managers Time and Support
The next focus is on the managers responsible for conducting compensation reviews. For the review process to run smoothly, managers need the proper support.
Giving management plenty of time to conduct reviews is the key here. I’ll circle back to the Stone Press method of aligning compensation cycles with employee start dates, which ensures that not all reviews need to be completed at one time.
After all, rushed reviews won’t be thorough reviews, which will ultimately cause more harm than good for your compensation practices and your employees.
Training managers to run compensation reviews properly is equally important. Annual workshops might be a good idea to refresh management on your review policies and techniques to improve accuracy and efficiency when completing them.
According to a 2018 PayScale report, only 29% of companies offered their managers enough training to communicate with their employees about pay practices effectively. You can probably see why this could easily snowball into a big problem.
With managers trained to handle compensation reviews and subsequent conversations about pay with employees, both sides of the fence win. Managers feel confident and prepared to go into the review process, and employees become an integral part of the conversation.
Follow Through by the Next Paycheck
After completing reviews, managers should act quickly to transfer information about raises and promotions, if applicable, to HR or whoever manages this process.
Best case scenario: All raises and promotions should be ready to go by an employee’s next paycheck. Managers should communicate with employees about when to expect either.
Completing reviews quickly but not being swift about giving employees what they deserve as a result of their review could lead to problems down the road with payroll. It also doesn’t leave a positive impression on employees when benefits lag behind.
No More Compensation Review Chaos
If there’s one thing you don’t want to slack on in your business, it’s anything surrounding compensation and benefits. By following the steps above, there’s no reason your compensation review periods should feel overwhelming. Clear policies and ample training and support should get the ball rolling smoothly.
Still, even a company that runs like a well-oiled machine needs processes and supportive resources to continue running that way. HR software that keeps track of employee start dates and sends reminders for compensation cycles throughout the year could benefit even the most on-top-of-it organizations.