How to Run an Effective Compensation Review Process

A 2022 survey suggests that only 32% of employees feel like they receive fair pay. This data indicates a larger problem as compensation is one of the motivators for workers to do their job effectively. Without good compensation for the workforce, company goals are harder to achieve.

Fair pay is giving equitable financial compensation and proper benefits that align with the employee's value of work. Good thing there are ways to ensure fairness and equity in employee compensation. One of them is through compensation reviews.

To know more about this process, read on as we discuss compensation reviews, their types and importance, factors, how to prepare for salary reviews, and how to run an effective process.

What does a compensation review mean?

Compensation review is a system that evaluates the total compensation package of employees. It is conducted annually to ensure the company’s pay practices are fair, competitive, and reflect business goals, market trends, and the company’s compensation philosophy.

When it comes to salary reviews, the process is easier with a Compensation Software, where HR leaders can gain salary insights from the job market, streamline survey management, provide pay equity analytics, model salary structures, and automate pay communication across the organization.

How long does a compensation review take?

The annual compensation review process varies in length depending on the company’s size. It typically takes 4 to 6 months from August to March. Here is a sample of a compensation review timeline:

Month	Activity
August to September	Align stakeholders on compensation strategy Get updated salary benchmarks Review internal pay equity and employee pay package Evaluate performance ratings
September to October	Decide on budget allocation for salary adjustments with finance department
October to November	Refresh pay bands Plan salary adjustments Labor Cost Forecasting
November to December	Arrange and finalize compensation adjustments
December to January	Communicate compensation with employees
January to March	Integrate compensation adjustments through payroll

Why are salary reviews important?

The salary review process serves many benefits in an organization, as it helps maintain the fairness, equity, and competitiveness of employees’ compensation packages. Here is the importance of salary reviews:

• Insights on industry standards

  Sourcing job market benchmarks is part of the salary review, ensuring that the pay packages are aligned with industry standards. This helps companies attract top talent with competitive benefits and effective salaries.

• Enhances team communication

  Reviews give leaders the opportunity to explain the company’s compensation strategy through internal and market data, involve team members in salary discussions, and mitigate pay issues like discontent and turnover caused by a lack of pay transparency.

• Determines talent gaps

  The compensation review cycle discusses employee performance and skills gaps that need to be prioritized to advance in their career and salary. This helps companies identify areas of improvement in terms of competencies, productivity, and promotion.

• Prioritizes employee compensation

  An established and regular salary review reflects the dedication and investment of an organization to its employees. Compensation backed by data-driven and deliberate decisions fosters valued and contented employees.

• Better retention and motivation

  Employees who experience fair and competitive pay tend to stay in the company, increasing employee retention, motivation, productivity, and engagement. To provide fairness in pay practices, an effective compensation review must be conducted.

Types of compensation reviews

Compensation reviews are not boxed into only one type. Various types of this process have different highlights and aspects. Here are the different kinds of compensation reviews:

• Annual compensation review: This involves all parts of the compensation and benefit package for all employees, regardless of their job positions and seniority.

• Promotional compensation review: This evaluates an employee’s compensation based on promotion.

• Performance-based compensation review: This highlights employee performance and the bonuses and rewards that come with it.

• Market-based compensation review: This is based on industry data, job market factors, and competitors for pay decisions and salary adjustments.

Factors to consider during compensation review

Conducting a thorough compensation review needs to have considerations to make it an effective one. Here are different factors that keep in mind during salary reviews:

• Industry benchmarks: The company’s compensation and benefits package must be competitive among the industry competitors to attract and retain top talents.

• Budget allocation: Ensure that wage costs and budget capabilities of the company align to avoid overspending and financial shortage.

• Job roles: Review roles and responsibilities and conduct Job Matching to align salary expectations with different job positions and complexities.

• Internal equity: Assess the fairness of the organization’s compensation practices through evaluation of employee compensation.

• Employee performance: Take note of employees who perform well and exceed expectations and establish a reward program to continually motivate them.

• Geographical factors: Location is important in salary decisions as the cost of living and economic factors vary from one place to another.

• Employee tenure: Consider employees who have served for many years in the company and establish a compensation system for them to promote longer tenure.

How to run an effective compensation review process

A successful compensation review process requires a systematic approach that reflects the company’s compensation philosophy and market competitiveness. To achieve this, here are 6 steps your organization can take:

1. Step 1: Align stakeholders with compensation approach

   Buy-ins from key stakeholders are vital in compensation strategy as they reduce resistance, ensure alignment with organizational goals, and increase trust and transparency. Involve stakeholders by communicating the benefits, processes, and impacts of salary review to employee satisfaction and performance.

2. Step 2: Determine budget with finance

   Compensation adjustments are effective when proper budget allocation is in place. Set an appropriate budget for salary and benefits package, promotions, and salary increases. Confer with the finance team and agree on the total funds needed for your company’s pay strategy.

3. Step 3: Update bands and benchmarks

   The job market changes from time to time, so make sure to regularly review the compensation packages by sourcing updated industry benchmarks. Update existing salary bands, use Pay Equity Analytics to assess internal pay differences, and integrate necessary pay adjustments.

4. Step 4: Conduct performance review

   Performance reviews are one way of determining salary adjustments during compensation reviews. Through this, the company can assess performance ratings, decide on promotions or salary increases, and guide employees on areas of improvement to attain better compensation adjustments.

5. Step 5: Set compensation adjustments

   Once stakeholder buy-ins, benchmarks, and budget are set, decide on the compensation adjustments with senior leaders, finance department, and managers. Consider all aspects of compensation, such as salary, benefits like health insurance and retirement plans, and rewards that match the job roles and performance of employees.

6. Step 6: Communicate compensation adjustments

   Inform the employees of the adjustments made to their compensation packages. This can either be done through organization-wide announcements or one-on-one conversations with line managers. Ensure that adjustments are integrated into HR systems, documentation, and payrolls.

   Pay communication has become easier through the Total Compensation Statement. It is a consolidated view of an employee’s overall compensation, such as base salary, bonuses, and benefits, ensuring pay transparency across the organization.

How to prepare for a compensation review

Prior to conducting regular compensation review meetings, your team must be prepared to ensure an effective and productive outcome. Here are ways for the HR to get ready:

1. Make clear guidelines: Guidelines help HR align the review process with business goals and compensation philosophy. Create a framework that details clear processes, instructions, and criteria.

2. Train managers: Managers lead the team in terms of fairness and compensation metrics. They must determine and reduce bias in the workplace to promote pay equity and identify fair compensation through key data like compa-ratio and performance metrics.

3. Set clear performance expectations: Every job role in the company must have clear performance expectations to guide managers in making compensation decisions and adjustments.

4. Build consistency in teams: To promote consistency, managers must have standard training, tools, and guidelines. This fixed system allows uniformity in achieving equitable compensation that aligns with company goals and philosophy.

5. Use compensation management software: Technology makes the workflow more efficient, eliminating administrative and repetitive tasks. It also helps your compensation packages compete among industry benchmarks, aiding in the attraction and retention of talents.

Compensation reviews are done to ensure that employee's salary and benefits are fair, equitable, livable, and competitive. Through Compensation Software, companies have access to accurate and updated market pricing that spans wide industries, job titles, and locations, making way for the right pay for the workforce.