Understanding Salary Reviews

There may be no process that is more impactful on employee and manager morale and productivity than the salary review. Done well, it can help your organization to retain and motivate your people. Done poorly, it can be a source of frustration and wasted time for managers, and demotivation for employees.

Here are some key points to consider if you are looking for ways to ensure a well-run salary review process.

What is a salary review?

A salary review is a process by which an individual employee's pay is set for the forthcoming period. Typically done annually and referred to as the Annual Salary Review (ASR), the salary review is generally conducted by an employee's manager, taking into account the employee's past performance, role and goals going forward, and budgetary guidelines. The manager recommendations may then be reviewed by supervisors and/or HR compensation advisors. A key function of a compensation management solution is to ensure that the salary review process is efficient and effective.

Why do we pay people?

We pay people for a reason, of course. The reason we hire and pay employees in the first place is to accomplish a certain result, so naturally, the salary review process goes hand-in-hand with performance evaluations. The performance review is an assessment of how well the employee has performed their job and met their objectives.

Data from the performance evaluation may be used to inform the salary decision. For that reason, the salary review process is also sometimes referred to as the merit increase process, meaning that a salary increase is tied to merit or good performance. Increases may also be based on a promotion or transfer to another position.

Many companies strive for a “pay-for-performance” culture, in which rewards are earned through meeting key performance indicators (KPIs). To support this philosophy, this data should be available to managers when they propose merit or promotion increases for their employees, so they have the information needed to make objective, data-driven pay recommendations. A key reason why technology-savvy companies use digital compensation management tools is that they can calculate proposed increases based on employee performance and business rules, and present the amounts to managers for consideration. This can save managers a lot of time, and lead to better compensation decisions.

The perennial challenge: staying within budget

Of course, there are always budget considerations, so salary increases for a team need to stay within the allocated budget (determined during the salary planning phase). As managers are awarding salary increases to their teams, they need visibility into their budget pool and real-time feedback on how much of their available pool they have used vs. how much is remaining.

This is another strength of dedicated compensation management technology, which can constantly track the available budget and prevent managers from exceeding it, or at least warn them if they have gone over and are risking the rejection of the requested amounts.

The approval process

A key aspect of salary reviews is the approval process, which is central to good governance, risk management, and compliance. Generally, there are a few levels of approval, such as from manager to department head to group VP. HR may also take part in the approval process to ensure pay consistency and fairness across the company. Automating and tracking this process ensures transparency and accountability for regulatory compliance while maintaining an audit trail of approvals and related comments. A centralized compensation system can allow for this level of control, as well as provide a platform to drive and track the company-wide process so that HR and senior management can keep tabs on the completion status and ensure operational efficiency.

Implied in the approval process is a hierarchy that determines who needs to approve what. Sometimes this is a simple tree reporting structure, but in many companies, there can be multiple hierarchies, exceptions, and matrixed reporting structures that require flexibility in the compensation system to accurately reflect the reporting and approval relationships.

Key system capabilities

To get the most out of your salary review process, here are some of the capabilities to look for in your compensation technology:

• Manager self-service to participate in the review process
• Access to performance data, salary history, and total compensation for managers for each of their team members
• Visibility of budget available for allocating to the team, and amount remaining
• Transparency and auditability in pay calculations, recommendations, and approvals
• Flexible hierarchy structures to match the way the organization operates
• Workflow-driven process management

Global salary administration

In global companies, salary administration can have added layers of complexity due to different rules and regulations, local labor markets and pay scales, rules around expats, multiple currencies and languages, and different data inputs and outputs such as varying HR or payroll systems. Ideally, a compensation system will provide centralized control and consistency but with the flexibility to adapt to local needs.

Added capabilities for global companies

For global companies, here are some additional capabilities to look for in your compensation management solution:

• Flexibility within a framework to adapt compensation plans and business rules to local needs while providing central control
• Support for local languages, multiple currencies, and expats
• Adaptable data management and integration capabilities

Salary success

Ensuring a smooth and controlled salary review process is the hallmark of a well-run company. The right compensation management technology can support you in running an efficient and effective salary review.

If any terms in this article are unfamiliar to you, don’t worry. We have a resource that will help you navigate this and other compensation management terminology. Bookmark our Compensation Glossary or download a copy to access it offline.