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5 steps for HR professionals to guide managers through annual salary reviews

Compensation Strategy & Design|Inclusion and Diversity|Talent|Total Rewards
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By Mariann Madden and Rishabh Krishnan | January 21, 2021

It’s salary review time. So, how can you help managers use their limited pay budgets to make meaningful and fair base pay recommendations?

For many managers, salary review time can create a great deal of consternation as they try to manage limited pay budgets and still provide impactful and fair pay increases for their employees. This year’s process is likely fraught with even more stress as a result of the COVID-19 pandemic. Yet the best practices applied to make pay decisions remain the same.

To help managers make clear decisions, you should provide them with guidelines featuring important questions and data points to consider. These five key considerations will help managers make the appropriate adjustments to base pay.

  1. 01

    Job worth (externally and internally)

    Managers should have a clear idea of the value of each position. A good way to start is by looking at the compa-ratio, the salary they’re paying employees compared to the market midpoint for similar positions at other companies. Understanding this alignment will give managers clear insight into the value of each job, but it’s not the only input they’ll need to make pay increase decisions. It’s equally important that managers understand your company’s compensation philosophy as well as how each job is valued within your company. Consider the following questions when evaluating a job’s worth:

    • Is the job critical to the success of your business?
    • Does it require skills that aren’t easily found in the market?
    • Is your company willing to pay more for these types of jobs?

    Once managers have a firm grasp on each job’s value, they can review other factors that will help them determine salary increases.

  2. 02

    Performance

    It’s important to educate managers on how best to examine the employee’s performance in an unbiased manner and be able to assess how it aligns (or doesn’t align) with the job requirements now and in the future. Consider the following questions when evaluating performance:

    • Is the employee meeting expectations for the job requirements?
    • Is the employee demonstrating skills above or below what is expected?
    • If the employee isn’t meeting expectations, is further training and development needed?
    • Or, is the employee not fully competent in the job, but expected to reach the competence level in the future?
  3. 03

    How the job compares to similar roles

    Determining employee pay should never be done in a vacuum. Otherwise you may be at risk of violating pay discrimination laws.

    The good news is there’s typically a pool of employees in which to compare. Managers need to look at their employees’ pay and compare it to similar jobs in the same job family and job level (and job architectures and leveling frameworks also are key in making accurate comparisons). If there are gaps, does it make sense, given the employees’ past performance, current performance, skills, overall experience, time in their current jobs, their career paths at your organization, geography, etc.? If it doesn’t, managers should work with the compensation team to establish a plan to close any pay gaps.

    Gaining an understanding of pay gaps is essential to deciphering if there are gender, age, race or ethnicity-based gaps in the organization and issues relating to pay fairness. Pay fairness continues to draw more attention both from governments as well as from company boards of directors.

  4. 04

    What to expect from employees now and in the future

    People change and so does the work they do. As unpredictable as the last year was and the future may be for many organizations, the best practices applied to make pay decisions aren’t as volatile. Current employee performance is a useful metric to gauge potential for future performance. Looking ahead and establishing a compensation plan as well as a career development blueprint will help managers organize where members of their teams align and where they should or will be in the coming months and years. To pave the way for smooth decision-making down the line, consider the following questions:

    • Where do managers see employees’ roles in the next two to three years and how will this correlate with pay?
    • Are any employees nearing a promotion?
    • Do managers need to make aggressive moves now from a training, development or pay standpoint? Or should they back off?
  5. 05

    How it all stacks up

    Once you have an idea of how a manager values the employee’s performance and the career path, see how it aligns with compensation. Is the employee meeting or exceeding expectations? From there, the manager can look at where base pay falls to see if it’s positioned appropriately with their peers based on the employee’s skills, experience and performance.

Final thoughts

These guidelines will help managers make the appropriate adjustments to base pay. If their employees are meeting expectations, pay is within the compa-ratio, and no pay gaps exist with their peers, it’s appropriate to keep pay where it is. If their employees are showing higher level skills but promotions aren’t an option (i.e., clogged pipeline, no position available, etc.), consider giving managers even more pay increase dollars to get their employees closer to the pay grade of the next highest job — which is often easier said than done given salary budgets.

Again, a plan for the future needs to be formulated so managers and the compensation team can assess how these adjustments will alter long-term compensation plans. Differentiating pay increases helps send the right message to employees — the hard work they put in does have a meaningful impact.

Authors

Director, Talent and Rewards

Analyst, Rewards practice

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