How to Conduct a Thorough Annual Compensation Review

Offering fair and competitive pay is one of the most critical ways to deliver a positive employee experience to your workforce. But to ensure employee compensation remains in line with employee performance and the external market, you need to review it regularly. Given the many possible elements of employee compensation—salary, cash incentives, and equity, just to name a few—conducting a compensation review requires a deliberate approach to planning and communicating changes to your employees.

How to Conduct a Thorough Annual Compensation Review

December 20, 2021

Offering fair and competitive pay is one of the most critical ways to deliver a positive employee experience to your workforce. But to ensure employee compensation remains in line with employee performance and the external market, you need to review it regularly. Given the many possible elements of employee compensation—salary, cash incentives, and equity, just to name a few—conducting a compensation review requires a deliberate approach to planning and communicating changes to your employees.

Therefore, take the following steps to be sure you conduct an annual compensation review that covers all the necessary bases:

Establish a Budget

As with any other important investment in your people, you’ll need to establish guidelines for how much you can reasonably spend on compensation increases. As in most organizations, labor costs likely represent your organization’s largest expense, so you’ll need to determine what you can afford to pay in annual salary increases and incentives. In addition to salaries and overtime, the compensation elements you should plan to include in your compensation budget each year include the following:

● Commissions

● Cash bonuses

● Restricted stock and stock option awards

Review Employee Performance

The leading driver of employee pay is performance. In fact, according to Mercer research, 90 percent of organizations use individual performance to drive base salary adjustments. Whether you conduct performance reviews quarterly, annually, or on some other schedule, be sure to link employee pay to performance. Doing so will ensure employees are recognized for their contributions and achievements at work.

Benchmark for Competitiveness

When determining the need for compensation adjustments and awards, it’s important to understand how competitively your organization pays employees. Having a sense of the market wage for company positions not only helps you to attract the right talent, but it can also help you retain existing employees who might otherwise leave for better pay elsewhere.

Understanding market compensation doesn’t necessarily require investing in costly industry compensation surveys. Other sources of competitive compensation data include the following:

● U.S. Bureau of Labor Statistics

● Glassdoor

● Indeed’s salary tool

● Data gathered from candidates in job interviews

Use HR Technology for Data Analysis

Modern HR technology allows you to upgrade your employee compensation management activities and move beyond simple spreadsheets. For example, a cloud-based HR tech platform enables more comprehensive reporting and analysis, so you can see employee compensation history, identify trends, and model salary and bonus actions during the planning process.

HR technology also supports a comprehensive compensation review process by helping build and maintain internal equity. For instance, you can run reports that analyze employee pay histories and help you determine any pay gaps across race, ethnicity, or gender.

Establish an Employee Communication Plan

Without a plan for communicating employee compensation actions, you can unintentionally leave employees in the dark about the competitiveness of their pay. In fact, research shows many employees don’t have a good sense of whether their pay is fair or not. According to 2021 Pay scale research, most people who are paid at or above a competitive wage for their role still believe they’re underpaid.

Before salary increases and bonuses hit employee paychecks, make sure employees understand that you have a process for reviewing and benchmarking compensation. You can also boost pay transparency by explaining your pay-for-performance philosophy and commitment to internal equity.

Revisit Compensation During the Year

Your annual compensation review is a great time to analyze employee pay and make appropriate adjustments. However, you may need to conduct reviews more frequently than once per year, as changing market conditions and special employee achievements may require ad-hoc adjustments. For example, if your organization is battling a falling employee retention rate, you may need to conduct periodic compensation reviews to ensure employee pay remains competitive.

Manage Workforce Compensation Effectively

Employee compensation is an ever-evolving part of the employee experience, and it requires ample planning and analysis to get it right. But when you take steps to assess employee pay and deliver rewards fairly and in line with performance, you can both motivate and retain your employees throughout the year.

As your HR services partner, MarvelHR can help you successfully budget, plan, and communicate employee compensation. To learn more, contact us for a consultation.

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