End of Year HR: Compensation Review

With the year coming to a close, it means it is time to start thinking about annual compensation reviews for the employees within your organization. Annual compensation and performance reviews can be stressful for both managers and employees, but we are here to fix that. The process can vary from organization to organization depending on the employer and company culture. In this week’s blog, we will discuss the strategies to help the make the annual compensation review process more transparent and less painful for everyone involved.

Evaluating Employee Performance

Before jumping in to review an employee’s salary, it is important to understand the objectives and purpose of the process. When conducting a compensation review, take into consideration how well an employee performs their job and where that employee fits relative to the external job market. The employee’s performance review will play a key role in the salary review process.

To evaluate an employee’s performance, you first need an objective set of job-related criteria that contains knowledge, skills and abilities needed for a position. In addition to the knowledge, skills and abilities there needs to be a clear definition of success for that position. The standards for success can vary from employee, so managers should work closely with the employee to establish an individualized success metric. After establishing the criteria and success metrics, the performance review process can begin in which you rate your employee’s performance. The performance review is a part of the equation when it comes to the compensation review.

Another factor that is taken into consideration is where the employee fits relative to the external job market. Is the position significantly over- or under-paid compared to the market? This could mean that it was not benchmarked correctly or designed at the right level for market comparisons. When you compare internal jobs to the market, be weary of titles like “senior”, executive level positions like “vice president” or C-suite as these could pertain to specific organizational structures and how they approach these titles. When conducting compensation reviews, it is important to understand your organization’s structural design and how it compares externally so that your analysis is built on a solid foundation.

It is best to conduct monthly performance reviews instead of just once per year.

Connecting Performance with Compensation

When you combine the performance review with compensation, many organizations will reward their top performers with a salary increase while the non-performers will receive little or no increase. Some organizations choose to hold the two in one meeting while others find it beneficial to separate the two. By separating the compensation and performance reviews, your employees may be able to hold a meaningful conversation about their performance instead of feeling anxious about what their salary will be.

Another tip for making the annual review process less painful is to conduct monthly performance reviews instead of just once per year. Most of the time, annual performance reviews are forgotten weeks after the fact so by conducting regular monthly check ins, the employee will be reminded of their goals and success metrics. This allows for employees to actively regroup to effectively reach their goals. This also is effective for preventing backlash from underperforming team members; those who are not making progress toward their goals won’t be surprised if they don’t get a raise or if its lower than they anticipated.

The key with successful compensation reviews is to have clear metrics for every evaluation area. If skills like teamwork, communication and time management are taken into consideration at the compensation review then they should be included within the written evaluations and key abilities and skillset. The more information that the employees are given regarding success the better.

Remain Transparent

When you have hardworking employees, it is common for them to sometimes feel like they deserve a raise. While they may deserve it, sometimes it can be difficult to explain why. Companies should provide transparency to their employees to eliminate false hope. Whether your company is on a salary freeze or budgets are tight, it is crucial to keep your team members in the loop. When it comes to raises or lack thereof, remaining honest and transparent with your employees is always the best policy.

The compensation review process is not difficult but there may be times when it may feel like it. When it comes down to it, each employer must decide what annual compensation review strategy is best for them. Whether its conducting performance and compensation reviews together or separately, it is important to have a clear outline in place. Communication, transparency and well-defined strategies are the key to compensation and performance success. By incorporating these best practice tips, we hope you will have a more effective and enjoyable compensation review process this year.

End of Year HR: Compensation Review