Salary reviews: why, when and how

You may be hesitating whether this is the right time for a salary review for your employees. You may find that it is already too late, and your best talent is looking elsewhere. Many ask these three basic questions when it is too late: why run a salary review? When should we do it and how?

The ‘why’

Remuneration and recognition are two of the most important factors in talent retention. Keeping up with the salaries being offered has become very challenging.  Equally difficult is  attracting new talent.

Filling the gap between the employee’s salary expectations and what the business can afford can be bridged by developing the employee’s role further by giving an opportunity to take on greater responsibilities, setting targets or giving clearer tasks.

Whilst the basis of salary reviews is to retain talent and remain competitive, every company must identify its own primary objective as to why it carries out salary reviews. It is this objective that will help the business decide on which approaches to take for the ‘when’ and the ‘how’.

The ‘when’

Understandably, well-managed businesses look at their current and expected growth for the upcoming year and sync their company payroll budget accordingly.

If not done annually, salary reviews should at least be conducted every two to three years. In such a dynamic labour market, two years is already stretching it. The longer it takes to conduct a company-wide salary review, the greater the risk of adjustments becoming too expensive.

While I understand that some businesses prefer to react flexibly  to salary reviews, deciding on a consistent approach towards salary reviews will surely be of great benefit to the organisation. It removes subjectivity in salary increases since a consistent approach is adopted, based on set criteria and a transparent structure visible to one and all.

The ‘when’ a salary review should take place should be based on the three factors: business performance, the employee performance and going salary market rates.

The ‘how’

There is more than one approach in giving a salary increase. The first orthodox, non-issue arising approach is that to give the same increase across the board. This approach can be expensive and does not provide incentive to the top performers. It can be considered as a foregone year-on-year salary increase, irrespective of attaining any set targets.

The second approach is that of rewarding based on the individual’s performance. This approach should dissuade employees from becoming complacent. Pay increases are tied to output increase and attainment of set targets.

The third approach is a mix of the two options mentioned above.

If a company decides to review salaries based on performance, then the payroll budget is subject to the evaluation of the employee performance, through tools such as the performance management system. In such cases, employee performance is linked to set outputs or objectives (which the employer and employee mutually agree to) and should be attained to benefit from an increase or a bonus. As an employer, one needs to decide how much weighting should be given to the performance factor. This approach justifies the ‘how’ and the ‘why’ salary increases are given.

The approach to the salary review process can be as robust as one wants it to be. Nevertheless, this process must look at both internal and external data.

The internal insight is typically done by conducting a job evaluation exercise to see the value and worth of each and every position within the organisation, with the scope of determining the monetary value of each position.

The external insight is determined against the going market rates for every post and aligning to such data. Understanding what competing organizations are offering is vital information for your salary review. Companies may commission HR advisors to carry out salary surveys. This will provide specific pay analysis, comparison of every grade (and the respective pay) within the company benchmarked against competing organisations.

It is also understandable that businesses may still not match or exceed the salaries of competing organisations. In such cases, there are other options that can be used to offer better working conditions for employees, such as flexible working arrangements.

It is also important to keep an open communication channel with your departmental managers. They may easily recognise the recruitment and staff turnover concerns within their department. They may indicate that salaries of certain positions are not aligned with those of labour market.

The potential and benefits of salary reviews in supporting business performance can only be achieved if it is linked to the overall business and HR goals. It also needs to be aligned with any other HR processes already in place, such as the performance management system and other reward systems.

This article featured in the Classified Section of The Sunday Times of Malta on 30 September 2018.

About the author

Maria Bartolo Zahra is Managing Director and HR Advisor at SurgeAdvisory. She has over fifteen years of human resources and business advisory experience.