A salary review is the process of evaluating an employee’s salary to ensure it is competitive, fair, and accurately reflects their work performance.

Companies should perform regular salary reviews to determine their employees’ overall performance, growth potential, and progression toward goals and achievements.

Salary reviews help companies make informed business growth decisions and improve employee retention and productivity. They also help employers determine the value and demand of job positions within the organization and competitive rates for similar jobs within an industry or region.

Salary review vs. salary increase

Employers typically conduct salary reviews to assess an employee's performance and determine whether their salary aligns with market value and their contributions to the company.

Based on the review’s outcome, HR may adjust the employee’s salary, which could result in a salary increase. However, a salary increase depends on many factors, like the employee's performance, company budget, and market value of the position.

Why are salary reviews important?

A salary review is an essential tool for building a positive and productive work environment. 
Salary reviews help employers assess global compensation rates and fairly compensate their workforce accordingly. They also provide employers the opportunity to discuss an employee’s strengths, weaknesses, and job expectations.

Additional benefits of salary reviews include the following: 

Ensure equity and fairness

The salary review process typically involves an employer comparing the employee's salary to their market value, performance, and the salaries of other employees in similar positions within the company or similar industry.

Salary reviews ensure employers fairly compensate employees for their work and that the company's compensation practices are equitable.

As a result, employees receiving equitable and fair salaries feel valued and appreciated, which may lead to increased engagement, productivity, and satisfaction.

Collect job market insights

Salary reviews allow employers to stay up-to-date on job requirements and market salary rates. Employers can use the data as a benchmark to assess whether their employees’ salaries align with industry standards.

Collecting market insights helps employers identify areas where they can improve their compensation to attract or retain top talent and maintain a competitive advantage.

Manage business costs and goals

Salary reviews help employers identify and address any pay disparities within the company. Employers can benchmark their salaries against market rates, set realistic compensation budgets, and make informed hiring decisions.

Salary reviews also allow companies to identify training and development needs for their employees to increase productivity and achieve growth goals.

Align with cost of living

Employers can use salary reviews to adjust salaries to keep up with cost of living increases and ensure their employees’ pay remains competitive in the current job market.

Employers can identify underpaid employees and provide cost of living adjustments or offer regional salary differentials for employees living in areas with a high cost of living.

Learn more: Complete Guide to Determining Employee Cost

Increase talent’s trust

Salary reviews play a critical role in ensuring successful employee-employer relationships.

Salary reviews show employees that the company values their contributions and is committed to paying them fairly and competitively. Salary reviews create dialogue and open communication that helps employers retain high-performing employees and engage low-performers—which can increase employees’ trust, motivation, and company loyalty.

How salary reviews impact morale and retention

Salary reviews are essential to successful compensation planning and management, significantly impacting company culture, employee morale, and a company's ability to attract, hire, and retain global talent.

Effective salary reviews lead to honest conversations about pay and performance and motivate employees by helping them understand how to achieve salary increases. This open dialogue helps strengthen the relationship between employers and employees.

Additionally, salary reviews help create a positive corporate culture by showing employees that the company values their contributions and is committed to fair compensation.

How often should you conduct a salary review?

Employers commonly hold salary reviews on an annual or semi-annual basis, but the frequency depends on the company.

Annual salary reviews allow companies to review and reflect on the past year, while a six-month review provides employers opportunities to check in with employees on goals and expectations mid-year and make adjustments accordingly.

Additionally, employers may conduct a salary review six months or a year after hiring a new employee to evaluate their performance and offer a salary increase.

How to implement an effective salary review process

The following strategies may help ensure a successful salary review process that fits into a broader compensation management plan.

Establish clear objectives and timelines

Determine your business goals for what you want to achieve in the salary review process. This may include increasing salaries to improve employee morale, retain top talent, or align salaries with market rates. Consider your company budget and how it may impact your objectives.

Additionally, set expectations for employees and establish clear timelines in the review process. Employees should understand how HR determines their salaries and what they can do to improve their chances of receiving a salary increase.

Align salary reviews with business goals

Determine how salary reviews align with your overall business goals. Set salary bands for each position based on market data, industry standards, and company objectives. Aligning salary reviews with the company’s success ensures employees receive fair pay and feel motivated to contribute to the organization's goals.  

Create a merit matrix

Develop a guide for evaluating employee performance and determining fair and equitable salary increases. This guide, or merit matrix, should include a methodology for paying global employees based on market rates, industry standards, and company success. It should also consider factors for performance, such as experience, education, and job responsibilities.

Encourage employee involvement and feedback

To get the most out of salary reviews, employers should involve employees in the process and encourage their feedback. Communicate the salary review process to all employees and offer opportunities to provide feedback during performance reviews and one-on-one meetings.

Employers should also be transparent about their compensation system and explain the reasoning behind their employees’ determined salary.

Ensure consistency

Employers should conduct regular salary reviews to help ensure employees receive fair pay for their contributions. A consistent salary review process helps employers identify and address any pay disparities, stay up-to-date on market salaries, stay competitive when hiring talent, make cost-of-living adjustments as needed, and gain their employees’ trust.

Conducting regular salary reviews also helps employers identify any areas where employee performance needs improvement. By providing employees with feedback on their performance and setting clear goals, salary reviews help employees develop and succeed.

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