Compensation Review: Your 11-Step Guide to a Fair and Effective Evaluation
70% of employees think their last compensation review was unfair, and 44% of them are likely to switch roles in the next 12 months. The message? Compensation reviews matter, and you must get them right to prevent talent loss.
A compensation review process is necessary to assess how fair and competitive your compensation and benefits offerings are and to ensure you attract and retain top talent. For instance, the factors that most influence pay decisions U.K.-based companies make are inflation rates (62%), followed by market rate changes (57%) and employee performance (53%).
This article discusses how to ensure a fair and effective compensation review process and how to tactfully communicate salary changes to employees.
Contents
What is a compensation review?
Types of compensation reviews
The compensation review process
How to prepare managers for a compensation review
11 steps to conduct a fair, effective compensation review
What is a compensation review?
A compensation review—also known as a comp review, salary review, or pay review—is a systematic evaluation of an employee’s total compensation package. It is typically conducted at least once a year to ensure fair, competitive compensation aligned with industry standards, organizational goals, and the company’s compensation philosophy.
Companies often link compensation evaluations to performance and use them to reward employees for meeting or exceeding their goals. However, they are not the same as performance reviews, which solely focus on employee performance.
Types of compensation reviews
Some of the most common compensation reviews include:
- Annual compensation reviews: Typically conducted in the fourth quarter of each year, an annual compensation review considers all aspects of compensation and benefits an employee receives. This regularly scheduled review applies to all employees, regardless of their role or seniority.
- Promotional compensation reviews: Assesses compensation based on a promotion an employee has just received or is about to receive.
- Performance-based compensation reviews: Focuses on employee performance and rewards top performers with raises or bonuses.
- Market-based compensation reviews: Uses industry benchmarks, competitor data, or economic factors to make decisions on compensation adjustments.
Factors to consider during a compensation review
Here are a number of factors to consider when conducting a compensation review:
- Market benchmarks: Does your organization offer competitive compensation packages by industry standards to help you attract and retain top performers?
- Internal equity: Compensation evaluations can help you ensure the company pays all employees fairly for their work.
- Job responsibilities and complexity: Roles and responsibilities can change at any anytime, so it’s important to ensure the organization updates its compensation offerings to match current job expectations.
- Performance and productivity: If an employee consistently exceeds expectations and performs exceptionally, a compensation review can help ensure they’re rewarded for it.
- Budget constraints: Wage reviews must account for the company’s budget to prevent overspending.
- Economic and regional factors: The cost of living rises as inflation increases, making this an important factor in salary adjustments.
- Employee tenure: Many organizations reward long-serving employees. For example, their compensation may increase by a predetermined percentage for each year of employment, which in turn encourages longer tenures.
- Total rewards package: Consider all the monetary and non-monetary pay and benefits an employee receives if there are budget constraints or their pay is above the market rate. This will help you decide if any employee benefits need adjusting and, if so, by how much.
The compensation review process
It’s important to carry out this cyclical process at least once a year to ensure the organization is offering the fairest and most competitive compensation it can to all employees. Here are the five steps of a typical compensation review process:
- Gather data: Study market and internal salary benchmarks to see how your current compensation offerings compare to competitors’ or averages in your industry.
- Analyze roles: Review all roles, job descriptions, key responsibilities, and performance metrics. This will help you assess if the company is adequately compensating employees based on their workload, job complexity, and performance expectations. A common method to do this is job evaluation.
- Evaluate budgets: Get a clear, detailed picture of your company’s budget and priorities so you can align your compensation adjustments with them.
- Implement adjustments: Once the relevant managers approve any compensation adjustments, implement them by getting HR and finance to update the payroll accordingly.
- Communicate changes: Finally, communicate compensation changes to all employees involved, and be transparent about your decision-making process so they understand the reasons behind the adjustments clearly.
Learn the skills you need to conduct fair, effective compensation reviews
Any HR professional must be able to conduct compensation reviews fairly and effectively. You must be aware of unconscious bias, ensure pay equity for all employees, and use the right data to make informed compensation decisions.
In AIHR’s Compensation and Benefits Certificate Program, you will learn to interpret data to identify pay gaps and draft an action plan toward pay equity.
This online, self-paced certificate program will also teach you to craft an impactful reward strategy fully aligned with business goals.
Typical compensation review outcomes
Common annual compensation review outcomes include salary increases, bonuses, incentive adjustments, non-monetary compensation adjustments, pay equity corrections, and promotions and role changes.
A bonus or incentive adjustment could come in the form of a one-off payment or reward for outstanding performance, such as a new job title or future promotion. On the other hand, non-monetary compensation adjustments may include extra leave, flexible working arrangements, paid birthday leave, wellness days off, or time off to do volunteer work.
Pay equity corrections involve correcting any compensation discrepancies found among employees doing work of equal value. Additionally, compensation reviews are often linked to promotions and changes in roles and responsibilities.
How to prepare managers for a compensation review
Here are some tips for HR to prepare managers to conduct effective compensation reviews with their team:
- Provide clear guidelines: Ensure your company’s compensation review framework clarifies how the review process aligns with strategic goals. This provides managers with clear guidelines for conducting compensation reviews.
- Train managers on fairness and equality: Bias is common in the workplace and can lead to pay inequity. Train managers to help them identify and mitigate biases while emphasizing the importance of pay equity.
- Educate managers on compensation metrics: Train managers on how to use key compensation data by providing examples of how to do so. For instance, knowing how to work out the compa ratio can help them determine if employees are receiving fair compensation.
- Use compensation analysis tools: Tools can make the compensation review more efficient, whether it’s Excel or specialist compensation analysis software. Introduce managers to these tools to aid in faster decision-making.
- Define performance expectations: Ensure every role has clear performance expectations so managers can refer to them when making compensation decisions.
- Set up check-ins with managers: Regularly speak to managers to answer any questions they may have about the compensation review process.
- Promote consistency across teams: Ensure all managers receive the same training, guidelines, and tools to facilitate consistency across the organization.
- Use technology workflows: You can use these to set reminders and initiate actions during the review process, removing some of the administrative burden from HR.
- Focus on compensation reviews in manager onboarding: Doing this can help you set up new managers for success from the beginning.
11 steps to conduct a fair, effective compensation review
Here’s a step-by-step guide to conducting a fair and effective compensation review in the workplace:
Step 1: Set clear objectives for the review
The first step is to clarify your purpose for conducting the salary review. For example, your main goal could be improving workplace equity, retaining top performers, or addressing market competitiveness.
Additionally, make sure your compensation practices align with the organization’s wider values. If the company prides itself on rewarding high performers or excellent work, you must ensure a pay practice that reflects this. 
Step 2: Use accurate data and market benchmarks
Make sure you have accurate data sources to help you review your company’s compensation packages. Reliable market benchmarks will show how the organization’s compensation offerings compare to others in the same industry and geographical location.
Compare these to your company’s internal salary data to determine if any employees are underpaid based on their roles, skills, and experience. You should also know the budget allocated for total compensation packages to better estimate how far you can adjust salaries.
Step 3: Train managers to avoid bias
Train managers to avoid biases in the compensation review process. This includes affinity, expedience, recency, and contrast bias, which can all lead to pay inequity and unhappy employees. It can also result in potential legal implications for the company.
Teach managers how to assess salaries and bonuses fairly and how to approach conversations on compensation with their employees. They should be able to highlight the benefits of the review process, build trust within their team, and help promote employee retention.
Step 4: Engage employees to emphasize transparency
Only 54% of organizations check to ensure their employees understand their pay, even amid increasing queries about pay. This demonstrates a lack of transparency from businesses and can lead to employees being disgruntled and distrustful.
As part of your compensation review, establish open and honest communication with your workforce about pay structures, criteria, and the reasons for adjustments to help them better understand such decisions. Explain how compensation evaluations can benefit everyone, and communicate clearly and promptly at every stage of the process to avoid sudden surprises.
HR tip
Ensure there is an appeal process in place for any employee who is not satisfied with their pay review so they can voice their concerns and have them addressed. This ensures fairness and trust, shows the company values employee input, reduces dissatisfaction, and helps maintain a positive workplace culture.
Step 5: Audit regularly to ensure fair compensation
Many organizations conduct compensation reviews annually, but more frequent reviews (i.e., every three to six months) are also common nowadays. More frequent compensation increases can also help employees stay motivated and engaged at work.
However, auditing is time-consuming, so remember to weigh the costs and benefits of doing so, and decide on a schedule that suits your organization. Regular audits will ensure your compensation packages are fair and competitive, and help increase retention.
Step 6: Segment your workforce for pay equity
One of the key steps in a compensation and benefits review is to ensure pay equity. To do this, you must segment your workforce according to different salary bands. You could do this based on differences in pay practices, nature of work performed, location, and tenure.
This allows you to clearly see and assess the different compensation packages and practices in different workforce segments, pinpoint any concerns, and make any necessary adjustments promptly and precisely.
Step 7: Integrate performance metrics to reward top performers
Your organization may link compensation evaluations to performance, with compensation adjustments reflecting an employee’s performance ratings. This helps reward employees for their hard work in achieving organizational goals and drives exceptional performance.
To help you make fair performance-based salary increases, integrate performance metrics into your compensation reviews. This will give you a firm idea of how employees are performing and whether they’re meeting goals. You can then help ensure the company rewards top performers and tries to incentivize under-performers.
Step 8: Incorporate market trends to remain competitive
Market-based compensation reviews analyze market benchmarks to ensure a company’s compensation packages are competitive within its market. An example of a company that takes this approach is Netflix, whose employees’ salaries are always above the market median rate. In return, it expects consistently excellent performance from all employees.
A main benefit of a market-based approach is its use of salary data to help you make fair, unbiased pay decisions. It also ensures compensation is competitive, reduces bias, and builds trust while helping attract and retain top talent.
In the broader employee experience, the compensation review matters a lot to employees. Therefore, a big part of the process should be focused on enabling line managers to have the right conversations and create trust and transparency. Often, when employees are unhappy about the compensation review process, it has more to do with their experience of the process rather than the outcomes.
Step 9: Account for total rewards, not just salary
When evaluating compensation, don’t just look at salary—review the total benefits package each employee receives. Candidates today often look at more than just salary; certain benefits, such as flexible working options and health insurance, can be just as valuable as pay.
Use employee surveys and key metrics to see if your compensation package is helping you attract and retain high-quality candidates and employees. If it isn’t, what changes can you make?
Step 10: Use compensation analysis software to streamline the process
Compensation analysis tools and software often include access to updated market prices, benchmarks, and salary survey data, making it easy to check your company’s salaries against market rates and adjust them as needed.
Visualization features can also help you spot patterns and trends, reduce manual workload, and allow HR and managers to make faster compensation decisions. However, remember to weigh the cost of such software against the potential cost of losing top talent to competitors before spending any money—smaller companies may not be able to justify this expense.
Step 11: Document and communicate findings with the relevant parties
Throughout the compensation review process, be sure to document your findings in detail. If you’ve discovered compensation gaps that need fixing, propose a plan of action. For instance, should the company offer compensation increases to all employees to reflect inflation or only to top performers? If there are inequities you must address, how will you do so?
Communicate your findings to stakeholders, make your final decisions, update employees, and discuss the amended compensation arrangements with them. Ensure these adjustments are reflected in all official documentation and HR systems, including payroll.
Tools and software for effective compensation analysis
The right compensation analysis tools and software can save you time, enhance accuracy, and improve decision-making. Here are some popular tools HR can use to streamline the process:
- AIHR’s free compensation plan template: This free customizable template can help you ensure fairness and consistency in your compensation review process and align pay with strategic organizational goals.
- AIHR’s free compensation package templates: This template, which you can download for free and customize in two formats, can help you detail and visualize all the details—from financial compensation and benefits to PTO and retirement planning.
- Mercer Comptryx: An online solution focused on international job benchmarking for tech and non-tech positions, Mercer Comptryx can offer insights into global pay and workforce metrics data.
- PayScale: This AI-powered compensation software offers solutions like pay transparency, pay equity, compensation planning, and pay communications.
- Salary.com: This all-in-one compensation software offers users access to global market data and surveys.
To sum up
A fair and transparent compensation review process builds trust, boosts retention, and ensures employees feel valued. By using accurate data and clear communication, you can reduce dissatisfaction, reward talent, and stay competitive.
Investing in this process benefits everyone—leadership, managers, stakeholders, and employees. It also keeps the workforce motivated, strengthens workplace culture, and supports long-term success for your organization.
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