10 Compensation Review Mistakes to Avoid
As we may have mentioned once or twice, we’re pretty big on the idea of conducting regular compensation reviews.
Doing this at least once a year allows you to make sure every one of your employees is getting the salary they deserve — taking into account everything from market data to performance to the rate of inflation.
Ultimately, this can help to reduce internal inequity, boost employee retention and lead to a happier, more productive workforce.
Of course, the way you conduct compensation reviews matters. In this article, we’ll discuss ten of the most common mistakes that companies make in the compensation review process.
If you see yourself in any of the below, don’t panic — but do scroll to the end to find out how we can help you.
10 common mistakes in the compensation review process
Ready? Here are ten of the most common mistakes we see companies make during the compensation review process:
1. Conducting compensation reviews less than once a year
One of the biggest mistakes you can make when it comes to your compensation reviews? Not performing them often enough.
Simply put, if you’re not conducting a comprehensive review at least once a year, you have no way of knowing whether your salaries are actually fair and competitive. And if they’re not, you’ll soon see the impact in terms of employee engagement, morale and turnover.
There are even arguments for running compensation reviews more than once a year. This allows you to be even more reactive to market changes and ensure everyone is being paid what they deserve — even in industries where the market changes quickly.
2. Not aligning your process with your compensation philosophy
Your compensation philosophy is a mission statement that sets out your overall approach to compensation. That means it should be guiding every part of your compensation strategy, including how you conduct reviews.
However, processes can shift and change over time, particularly when a business is growing quickly. That means that if you’re not checking in with your compensation philosophy, you might find it ends up out of line with what your operations actually look like.
If this happens, you need to make some changes to either your compensation philosophy or your compensation review process. Since your core beliefs about compensation probably haven’t changed, this usually means reassessing your approach to compensation reviews and bringing it back in line with your compensation philosophy.
Oh, and if you don’t yet have a compensation philosophy? Stop reading this post now and go create one — here’s how!
3. Not having clear and consistent criteria for salary increases
The whole point of a compensation review is to determine who gets a raise, and by how much. But if you don’t have a set of consistent, predetermined criteria for making those decisions, you’re opening the door to unfairness and bias.
Of course, the criteria you choose can (and probably should) encompass multiple factors, including:
- Performance ratings (more on this later)
- Inflation per country
- Years of experience/tenure
- Market positioning
The important thing is that whatever criteria you’re using should be determined in advance — and you should stick to them as much as possible. It shouldn’t come down to an arbitrary decision on the part of a manager, but a consistent, repeatable process.
4. Not taking market positioning into account when determining raises
Here’s a scenario for you: you have two employees in the same role, who have received the same (excellent) performance rating. Based on your salary increase criteria, this means they’re both entitled to a percentage-based raise.
Sounds fair, right? But what if those two employees weren’t paid the same amount to begin with? This can happen for a number of reasons: perhaps one employee negotiated better on hiring. Or maybe they were both hired at the 50th percentile, but a year apart (during which time the market shifted).
The point is, awarding them both the same percentage increase based on their current salaries only perpetuates existing inequities and makes them harder to overcome. Repeat this cycle a few more times, and one employee could be making thousands less than their colleague for doing the same work, at the same level.
So, what should you do instead? Simple: bring everyone’s salaries in line with the market (at your desired positioning) first — and then start thinking about performance-based increases.
5. Not communicating clearly with managers and employees
A successful compensation review involves clear communication. First, you need to communicate effectively with the people who are involved in the process — specifically, managers. Before the process begins, they should understand exactly how it will work and what is expected of them.
But you also need to think about how you’ll communicate with the rest of your organisation. After all, even if employees aren’t involved in the process, they’re certainly impacted by the outcome.
The exact level of transparency you want to go for is up to you. But as a minimum, you should make sure employees understand:
- The timeline for the compensation review process
- What (if any) information they need to prepare
- The criteria that will be taken into account
Why is this so important? Well, not communicating clearly about the compensation review process can lead to confusion and even frustration. Worse: if employees think you have something to hide, they may think their pay decisions are being made unfairly, even if they’re not.
6. Not having a standardised (and fair) performance rating system
Many organisations take performance data into account when conducting their annual salary reviews. And this makes sense: there’s nothing wrong with rewarding those employees who have been working extra hard or achieving exceptional results.
However, you need to make sure that the performance ratings you’re using are fair and objective — which isn’t always easy. For example, if you’re simply asking managers to score each employee on a scale of 1–5, there’s a big opportunity for bias to creep in.
Instead, employees should be measured against a clear, predetermined set of criteria, which they themselves understand. Where possible, you could also consider using 360° reviews to get a broader picture of each employee’s performance.
7. Discussing performance and pay in the same conversation
While we’re on the subject of performance and compensation reviews, there’s one thing you definitely shouldn’t do: try to have both conversations at the same time.
Look at it this way: when you meet with employees to discuss their performance, the focus should be on helping them resolve any issues and improve their work — as well as providing kudos for a job well done.
But employees can’t focus on that conversation if all they can think about is whether or not they’re getting a raise. That means you should run your performance reviews as a separate process, and meet with each employee to discuss the results — without bringing compensation into it at all.
Then, once that’s done and dusted and employees know where they stand, you can use the data you’ve collected to inform your compensation reviews.
8. Allowing too much manager discretion in compensation decisions
Some companies allow a certain amount of manager discretion when it comes to salary increases. After all, an employee’s direct supervisor usually knows them and their work better than anyone else, and allowing them to manually adjust their salary by a few percent isn’t necessarily a problem.
However, allowing this to happen too much is a big mistake, because the more managers move pay decisions away from the predetermined criteria you’ve set, the more you weaken the system you’ve spent so much time building. This can (understandably) concern employees, who may worry that decisions are not being made fairly.
So, yes: allow a certain amount of manager discretion if you must — but be sure to keep it to a minimum if you want to avoid discrediting your whole pay structure.
9. Not clarifying communication expectations with managers
After the compensation review process is over, it usually falls on managers to communicate the results back to their teams. This is a big responsibility — and it’s important to provide them with guidance to help them do it effectively.
For one thing, these are important conversations. That means you should ask each manager to schedule individual meetings with their reports — ideally face-to-face.
Also, remember that managers won’t always agree with the final compensation decisions that have been made. But letting employees see this can have a serious impact on team morale. Whatever managers think personally, it’s absolutely vital to have them agree to ‘disagree and commit’ — and not badmouth the compensation review to their teams.
10. Failing to follow up and ask for feedback
A compensation review isn’t over once you’ve shared the outcome with your employees. If you want to get the most out of it, it’s important to properly follow up with each one.
That means providing employees with a written follow-up that confirms any decisions about their pay. It could also mean addressing any issues that came up during the process — especially if it involved heated discussions.
Also, it’s a good idea to ask managers and employees for their feedback on the compensation review process. That way, you can continue to iterate and improve each year, and ultimately build a stronger, more effective process.
Conduct smooth and effective compensation reviews with Figures
The one tool you need to make sure all of your employees are paid fairly and competitively in 2024? Figures.
You can use our platform to build flexible, scalable salary structures, perform compensation reviews smoothly and benchmark your salaries against our database from 1000+ companies across Europe.
Put simply, Figures gives you everything you need to run smooth and compliant compensation reviews, without the administrative headache they usually entail.
Want to learn more? Sign up for a demo to see Figures in action.