What is a compensation review?
A compensation review is an evaluation of employees’ salaries and benefits. The objective is to ensure that what the business offers its employees is competitive with market standards. Conducting regular compensation reviews is not an exercise that solely focuses on numbers; it should evaluate employees’ satisfaction and benefits. It is a powerful tool to foster a culture of appreciation and engagement. Compensation and benefits reviews should be conducted by HR teams regularly, ideally yearly. They should also include benefits reviews.
Compensation and benefits key components
While salary reviews refer to the basic pay of employees, compensation and benefits reviews entail much more. Indirect and non-monetary benefits have grown in importance over the last few decades and play an essential part in talent acquisition. Here are the three typical categories that should be reviewed:
Salaries
Most salaries are fixed, but many businesses now offer variable or personalised pay. A fixed salary is set, either annually or hourly, while variable pay can depend on factors like tips, bonuses, commissions, or stock options. Variable salaries can appeal to candidates who enjoy challenges, want career growth, or are motivated by the chance to earn more.
Indirect monetary benefits
Employee benefits can make job ads stand out and influence candidates’ decisions. People value different rewards, so offering a variety is more effective. For instance, those with children will appreciate childcare support.
While benefits don’t have direct monetary value, they’re still important for attracting talent. Many top UK employers offer these as standard, with the key difference being the level of generosity. Employee benefits may include:
- competitive contributions to pension plans
- paid time off
- childcare, travel and home office subsidies
- healthcare plans
- free meals and snacks
- wellness programmes
- additional days of holiday
- cycling schemes, and much more
Non-monetary benefits
Non-monetary employee benefits can be just as valuable as salaries for some workers. After the COVID-19 pandemic, flexible working has become one of the most in-demand perks. Flexible working costs little but can lead to significant gains in productivity and employee satisfaction. Employee well-being is a priority for many businesses, and non-monetary benefits can play a big part. These can include recognition schemes, hybrid work schedules, volunteer opportunities, and parking perks.
Related: Allowing employees to work remotely as part of a lifestyle benefits package
Why conduct a compensation & benefits review
Conducting an annual compensation review might seem time-consuming. However, doing so brings many benefits to companies, including:
Boost talent acquisition and retention
Reviewing salaries and benefits regularly helps attract top talent and retain them. When pay and perks match or exceed the market, employees feel valued. They are more likely to stay. In turn, this reduces turnover and saves time and money on hiring and training.
Related: 9 effective employee retention strategies
Implement a fair and unbiased process
Another advantage of regular salary and benefits reviews is maintaining fairness across the organisation. The process helps identify and rectify any gaps between employees. This builds trust and demonstrates that the organisation values everyone equally. When employees perceive fairness in pay, they are more likely to stay engaged and motivated.
Related: What is fair chance hiring and fair selection?
Ensure compensation aligns with organisational goals
Regularly reviewing salaries and benefits keeps pay aligned with the organisation’s goals. It ensures that rewards granted to employees support the mission, vision, and values of the business. When pay reflects what the organisation stands for, employees feel more connected and engaged in helping the organisation succeed.
Related: Performance management: employee engagement and appraisal
Ensure compliance with legal requirements
Another advantage of regular compensation reviews is that they help organisations remain compliant with wage laws. Minimum wage, overtime and any other pay rules are reviewed to ensure alignment with legal requirements. As a result, businesses can avoid costly legal issues.
Related: National minimum wage: a guide for employers
Safeguard employee satisfaction
Regular salary and benefit reviews help keep employees happy and engaged. When people feel they’re paid fairly, they’re more satisfied and motivated. This boosts engagement, productivity, and overall job satisfaction. It also helps create a positive workplace where employees feel valued and respected.
Related: How to motivate your employees
Remain competitive in your field
The compensation and benefits review process benchmarks internal data against peers in the market to ensure the organisation stays competitive. This means salaries and perks are in line with what other companies offer in the same industry or area. Staying competitive helps attract top talent, retain them, and maintain an edge over competitors.
Related: What is competitive pay?
Engage with finance teams for budget planning
Regular salary and benefit reviews help with budget planning. By frequently checking pay, organisations can identify any changes in compensation costs. This allows them to plan for budget adjustments and contributes to the business’ financial stability.
Steps to conduct a thorough compensation review (with tips)
A compensation review entails the collection of data, the analysis of employees’ needs and much more. The process may seem time-consuming. This section provides you with essential steps for conducting a compensation review, along with some tips to lead you to a successful review.
Key steps to conduct your compensation review
Here are five essential steps to follow when delivering your compensation and benefits review:
Step 1: Gain visibility and evaluate your existing compensation
Start by reviewing your current pay processes to identify gaps or areas for improvement. Regular evaluations make the process more efficient and employee-friendly. Gather feedback from HR, managers, and employees to address any issues and refine your approach.
Step 2: Be aware of employment terms
Before a pay review, ensure you understand the relevant employment terms and conditions. This helps maintain fairness, avoid conflicts, and encourage open communication. Review contracts carefully, focusing on compensation, bonuses, and any limitations.
Related: Types of employment contracts: a guide to classifying jobs
Step 3: Benchmark market data
Next, compare your employees’ value to the job market to ensure your salaries are competitive. Aligning pay with industry standards helps attract top talent and boosts company culture and engagement. Use data on average compensation in your sector to guide salary decisions and pay reviews.
Step 4: Define your budget
Calculate your pay review budget and set a schedule for appraisals. Your budget depends on company size, policies, and the job market, including pay scales and rates. This ensures realistic salary expectations while balancing competitive pay with your organisation’s financial health.
Step 5: Launch employee performance reviews
The best way to gather this data is through a continuous performance management system. Performance reviews help track and improve employee performance, providing insights into individual and team contributions. Use this data to guide pay decisions, ensuring compensation reflects employees’ value to the organisation.
Related: Employee performance review: an evaluation sample (with downloadable templates)
Tips for creating a best-in-class compensation review
A compensation and benefits review can be complex. Here are additional tips to ensure your process leads to successful outcomes.
Collect meaningful data
To make informed decisions, your data collection should include both internal and external sources. By comparing your own salary data with industry benchmarks and trends, you can significantly improve the accuracy of your salary decisions.
Include both quantitative and qualitative data in your performance metrics
Using both qualitative and quantitative data means implementing a performance management system that focuses not just on numbers but also on qualities like leadership, teamwork, and innovation.
Have a strong communication plan and strategy
Being transparent with employees and explaining the reasoning behind decisions builds trust. Highlight how performance links to compensation. This fosters confidence in the process and helps employees understand the criteria for salary changes.
Ensure open communication and gather feedback
Collect feedback at every stage of the process to ensure you are aligned with employees’ needs. Use it to shape your approach for future salary reviews. This will help ensure your process remains relevant and effective.
Continuously assess and review the process
Salary reviews should be an ongoing process. By regularly revisiting compensation, your business can stay aligned with market shifts and adapt to changing business needs.
Related: Pay bands in the UK
