Many businesses have a salary review process. A salary review is an organisational evaluation of employee remuneration to ensure competitive and fair pay. It is a crucial tool to ensure that staff are fairly compensated for their work and that salaries are in line with market rates. A salary review is typically conducted annually. Fair compensation for employee output is often based on a performance review assessment of performance. Market rates for categories of employment and seniority often get ‘benchmarked’ against outside sources. However, not every organisation conducts a salary review. So, today we look at salary review pros and cons for today’s organisation.
Salary review rationale
Most employees expect a salary review every year. Given that inflation erodes the time value of money, a salary of £20,000 today will buy you less in 5-years’ time than it does today. Unfortunately, we very rarely experience deflation, so this holds true in most cases. This is especially true today with inflation exceeding double-digits, though it has recently reduced below 8%. As a result, employees experience a reduction in household disposable income.
Occidental economic growth is a necessity to fund future Government expenditure and pension liabilities. Unfortunately, improving living standards appears to be slipping down the priority list. As debt finance costs rise (the interest payments on the UK’s national debt will hit £110bn this year), the other lever of growth is productivity. This means increasing the Gross Value Added per worker per hour worked. You can start to see the dilemma for organisations if increased salary does not boost productivity.
Additionally, people tend to expect higher pay with greater experience, further qualifications and training. Where an organisation uses pay bands/scales, some staff are near the top of their band. Successive years of salary review but no promotion often leads to employees who are ‘stuck’ at the top of the band. Many employers operate a kind of ‘fiscal drag’ on pay bands to cap future increases, rather than paying market rates.
Salary review process
The salary review process aims to ensure fair compensation for a job based on a variety of factors. These include the job itself, your experience, your performance and current salary. There are a number of nuances to this such as location, salary of peers and your perceived potential. Underpinning any salary increase is the available budget, job market availability of good candidates and inflation. In a low-inflation economy, an employer may only budget 2-3% for pay review.
Employees may also argue that they would be paid more money at a competitor. This increases the importance of paying market rates i.e. a competitive salary for working in your organisation.
A typical salary review process is as follows:
- Check affordability – how much budget is available to increase salaries.
- Agree the scope – what we want to achieve and why helps align employees to strategy.
- Benchmark the roles – provides comfort that roles are like-for-like, more or less complex.
- Compare the market – understand salaries for role, experience and sector to guide decisions.
- Assess performance – confirm performance outcomes and ratings to allocate budget.
- Communicate outcomes – explain any salary decision to employees and why.
Now, let’s look at some salary review pros and cons.
Pros and cons
A salary review has pros and cons. Whereas some business leaders would rather avoid the topic altogether, others recognise that there are advantages. In some cases, a halfway-house solution means no formal salary review process but awarding increases to key personnel.
Pros of a salary review
- Reward your high performers
- Increase staff retention
- Easier talent attraction
- Attract staff from your competition
- Higher employee engagement
- Perceived fairness
- Provide a living wage
- Support legislative compliance e.g. minimum wage
- Fewer hardship requests
- Ensure you don’t overpay market rates for similar roles
Cons of a salary review
- Cost or affordability
- Across the board increases could reward poor performers
- Sets an expectation of pay rises for no more productivity
- High performers may make unrealistic demands
- May identify some people and roles who are underpaid
- Assessments of performance may be unfair or biased
- Poor communication of decisions can do more harm than good
- More salary may not mean more employee engagement
- Headcount may need to be reduced to afford pay rises
- It may reduce variations in pay based on experience and qualifications
Conclusion
Employees generally expect pay rises in line with or in excess of inflation to stay with an employer. If not, they face declining living standards and quality of life. This is not to say that everyone does or should receive a pay increase. Where job roles are relatively straightforward, such as supermarket workers, pay awards may cover all employees at the same amount. There are also considerations where trade union representation is involved. However, if non-unionised workers receive a 3% pay rise and the unionised workers receive 8%, expect morale and retention of the non-unionised workers to fall.
Furthermore, many companies choose to only give pay rises to high performers. This recognises those people considered essential to future business success. Since pay is not the primary driver of workplace wellbeing, other steps to boost the experience of employees may help here. There are also businesses who do not conduct performance reviews and therefore have no measurable way of determining relative pay awards. The supermarket analogy would apply again here, where promotion is the route to success.
To conclude, there is greater pressure than ever to increase pay as we write this in 2023. High inflation, rising interest rates and slow growth in wages has led to substantial pay demands. Since pay inflation tends to be a driver or price inflation, economists are hoping for pay restraint. Workers see things differently, so a pay review needs careful planning. However, you don’t want to reward underperforming staff or managers in need of substantial development. Not everyone will be happy, as should be the case if you get it right, but some people must be.
Think Beyond for advice
Here at Think Beyond, we offer support with strategic business planning for the future. Where could we be in 5 years’ time? How do we get there? What do we need to change to solve these challenges? Part of this may be working out how you assess the performance of people, planning a salary review, enhancing EX, attracting the right people or how to retain key talent.
If you would like to discuss your people and planning needs, why not reach out to our team. Alternatively, add a few details online and we will organise an introduction. We always offer a 1-hour introductory meeting to identify your needs and see how we can help.
Finally, why not check a related article that looks at people, org design and your operating model.