Guide to salary review processes: Inspiring employees through effective reviews

Many moments in our lives are preceded by a sense of suspense – upcoming exam results, the cake baking in the oven, or the inevitable twist at the end of a horror movie. It’s all about that end result, and hopefully an outcome that you’re happy with.

For employees, waiting on a salary review can be a similarly suspenseful experience. Have your months (or year) of hard work paid off with a boost to the payslip?

Meanwhile, for employers, the salary review process can be quite stressful. You’re juggling budgets with employee engagement, trying to ensure that you’re offering enough to keep your team on board while not overspending.

We’re here to help, with a guide to navigating the salary review process in a way that supports both your team and your business…

Why are salary reviews important?

The first thing to note is that organising salary reviews is not mandatory in Australia, and can be done at the discretion of an employer. Employees can ask for a pay raise, and employers should consider and respond fairly, but they don’t have to grant one.

However (and this is a big ‘however’), having no plans in place to conduct a salary review can seriously affect employee engagement, morale and retention.In a tough economic environment, employees are unlikely to be satisfied with their salary staying the same while inflation and the cost of living bites, no matter how exciting or satisfying their work is. For most of us, we work to afford our lifestyles and if work is no longer meeting that need, a change may be inevitable.

For employers, that can lead to a vicious cycle – employers who don’t adapt salaries to retain employees could end up spending more than they saved to replace those same employees when they leave.

The data backs this too. The prospect of a salary increase was popular with many respondents in Employment Hero’s Talent Insights Report, far eclipsing anything related to company culture or job security. An overwhelming majority said that a salary increase would encourage them to stay in their existing role, and that it would also encourage them to work elsewhere.

With all that in mind, having a set salary review process can be an important part of retaining an existing team and keeping them motivated. If like many businesses, you choose to tie regular salary reviews in with performance reviews, this can also help drive strong performance in your employees.

How to conduct an effective salary review process

There are two key things to remember when it comes to salary reviews – they should be structured and they should be fair. If you miss either of these elements, you risk undermining the process as a whole and affecting trust between you and your employees.

With that in mind, here’s how to conduct regular salary reviews from beginning to end:

Step 1: Know your budget and market data

Start with the research and dig into the data. That includes checking your business’s financial performance, the money you have to spend for the coming months or year, and where there is space to make changes.

You should also be aware of where the market is currently sitting on wages, to ensure that what you’re paying your employees is competitive. Try our salary benchmarking tool to get started and compare salaries across industries and roles. We also have a handy report that covers the latest wage changes across Australia – data like this is critical for being informed during the salary review process.

This isn't just to ensure that your employees are satisfied with their compensation. It also ensures that you have a steady base of data to provide greater clarity on a salary review, should you get employee feedback on the decision.

Step 2: Establish your criteria

To conduct effective salary reviews across a business, it’s essential that all managers are working with the same criteria and salary bands. This reduces unfair bias across teams or individuals. With that in mind, set up clear criteria for what would warrant a salary increase, and at what rate.

For example, it may be that you set a company-wide base increase to match current industry salaries or the effect of inflation, and then add employee performance criteria for additional increases.

Just ensure that your criteria is as clear as it can be for both employees and managers, so that everyone understands what is expected of them. If employees also understand what performance merits a salary increase, they’re more likely to work to achieve that.

Step 3: Set up a timeline and cadence

Deadlines generally make everything move a little quicker so set specific milestones for your salary reviews that everyone across the business has to stick to. This way, managers know when they should be conducting reviews and senior leadership are aware of any decisions they might need to make or finalise.

Communicate your timeline to your wider team, as well as any tasks you might require of them prior to the reviews. For example, if you’re assessing performance, you might ask your employees to complete their own assessments of their performance for discussion with their manager during the salary review.

Additionally, don’t forget to set up a cadence for your salary reviews and stick to it. Whether you conduct them quarterly, twice-annually or annually, set a specific time period that you’ll follow in the future. This ensures that managers have a particular period of which to assess performance, any changes to salary are enforced at a set time, and employees know when their next salary review is coming.

Step 4: Conduct meetings and reviews

Time for the main part – the salary reviews themselves. Once you’ve set up your managers with the criteria they need to make decisions, make sure 1:1 meetings are organised with their direct reports in a timely fashion. If you’re going to have senior leadership approve any raises, also set up time for those salary review steps.

Finally, don’t forget that any salary changes will need to be formally communicated, usually in the form of a letter or updated employment agreement. Managers should also communicate the salary change informally with the employee, and it’s good practice to ensure that the employee has a chance to ask any questions about how the salary decision was reached.

This is again where Steps 1 and 2 come in handy – by ensuring that you’ve set out clear criteria and data behind any decisions, you’ll be able to give a solid rationale for the decision that has been made.

Step 5: Put the changes into effect

HR admin time – it’s time to work with your payroll team and put the salary review changes into effect. Depending on where you’re located, the steps for this could vary depending on compliance obligations. Ensure that you’re taking time to review what’s required of employers in the case of a salary change, and that everything is documented as it should be.

What does a successful salary review process look like?

The reality of salary reviews is that you’re unlikely to keep everyone happy. There may be some employees who feel like they deserved a raise and didn’t get one, or others that may have expected a bigger increase than the one they received.

All that said, a successful salary review process is one that is conducted fairly business-wide, with a clear criteria that is based on evidence and data. The decisions made also had solid backing behind them and were understandable. By taking the time to ensure that the salary reviews are conducted fairly, you can build a level of trust with your employees.

Having done some market research, you should have a good idea of whether your compensation packages are competitive. If you’re offering compensation that will retain employees, or adapting your compensation to meet that goal, then that will make a difference to employee engagement and wider business success.

How often should you conduct salary reviews?

There’s no one-size-fits-all approach to this – your salary review frequency will depend on your individual business. For example, you may work in a fast-moving industry where compensation is king and it’s easy to lose employees to higher-paying competitors. That’s when fairly frequent salary reviews could be beneficial.

Other businesses may work in industries where employees generally stay in a company for longer, and for additional reasons along with compensation, so they might not need to conduct salary reviews as frequently.

Many organisations choose to team up their salary reviews with annual or bi-annual performance reviews, making decisions about both compensation and promotions at the same time.

Our one piece of advice is not to leave it too long between salary reviews – market data shows that wages across industries often change, and as a business, you don’t want to get left behind and lose team members. Plus, it’s difficult to assess performance accurately if managers are trying to examine a very long period of time, as opposed to set periods of three or six months.

How should employers work out fair compensation?

Knowledge is power when it comes to employee compensation. The more that you as an employer know about what you can (and should) be paying your team members, the easier it is to make these big decisions during salary reviews. It also comes in useful should you be searching for new employees in the job market, as you’ll have a better idea of what kind of offer could bring top talent through the door.

The word ‘fair’ is going to be subjective for everyone. However, by using data and set criteria, as opposed to anecdotal evidence and varying criteria, you’re more likely to make what could be deemed as a ‘fair’ compensation decision. That approach is going to be appreciated by your team, and it’ll make more sense when you’re setting out your business budget as well.

Our benchmarking tool helps you review salaries with confidence

Get the information you need for effective salary reviews with the SmartMatch salary benchmarking tool. It offers real-time wage insights across industries and locations, driven by over 2 million* data points, and is available online without the need for logins and subscriptions.

Find out more and try the salary benchmarking tool today.