Compensation Review: The Complete Guide to Conducting Motivating Conversations

Are the remuneration structures at your organization competitive, and are they attracting top talent? 

Are your compensation plans keeping up with market trends?

It's not enough to set your people's pay based on their salary history alone, argues Lisa Shuster, Chief People Officer at iHire, "your compensation strategy must also address how you'll adjust new and existing employee pay as the market changes."

Compensation reviews are essential for assessing how well your remuneration (i.e., salary and benefit) structures align with your company objectives while being fair, competitive, and up-to-date.

In this article, we'll look at how to run a compensation review process that's thorough, effective, and brings out the best in your people.

💸 What is a compensation review?

A compensation review is a formal process that organizations go through to ensure that their employees' salaries and benefits are fair and competitive in relation to the market standards. 

This review typically considers factors like: 

• the employee's performance; 
• their role's market value; 
• the cost of living; 
• the company's budget; 
• the overall industry trends.

Note: Compensation is not just about salary. It can also include bonuses, benefits, stock options, and other non-monetary perks contributing to an employee's total remuneration package (and wealth preservation strategy).

Regular compensation reviews annually, or even once every two years—will help reduce pay inequity and mitigate possible legal consequences at your organization.

Compensation review vs. salary review

A person's salary is the amount of money they earn for their work. 

A person's compensation, however, refers to their total compensation package, i.e., their whole salary and benefits package. 

Compensation includes private health insurance, paid vacations, sick leave, profit-sharing plans, employee stock purchase plans (ESPP) or stock options, and other benefits.

While a salary review addresses the cash component of a person's total salary and benefits package (often called their 'base salary'), a compensation review has a broader scope.

🕵️‍♀️ 7 Reasons why conducting a compensation review is important

Put simply, compensation reviews can have a positive impact on your people's job satisfaction, retention, and performance.

Here are seven reasons compensation reviews can make a difference in your organization.

Alignment with your organization's strategy and objectives

Are your people's salary and benefit structures aligned with your organization's objectives?

If not, or if you want to check if they are, a compensation review helps identify possible areas of misalignment and inconsistency. Compensation reviews also keep your salary and benefit structures up to date as your company's vision and strategies evolve.

Suppose your company is seeking to increase sales, for instance. In that case, a compensation review can highlight areas where performance-based incentives may need more emphasis. This would better align the compensation of your sales employees with your company objectives.

Retaining top talent

Are your best people sufficiently incentivized? 

If your top talent is unsatisfied with their compensation package, they may be motivated to leave.

A compensation review will help you compare your company's compensation offering to industry peers. It will also help you compare individual compensation against colleagues with similar roles at your organization.

With the insights gained from a compensation review, you can consider how to adjust the compensation structures for your top talent. This not only reduces their risk of leaving. It likely boosts their satisfaction and loyalty to your organization as well.

Staying competitive

The findings from a compensation review will give you insights into how compensation practices at your organization compare with the external job market.

Is the balance between the base salary and variable compensation for your people at the right level? 

Is an annual review process frequent enough during heightened change and competition?

Compensation reviews give you the answers to such questions.

Compensation reviews also help ensure that your remuneration structures are competitive for all your people, giving them less incentive to leave on the grounds of inadequate pay.

Supporting organizational expansion

Is your company planning on entering new markets? 

Is the structure of your company changing to meet a growing customer demand? 

Are you about to embark on a hiring spree?

During expansion, a compensation review identifies the changes you need to make to the remuneration structures, employee benefits, variable pay, and other factors that impact your people's compensation. This helps to keep compensation management effective in your organization during an expansion.

When you're expanding into new markets that are different from your own, a compensation review highlights how compensation practices differ in the new markets. This will help you establish competitive salary levels and benefits while not overpaying.

Addressing pay equity

Are you paying your people fairly across different groupings, such as gender, age, and ethnicity?

Pay equity is more than equating salaries across different groups of people doing the same work. It takes into account "discretionary pay, allowances, performance payments, merit payments, bonus payments," and other benefits, according to the Australian Workplace Gender Equity Agency.

Compensation reviews uncover pay biases that may go unnoticed without an objective and thorough evaluation process.

When pay equity issues go unchecked, they can lead to a loss of morale, lower job satisfaction for your people, and possible legal consequences.

And since pay equity considers total compensation, salary reviews, on their own, are not enough. Only a thorough compensation review provides the scope and coverage to assess pay equity properly.

Ensuring legal compliance

Legislative and regulatory scrutiny is increasing when it comes to how people are paid and the structures that determine compensation.

How confident are you that your organization complies with all its compensation obligations? 

The best way to check this—and make changes where necessary—is with a compensation review.

Or better still, establish an annual compensation review process that's proactive in monitoring your compensation obligations regularly.

Promoting transparency

Employees are becoming more interested in how their cash compensation and benefits compare with their peers. 

Meanwhile, transparency regulation is increasing globally, and many US states have introduced laws requiring salary transparency.

Compensation reviews support salary transparency by serving as an 'audit' across the compensation structures at your organization. They make it easier to justify and defend the total compensation your people get.

They also make it easier to explain the structures to your people clearly and transparently. As a result, you'll promote trust and loyalty by giving your people a better understanding of how they're paid.

🪜9 Steps for your compensation review process

A compensation review cycle is about more than just a salary review process—it considers your people's total compensation, including their cash compensation and benefits.

Here's a 9-step process to make the most of your compensation review.

1. Define your compensation philosophy

Your compensation review process should reflect your organization's compensation philosophy. If a clear and concise philosophy doesn't already exist, define one.

Your compensation philosophy should address questions like:

• How should your compensation practices reflect the principles and values of your company culture?
• Should your pay structures reward high-performing employees?
• To what extent will an employee's performance determine their compensation?
• How should your compensation levels compare with the market—should they be aligned with or above your market peers?
• What balance will you strike between the base salary and a benefits package for each compensation band?

Your people should always know what your organization's compensation philosophy is. You'll boost their trust and satisfaction by clearly documenting the principles that define their compensation.

The philosophy also feeds into the performance review process at your organization.

2. Identify your review objectives

Based on your compensation philosophy, define the objectives of your compensation review. Your objectives should be consistent with the core tenets of your philosophy.

Suppose your philosophy promotes incentivization through rewards and bonuses, for instance. In that case, one of your objectives might be to review your people's variable pay structures.

Or, if there appears to be too much emphasis on the benefits packages of your people, then an objective may be to evaluate the benefits component of your people's current compensation relative to the market.

The frequency of your review cycle should also be consistent with your organization's philosophy, i.e., more frequently (e.g., six-monthly) or less often (e.g., annual or biennially), based on how up-to-date you want to be.

Tip: Remember that your review takes place in the broader context of your organization's company strategy and initiatives, so be sure to assess the review objectives in relation to those.

Is your organization about to enter a growth phase, for instance? Or is there a major corporate restructuring about to occur?

These scenarios would affect how you structure your people's compensation packages going forward. The objectives of your review should address and support your broader organizational efforts.

3. Appoint a leader for your review

Although it may seem straightforward, who should lead a compensation review is not always obvious.

In larger organizations, a C-suite executive may be the most suitable person. In smaller organizations, you may need a cross-disciplinary approach based on the responsibilities and skillsets of senior team members.

4. Collect data

There are many types of data that you will need for your review, including:

• Current compensation information for all your people, capturing all components of the total compensation packages that apply.
• Data on recent performance reviews and the outcomes of those reviews.
• The geographic locations of your employees, notably if your compensation structures differ by location.
• The budgets allocated for your people's total compensation packages.

This is an important preparatory step—if your data is incorrect or incomplete, your review findings and recommendations may be inappropriate.

5. Review employee benefits packages

When gathering compensation data, include the full benefits package in each case.

Benefits packages are a significant factor in each employee's compensation package. They go a long way toward attracting and retaining the best people in your organization.

Typical benefits include:

• Medical insurance and leave
• Leave to take care of family members
• Unemployment and disability insurance
• Leave for civic duties, such as jury duty
• Flexible work options

When reviewing benefits, you should consider questions:

• Are the benefits packages aligned with your organizational values?
• Are the most important features included, such as health insurance, family leave, and sick leave?
• How well are they working in practice?
• Are there any adjustments or additions to make?

6. Analyze data

Once you've gathered the relevant information, including data related to your employees and market data, you're ready for analysis.

There are many aspects to your compensation arrangements that you may investigate, such as:

• How do the compensation ranges compare with the market?
• Are people in the appropriate bands based on their performance?
• What are the retention rates and current levels of job satisfaction? Is there any evidence to suggest a connection with compensation?
• Is pay equity evident in the compensation arrangements? Are certain groups of employees being favored over others?

Many tools are available for conducting the analyses required to explore the above questions, including business intelligence and accounting systems, specialized HR systems, spreadsheets, and dedicated compensation management platforms.

7. Recommend compensation changes

What does your analysis tell you? 

Are there any gaps that you'd like to close? 

Are there inequities that you need to address? 

How do your compensation structures compare with the market? 

The next step in your review process is to address questions like these and formulate recommendations depending on what you find.

Recommendations usually require discussions with your leadership team as there may be different perspectives to consider.

Some software tools generate recommendations based on objectively evaluating the review findings. This can help frame more subjective discussions.

Also, remember to update your key stakeholders after your recommendations have been finalized. Be prepared to explain the rationale for the recommendations.

You'll need to manage this part of the process carefully, as you may be required to keep some of the recommendations confidential for a period.

8. Implement compensation adjustments

To implement the recommendations:

• Update compensation plans and structures in the relevant systems.
• Prepare employee letters or communications to send out.
• For publicly listed organizations, address any reporting obligations.
• Set up meetings with stakeholders (if further discussions around rationale are required) and employees to discuss the updated compensation arrangements.

9. Communicate compensation review outcomes with your people

Your process will culminate in compensation conversations to share the review results with your people.

Communicating compensation is an integral part of the review cycle. How your managers do this will impact your people's feelings about their updated arrangements.

While it may be easy to have conversations with those who've had positive outcomes, conversations with those who aren't happy with their results are more challenging.

The key is to focus on the rationale for the updated compensation, the circumstances of your organization and the market environment, and how it all relates to each employee's situation.

An empathetic and understanding approach will make difficult conversations easier, as will a focus on the future, particularly for employees who aren't happy with their reviews. 

Discuss opportunities for skills training, career advancement, or defining clearer development paths.

💡 Best practices for conducting a compensation review

Be transparent about the process

Your compensation review process should give your people a clear understanding of what's included in their compensation packages and how they're structured.

Not only will this build trust, but it will help ensure that you satisfy regulatory obligations for salary transparency.

Communicate the process with your people—the timetable, the key components, and the rationale—so there are no surprises and a better acceptance of the outcomes.

Be realistic about development goals

Development goals are a feature of most employees' salary and pay reviews. Still, it's not always easy to gauge how realistic they are.

During the compensation review process, you can assess the development goals for each employee against their peers and what you observe in the market. You need to set realistic development goals for your people that reflect market practice.

Be objective in your recommendations

Data collection and analysis underpins your compensation review process, allowing you to be objective about your compensation recommendations.

The data that you collect provides evidence on:

• how compensation structures differ between your people and the market;
• levels of pay and how they vary among your people and compared to market practice;
• market trends and the extent to which they apply in your organization;
• areas of difference based on geography.

Base your recommendations on what your data and analysis tell you—it will help you explain compensation outcomes and build trust, as your recommendations are more likely to be perceived as fair.

It will also help you justify your recommendations to your leadership team and stakeholders, as it's easier to demonstrate their rationale based on the evidence.

Involve your key stakeholders

Keep your key stakeholders informed about the compensation review process, timetable, milestones, and key recommendations.

Communicate the outcomes of the process with your stakeholders and decision-makers. This will give them comfort that the outcomes adequately address areas that matter to them, such as:

• Are top performers being incentivized adequately?
• Are the recommendations consistent with your organization's objectives and budgets?
• How competitive are your compensation structures relative to the external job market?
• Are there any alarming trends or anomalies that have emerged from the analysis?

Avoid biases

Compensation arrangements can be complex, and it's easy for unconscious biases to creep in over time. Examples include:

• Affinity bias—favoring people with a similar background as you
• Expedience bias—assessing people based on the speed and output of their work rather than its relevance or quality
• Recency bias—placing too much emphasis on recent performance reviews
• Contrast bias—being influenced by reviews that occur in succession rather than assessing each review on its merits, e.g., perceiving an average review as being less favorable if it comes after an exceptional review

If these go unnoticed (and untreated), they will impact the equity of compensation arrangements at your organization. And they may lead to legal consequences.

Use your compensation review process to uncover and address these types of biases.

Train your managers to have compensation conversations

How you communicate the review outcomes will impact how your people feel about their salary and benefit arrangements. Getting this right matters—it's easy to disengage and demotivate many of your people with inadequate compensation conversations.

The best way to avoid this is to give your managers targeted compensation training so that they know how to have conversations with your people that:

• Highlight the merits of the review process, i.e., fair, equitable, and objective
• Build trust and engagement
• Promote retention
• Mitigate possible legal risks, e.g., salary equity

Seek your people's input

Don't forget to seek input from your people about their experiences with the review process, what they liked or disliked, and their suggestions for improvements.

It will not only help you plan for future reviews, but it will also increase your people's buy-in for the review outcomes and help highlight the transparency of the process.

🔗 What is the relationship between compensation reviews and performance appraisals?

People sometimes refer to compensation and performance reviews interchangeably, so it's worth understanding how they relate to each other.

While compensation reviews address the overall salary and benefit structures at organizations, performance reviews (also called performance appraisals) address the performances of individual employees.

Some companies link these reviews or do them concurrently, but many don't.

Linking compensation and performance reviews is a traditional approach since, at face value, these are related activities, and it makes sense to do them at the same time.

🚨 If not done correctly, however, employees may not be honest in their self-evaluations due to their concern that it may impact their compensation. It may also detract from a positive organizational culture—teamwork, trust, and cooperation—due to the competitive environment that it sets up.

But when done correctly, it can drive a performance-driven culture, align employee goals with organizational objectives, and motivate employees to contribute through their performance.

➡️ Learn how Google runs performance reviews to motivate, inspire, and bring out the strengths of their people.

➡️ Drive growth and performance with Zavvy

As Zavvy, we know how important an effective compensation review process is for your people.

But you might need to step back and first look at your performance reviews. Wondering how performance reviews can align seamlessly with compensation reviews? 

We've got the solution you've been looking for. Zavvy specializes in:

• Performance reviews: Get the full picture of your employees' work with insightful, comprehensive reviews.
• Growth plans: Craft individualized growth plans and collect actionable feedback to fuel your employees' development.
• Development & training: Provide your team with the tools and training they need to excel in their roles (including training managers for handling compensation conversations and enabling employee growth in your company).
• One-on-one meeting software: Empower your leaders to have meaningful compensation conversations with their teams. 

❓ FAQs

How often should compensation be reviewed?

Many companies review their compensation arrangements annually, although they can be reviewed less or more frequently depending on circumstances.

Why is a compensation review important?

Compensation reviews help to align salary and benefit arrangements with company objectives, retain top talent, promote transparency, and promote equitable pay in organizations.

What is the difference between a salary review and a compensation review?

A salary review looks at the pay that a person receives. In contrast, a compensation review looks at the total pay and benefit structures that apply across an organization.