Actionable steps & tips for a successful compensation review process

Despite the fact that the labor market is slowing and the number of job openings is trending down, competitive compensation plans are still one of your best resources for attracting top talent.* But great pay for newcomers is only one pillar of a successful compensation strategy.

So, what are the other key components? Pay equity and transparency are key to engaging current staff and ensuring long-term success. Employees want to know that they’re paid fairly and competitively and that their employer isn’t segmenting pay scales based on arbitrary metrics. They also expect their salaries to increase in line with market trends and inflation — and without doing so, you will struggle to retain your top people.   

More and more companies are moving from annual to biannual and even quarterly compensation reviews to stay competitive while keeping up with wider trends in pay equity. In fact, pay equity is moving beyond being just a trend; it’s fast becoming a legal obligation to be honest about how much people are being paid.**

Regular compensation reviews (or salary reviews) ensure that an organization’s compensation plan is still consistent with its philosophy and is up-to-date with shifting markets and legislation. In this comprehensive guide, we’ll take an in-depth ‌ look at the steps you should take during the salary review process; we’ll also share best-practice tips for your next compensation review cycle.

* US Bureau of Labor Statistics, 2024

** CNBC, 2024
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Common elements of a compensation review

Compensation reviews are the assessment processes used to ensure that salaries and rewards are fair and competitive based on current trends, changing legal standards, and each business’ pay landscape. When employers are upfront about how they handle compensation reviews, the process can also contribute to greater pay transparency. 

Organizations typically consider the following factors when reviewing compensation:

• Market value of the role — Reviewers may look into benchmarking to understand how their pay bands stack up against competitors and market trends. This is easiest when you use a tool like Leapsome Compensation, which leverages the latest Mercer benchmarking data to help you analyze the market values of your roles and cross reference this to your current pay.
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• ‍Cost of living — Employers investigate how much day-to-day life costs for team members. As remote work becomes increasingly common, with nearly one in five professionals working remotely, it’s even more important to ensure your salaries work for workers located in different cities or countries.
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• ‍Company budget — Leaders can use their revenue and expenses forecast for a given period to determine their current budget for raises.
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• ‍Industry trends — Organizations analyze which roles have become more in demand due to technological and social shifts, and may adjust pay scales accordingly.
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6 steps to conducting a fair compensation review

Compensation reviews exist to ensure your compensation plan is doing what you designed it to do — and to make sure your employees are paid fairly. Here are our six recommendations for getting it right:
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1. Determine who should lead the compensation review

The people that should be involved will largely depend on your company’s size and stage. You should set up a cross-functional compensation review team and will likely need to include the following stakeholders in this process: 

• Head of Finance — to ensure that the proposed updates are in line with the company’s budget and give financial sign-off.

• HR manager — to share useful People data and perspectives from recent Surveys, giving insight into how current compensation packages are impacting recruiting, retention, and engagement.
• C-level leadership — to deal with budgeting, forecasting, benefits, and other financial issues; they should also collaborate with HR team members who handle performance reviews and compensation planning.
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2. Identify your objectives for the review

For the most effective compensation review process — and to ensure employees feel your company’s compensation approach is fair — it’s essential to clarify your review objectives. Depending on your compensation philosophy, you might conduct reviews annually or adjust compensation packages every six months in regular performance review cycles.

Whatever your timing, it’s important to assess how compensation aligns with broader company metrics. For instance, you may discover that below-market salary and benefits packages correlate with higher turnover. Alternatively, you might find that underrepresented groups are consistently compensated below average, which could prompt adjustments to ensure equity and retain top talent without overshooting your budget.

Once you pinpoint your compensation strategy’s issues and opportunities for improvement, it can be helpful to use a goal-setting tool like Leapsome Goals to establish specific objectives for improvement, ensure all suggestions get turned into action points, and track progress.
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“A few years ago, we implemented biannual performance reviews that are tied to compensation. If a team member receives a positive performance review, they are guaranteed a salary increase.

We have very straightforward KPIs that people need to meet to demonstrate positive performance — and the salary percentage increase is transparent and attractive. We’ve removed any ambiguity around compensation and made the feedback loop between performance and compensation fast.

‍No one likes asking for a salary increase, so our biannual reviews remove this awkwardness and give team members a clear path to earning more.”

— Mark Whitman, Founder of Sauce

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‍3. Evaluate compensation for market competitiveness

Benchmarking is necessary to investigate how your company’s compensation packages compare to those of competitors in your industry and location.

In the compensation analysis process, you gather market data and salary ranges for all relevant roles and compare them to your internal salary and benefit structures. Make sure your salaries fall within the same market percentile and identify whether anyone is being underpaid for their role and experience level. If you have a remote or distributed team, use benchmarks that are relevant to the location of employees

And remember: employees don’t always keep their salaries secret, so you should also identify any internal anomalies to avoid resentment among coworkers.

‍💡 Conducting internal salary research can be a demanding project

Leapsome Compensation lets you organize employee information by level, tenure, salary, and performance — and also uses Mercer benchmarking data to help you compare packages against industry standards.

‍👉Learn more

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4. Review the organization’s employee benefits package

Salary is just one part of compensation. Your wider benefits package, including free gym memberships, flexible working policies, work-from-home stipends, discounts, free trips, and more, is also a crucial part of your recruitment and retention strategy. You should evaluate your whole package to ensure it’s still attracting high-quality candidates and keeping valued team members around. 

A useful way to evaluate this is to ask your employees directly via surveys and look at metrics like employee NPS (Net Promoter Score), turnover rates, and feedback from previous survey rounds.

Stakeholders and HR leaders should ask themselves these questions:

• How does our benefits package reflect our organizational values?

• Have we covered basic needs like health insurance, sick leave, and family leave?

• Do our benefits function well in practice, or do we need to make changes (like not requiring a doctor’s note for the first X sick days)?

• Are there any benefits employees haven’t been using?

• Are there extra benefits we should add — like unlimited PTO or tuition reimbursement?

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5. Decide on a course of action 

If your research reveals any gaps in compensation you’d like to close, decide what steps you’re going to take. 

For instance, will you raise employee salaries by a certain percentage across the board to address inflation, or will you only offer raises to high achievers? Will you update your benefits package instead so you can keep base salary, equity, and bonuses within budget? 

These are big questions, especially with pay trends constantly shifting — and the more decisive your action, the better.

💡 You may also have to decide whether your organization will connect compensation with performance reviews. 

Our take? Doing so is an acceptable and even recommended practice as it ensures your people that salary increases aren’t arbitrary and that hard work is rewarded.

‍Bringing the two together can be a powerful motivator as long as employees feel that managers are honest with them and that they’re empowered to share feedback and have ongoing conversations about compensation and performance.

Granted, connecting salary reviews to performance assessments may raise alarm bells for some leaders, especially given the controversial way some companies have approached this in the past — but it doesn’t have to be something to fear.

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6. Share results with your people

Even if the updates you’ve made are beneficial to your employees, the way you share these changes matters. Don’t just focus on what, but also on how you communicate changes you’ve made in compensation.

“I have seen wonderful compensation models that no one understands (or uses) except the compensation professionals. So, take the time to build context. Explain the purpose of doing compensation reviews. Tell your employees how you created the compensation structure based on internal, external, and individual equity. Let them know the process is fair and open and who to talk to if they have questions about it. 

Finally, communicate the value of compensation reviews to the individual. Without the why, you can have the best model, and no one will value it.”

— Laura Barker, HR expert and director of coaching and leadership at TalentRise

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Tips for your compensation review process

Knowing what to prioritize during the review will make for an even fairer, more successful outcome. Here are some of our top suggestions:
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Ensure your plan aligns with your compensation philosophy

Your compensation policy outlines how your company approaches all current and future decisions around compensation. It covers how business objectives and salary structure relate, how you approach total compensation and incentive pay, and what you’ll do when certain roles become hard to fill. 

At the time of the compensation review, you’ll want to evaluate:

• If your compensation plan has gone off course from your original objectives

• If there have been major changes in your company structure, such as a shift to remote or hybrid work

• If any of the reviewees have in-demand jobs with a scarce amount of qualified professionals to fill them

• If you want to change your system for incentive pay

• If your benefits package still reflects your business values
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Be realistic about long-term financial stability & development

Thinking about long-term development is one of the key elements of a performance review, and the same goes for the compensation review process. The market is shifting, and trends in compensation are changing, so you have to make decisions that are feasible for your organization’s development.

While your goals and OKRs may (and should) be ambitious, it’s OK to be practical and cautious in the compensation planning process.
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Make pay equity a top priority

The compensation process steps we’ve outlined above should also help you solidify your commitment to pay equity. Analyzing external and internal compensation data should help you stay objective about whether or not to update your compensation plans for individual employees.

But if you tie compensation to performance reviews, which you likely do, you need to know how to avoid unconscious bias that can influence the performance element of the review cycle and impact an employee’s pay — particularly if they’re part of an underrepresented group.

If pay equity is a priority for your company, you need to understand how subtle unconscious bias can be. For example, you may not be aware of:

• Affinity bias — favoring someone who looks like you or comes from a similar background

• Expedience bias — judging someone’s work based on the speed and amount of their output rather than the quality of their work

• Recency bias — making a judgment based on the most recent performance rather than a longer time frame

• Contrast effect — the bias that can form when you have a great review and an average review in succession, making your average review seem less favorable

• Halo/horns effect — judging someone based on arbitrary qualities you deem good or bad
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Be open to employee input

Your staff will appreciate the compensation review process more if they know that it’s an open conversation. Remember you’re working with human beings, and encouraging them to share their thoughts and feelings about the process helps build trust in your organization.

“Have an appeals process in place in case employees are not satisfied with the outcome of the salary review. This process should be well-documented and fair. Employees need to know that they have a way to voice their concerns if they feel that they have been treated unfairly.”

— Linda Shaffer, Chief People and Operations Officer at Checkr

Take your compensation management to the next level with Leapsome

Though the compensation review process can be fraught with emotion and stress around fairness, the effort you put into it matters to employees, even more so if you make the experience as transparent and collaborative as possible. 

The good news is that compensation management tools like Leapsome can help you streamline the compensation review process and minimize the risk and frustration of doing it manually with an Excel spreadsheet.
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🚀 Simplify your compensation reviews with Leapsome

Leapsome offers the insights and data essential for planning and running your compensation reviews. 

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