5 Reasons to Run a Mid-year Compensation Review

There’s a new trend taking shape in Total Rewards: the mid-year compensation review. While only six percent of HR managers have decided to review compensation at least twice a year, around 20 percent plan to review off-cycle salary increases as needed. And another quarter of HR managers are considering it. 

The mid-year compensation review, also referred to as a true-up, can be a powerful tool in this competitive talent landscape. Here’s why you should consider running one.

1. Inflation is high

Inflation is reaching record-highs in many parts of the world, increasing the price of everything from food and shelter to clothing and childcare. In the United States, the Consumer Price Index rose by 7.9 percent through February 2022, the fastest pace of annual inflation in 40 years.

But the average salary budget increase was four percent this year, suggesting that many workers could be feeling the pinch of lower buying power. Financial strain can lead to stress and distraction at work, possibly even higher turnover as workers seek out opportunities for higher pay elsewhere.

A mid-year compensation review can be a good opportunity to provide some financial support to your team members. A cost of living increase is a great option if you can get the budget approved, but even a spot bonus can be a welcome relief.

2. Compensation is moving quickly

Compensation is rising quickly in response to things like talent shortages, the Great Resignation, and inflation. As your competitors increase compensation in response, your organization may feel compelled to keep pace and uphold your compensation philosophy. For example, if you target the 50th percentile, you may find that you’re now well below target.

While it was previously advisable to update your market salary data every year or two, it may now be more appropriate to revisit your data once or twice a year. A mini review cycle is a great time to update your salary bands and ensure employee compensation is within target.

3. Competition for talent leads to salary compression

Because salaries are moving quickly and skilled talent is in high demand, you may be offering higher starting salaries in order to close new employees. This can lead to salary compression in which there’s little variation in pay despite differences in tenure, experience, and skill. 

Salary compression can result in dissatisfaction and disengagement when new employees earn similar compensation to your more tenured, experienced, or high-performing employees. 

A mid-year compensation analysis and salary band update can help you identify and correct salary compression to ensure fair, competitive compensation for your team.

4. Improve pay equity

Individual decisions related to things like new hire compensation, counteroffers, mid-cycle raises, and remote work transitions can impact pay equity. Rather than waiting for your annual compensation cycle to identify and correct inequities, it’s a good idea to review pay equity more frequently. Forty-three percent of workers say they would leave their current position if they discovered they were paid less than a colleague of a different race or gender doing the same job.

Modern compensation management software like Compaas can provide insights to help you identify opportunities to improve pay equity during your mini compensation cycle. This can result in smaller and fewer strategic adjustments during your regular review cycle, improving employee trust, satisfaction, and retention. In fact, 82 percent of workers feel more engaged and fulfilled by their work when they are paid fairly, and 81 percent say they are more productive and loyal to their employers.

5. Address those previously ineligible for raises

Your team members may have been ineligible for raises during your last compensation cycle for any number of reasons. For instance, they may have been hired too recently or actively on a performance improvement plan (PIP). 

Rather than making previously ineligible team members wait for the next full cycle, a mini cycle can help more of your employees get a compensation review at least annually. This practice can be particularly important this year because of how quickly compensation is moving. 

Final thoughts on a mid-year compensation review

The talent landscape is becoming increasingly competitive, and compensation plays a key role in your ability to attract, engage, and retain employees. A mid-year compensation review can be a powerful tool to combat the skilled talent shortage and Great Resignation, address inflation, improve pay equity, and help every employee feel like a valued member of your team.