How to Execute a More Strategic Compensation Review Cycle

Compensation is your organization’s biggest operating expense—and it can also be your organization’s competitive advantage. The way you pay people can impact your ability to attract, retain, and engage the team you need to meet your business goals.

Use your compensation review cycles to analyze employee pay and ensure it aligns with your compensation strategy and company goals. A more strategic approach will help you get there. 

Stay in lockstep with your Finance team

As your company’s compensation expert, you are uniquely positioned to be a strategic advisor to your executive and finance teams. This holds particularly true for the Chief Financial Officer (CFO), who is typically the ultimate decision-maker for your compensation review cycle budget. 

Compensation is likely your organization’s biggest line-item expense and requires a strategic approach to maximize return-on-investment.

Regularly discuss compensation trends with your Finance team to ensure they’re not overlooked. For example:

• Wage growth. Globally, 96% of organizations have increased salaries and salary budgets. The 15 largest economies had a 4.9% average actual salary increase in 2022 and are forecasting a 4.9% average increase in 2023 as well. 
• Turnover. Low pay was the biggest reason Americans left their job last year and 78% of employed job seekers think they can make more money by switching jobs this year. In fact, half of employees who found a new job during the pandemic now make at least 10% more than they did in their previous roles. 
• Offer acceptance rate. More than half of job seekers say compensation is a top influence in accepting a job offer or not, and 38% have declined a job offer in the last year due to pay.

These trends underscore the importance of compensation and can help you build your case for the budget you need to meet organizational goals. 

Take the time during planning season to update your salary bands, run a compensation analysis, and request your ideal raise cycle budget. You will likely need a higher budget than you have in recent years, but your Finance team should already be expecting that and understand that costs will be offset in other areas. For example, the cost of employee turnover is estimated at one-half to two times the employee's annual salary, making a 5% increase feel like a better financial decision. 

Begin your compensation cycle with strategic adjustments

Compensation cycles are complex, with many different stakeholders making and approving pay adjustments. Promotional increases (87%), merit increases (87%), and market adjustments (83%) are the most common types of pay adjustments. The next most common adjustments are internal equity adjustments (67%), pay equity adjustments (50%), and geographic differentials (34%).

Compensation review cycles often begin with manager and company leader pay change recommendations—but that’s a mistake. These stakeholders don’t have the data or knowledge to identify broader issues like pay inequity or salary compression. Adding manager raise recommendations first means compensation teams need to make significant corrections later. 

A staged approach could be both simpler and more effective:

1. Strategic adjustments. First, your compensation team should make adjustments for corporate priorities like market rate alignment and compliance increases. This sets minimum allocations before handing off to managers.
2. Merit-based recommendations. Managers are the best suited to recommend merit-based raises to help retain top performers. There may still be corrections, but starting with strategic adjustments makes these both fewer and smaller.
3. Executive hold-backs. Hold back between 5% and 10% of your total raise cycle budget for additional targeted and discretionary adjustments at the end.

Have a plan to communicate compensation changes

Your compensation review cycle will be most effective if your employees understand the changes that were made to their pay—and why. 

As it stands, only 37% of workers feel like they’re paid fairly. But a little pay transparency can go a long way. Most (91%) employees who feel their organization is transparent about how pay decisions are made also say they trust that their organization pays people equally for equal work. Conversely, only 49% of those who feel their organization lacks transparency around pay decisions trust that employees are being paid fairly regardless of gender, race, and ethnicity.

Build a plan around how transparent your company wants to be with regard to compensation. Then train managers on how to have compensation conversations with their direct reports. Reward Letters can be used to guide these discussions and give employees a snapshot of their compensation at the end of a raise cycle. At the very least, each employee should understand why they were given their allocated increase, and how they can earn the next one. 

Great employee communication increases satisfaction and engagement, which can lead to higher retention, productivity, and profitability. 

Final thoughts on executing a more strategic compensation review 

A strategic approach to compensation helps your company reach business goals and elevates the visibility of HR as a key partner in your company's success. Compensation review cycles play a key role in that.

Your next review cycle may be especially challenging given the combination of a tight labor market, wage growth, inflation, and economic uncertainty. Make sure to use the right data to back up your budget request and offer your expertise to help solve complex business issues.

With the right planning and foresight, you can create a more strategic and efficient compensation review cycle next year—and beyond.