Here are steps to conduct a successful annual compensation review:

Step 1: Establish a leader for the review

Step 2: Identify the main objectives

Step 3: Evaluate current compensation plans

Step 4: Review employee benefits package

Step 5: Implement a course of action

Step 6: Discuss the results with employees

Today’s job market is getting more and more competitive each day. Therefore, employers must ensure that your company’s compensation practices are both fair and competitive.

According to a recent study, 49% of US companies give annual or semi-annual compensation reviews . This highlights the importance of visiting your pay practices more often to measure their competitiveness, efficiency, and most importantly, their effectiveness.

In this comprehensive guide, we’ll discuss everything you need to know about annual compensation reviews—their definition, common elements, best practices, and an actionable guide to conduct an effective program. Read on to learn more!

An annual compensation review is a systematic process that evaluates employee compensation and benefits, which is typically conducted by an organization once a year. This review process helps organizations make informed compensation decisions and determine salary adjustments for the upcoming year.

Its primary goal is to assess whether current compensation packages offered by the company are aligned with the organization’s compensation philosophy, market data, and internal equity standards. Moreover, these annual compensation reviews are critical for maintaining market competitiveness and ensuring that employees are rewarded for their performance and contributions.

By regularly reviewing compensation as part of their salary planning strategies, companies can ensure pay equity, respond to market changes, and support employee satisfaction and retention.

Before diving deeper into the topic of annual compensation reviews, it’s important to clarify the question “What does annual salary mean?”

An annual salary refers to the total amount of compensation an employee earns and receives in a year in exchange for performing their job. This amount typically excludes bonuses, commissions, or other forms of variable pay, but it forms the foundation of most compensation packages.

Understanding annual salary is crucial for both employers and employees, as it sets the baseline for salary reviews and merit increases. Moreover, using the compensation planning software allows companies to implement a tailored approach to enhance their pay practices and compensation packages.

In order to create a robust annual compensation review, companies must learn more about the common elements that comprise a salary review:

Compensation philosophy: These are the guiding principles that define how a company approaches pay. This includes its view on market alignment, pay equity, and rewarding high performers.

Internal compensation data: Consists of the analysis of current salaries, pay bands, and compensation structures within the organization.

Market data: Benchmarking against industry standards and competitors to ensure market competitiveness and up-to-date salary ranges.

Performance reviews: Involves the assessment of employee performance and contribution, often using a merit matrix or performance ratings.

Compensation adjustments: Refers to the recommendations for salary increases, equity grants, or changes to variable pay based on the review findings.

Communication plan: This consists of the organization’s strategies for transparent compensation conversations with employees, ensuring clarity and trust.

All of these elements work together to ensure a fair, transparent, and effective compensation review cycle that supports both organizational goals and employee needs. That being said, compensation planning software can help you to easily increase your efficiency, centralize your planning, and streamline collaboration among the workforces.

An effective and well-executed annual compensation review cycle can have a profound impact on employee engagement, pay equity, and organizational success. Here’s a step-by-step guide to conducting a successful annual compensation review:

Step 1: Establish a leader for the review

Make sure to designate a leader or a main point of contact. They’re usually from the HR, finance, or the executive team to oversee the entire compensation review process.

The designated leader will manage and coordinate efforts, ensure alignment with the company’s compensation strategy, and drive accountability throughout the compensation review season. It’s also their duty to:

Assign clear roles and responsibilities.

Set timelines for each phase of the salary review process.

Ensure access to necessary compensation management software and data.

Step 2: Identify the main objectives

Clarify the goals of your annual compensation review. Make sure to define what success looks like for your compensation cycle. Most importantly, decide whether to focus on base salary, variable pay, equity refresh grants, or a combination.

Step 3: Evaluate current compensation plans

The next step would be to assess your internal compensation data to get an up-to-date view of current salaries, pay bands, and compensation structures. Compare these figures to market data to assess market alignment and identify any gaps.

Collect and review salary data for all roles, focusing on the same job across different teams to ensure internal equity. Assess market benchmarks on trends and salary ranges using reputable data sources. Lastly, identify areas where salary adjustments or market adjustments may be needed.

Step 4: Review employee benefits package

A comprehensive annual compensation review process should also include an assessment of employee benefits such as health insurance, retirement plans, and wellness programs to ensure your total rewards package remains competitive.

With the help of compensation planning software, you can eliminate tedious manual tasks and fast-track your compensation planning procedures. Moreover, it also helps you simplify employee benefits and always makes the market competitive.

Step 5: Implement a course of action

Based on your analysis of the previous steps, develop a plan for compensation adjustments. This may include salary increases, equity grants, merit increases, or changes to variable pay structures.

You can opt to use a merit matrix or performance ratings to guide pay decisions and reward high performers. Ensure that any salary increases or equity grants are distributed fairly, supporting internal and gender pay equity. Lastly, prepare documentation and approvals for the next compensation review cycle.

Step 6: Discuss the results with employees

Last but not least, make sure to hold and conduct compensation conversations with employees and team members to explain the results of the review, the rationale behind compensation decisions, and how their pay aligns with the market and company standards.

Remember—transparent communication is vital. These results could help train managers to conduct effective compensation conversations, provide clear explanations for salary reviews, adjustments, and any changes to compensation packages.

Finally, ensure that you offer opportunities for employees to ask questions and provide feedback. Maintaining a healthy and transparent relationship with your employees can foster an effective talent management system.

To help you maximize the impact of your annual compensation review cycle, consider these best practices to achieve the best results:

Compensation is the most important aspect of every employee’s working life. It’s the primary reason why they go to the office every day and do their best. As an employer, it’s your responsibility to offer competitive compensation for your employees and make sure they are paid fairly to help them lead a better life and, of course, help your company perform better.