Manager’s guide to annual salary reviews: 5 key steps

woman in a suit holding a document with bar graph chart, using her pen to point out figures to another woman

It’s salary review time. So, how can you help managers use their limited pay budgets to make meaningful base pay recommendations? Take these five factors into consideration:

1. The job’s worth (externally and internally): Managers should have a clear idea of the value of each position. A good way to start is by looking at the compa-ratio, the salary they’re paying employees compared to the market midpoint for similar positions at other companies. Understanding this alignment will give managers clear insight into the value of each job, but it’s not the only input they’ll need to make merit pay decisions. It’s equally important that managers understand your company’s compensation philosophy as well as how each job is valued within your company. For instance, is the job critical to the success of your business? Does it require skills that aren’t easily found in the market? And is your company willing to pay more for these types of jobs?
Once managers have a firm grasp on each job’s value, they can review other factors that will help them determine merit increases, including:

2. Employee performance: Is the employee meeting expectations for the job requirements? Is the employee demonstrating skills above or below what is expected? If the employee isn’t meeting expectations, is further training and development needed? Or is the employee not fully competent in the job, but expected to reach the competence level in the future? It’s important that you educate managers on how best to examine the employee’s performance and be able to assess how it aligns (or doesn’t align) with the job requirements now and in the future.

3. How the job compares to similar roles: Judging how the employee performed can be difficult in a vacuum. The good news is there’s typically a pool of employees in which to compare. Managers need to look at where their employee’s pay is currently positioned in the pay range, then compare it to similar jobs in the same grade. If there’s a gap, does it make sense, given the employee’s past performance, current performance, experience in the current job, career path, etc.? If it doesn’t, encourage managers to reach out to the compensation team to establish a plan to close the gap.

4. What to expect from the employee now and in the future: People change and so does the work they do. As unpredictable as the future may be, current performance is a useful metric to gauge potential for future performance. Looking ahead and establishing a compensation plan as well as a career development blueprint will help managers organize where members of their teams align and where they should or will be in the coming months and years. Where do managers see employees’ roles in the next two to three years and how will this correlate with pay? Are any employees nearing a promotion? Do managers need to make aggressive moves now from a training, development or pay standpoint? Or should they or back off? Questions like these pave the way for smooth decision making down the line.

5. How it all stacks up: Once you have an idea of how a manager values the employee’s performance and the career path, see how it aligns with compensation. Is the employee meeting or exceeding expectations? From there, the manager can look at where base pay falls to see if it’s positioned appropriately in the range around the midpoint, based on the employee’s skills, experience and performance.

Final thoughts: These guidelines will help managers make the appropriate adjustments to base pay. If their employees are meeting expectations and pay is within the compa-ratio, it’s entirely appropriate to keep pay where it is. If their employees are showing higher level skills but promotions aren’t an option (i.e., clogged pipeline, no position available, etc.), consider giving managers even more pay increase dollars to get their employees closer to the pay grade of the next highest job (which is often easier said than done given salary budgets).

Again, a plan for the future needs to be formulated so managers and the compensation team can assess how these adjustments will alter long-term compensation plans. Differentiating pay increases helps send the right message to employees – the hard work they put in does have a meaningful impact!


Mariann Madden , Senior Consultant at Willis Towers Watson's Rewards Mariann Madden is a Senior Consultant at Willis Towers Watson’s Rewards practice in Chicago.

Rishabh Krishnan Willis Towers Watson Rewards AnalystRishabh Krishnan is an Analyst at Willis Towers Watson’s Rewards practice in Chicago.

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