Compensation Management is the process by which companies decide how much to pay their employees and make strategic decisions about how to change their total compensation across base salary, variable bonuses, equity, benefits, and more.
Compensation reviews are an essential part of compensation management, in which company management ensures that employees are being paid fairly and in a way that will accomplish their goals.
In this article, we’ll describe compensation reviews – one of the most critical parts of a robust compensation management strategy.
Why Are Compensation Reviews Important?
Compensation reviews are conducted to ensure that a company’s compensation strategy meets its goals.
During a compensation review, company leadership analyzes all of the different types of compensation they offer, and how that compensation is allocated – to ensure that their total compensation package is competitive and fulfills all of the goals of compensation management.
In addition, compensation reviews are also important for ensuring that your compensation strategy remains effective and compliant with Local and Federal regulations.
As time goes on, it's easy for pay inequities to surface. For example:
- Women being systematically underpaid relative to men
- Employees falling out of compensation bands, causing salary compression
- Compensation bands falling out of line with the market, causing slower hiring or regrettable employee attrition
Most companies conduct compensation reviews every few years to ensure that these negative downsides don’t materialize.
How Do You Run a Compensation Review?
Running a thorough compensation review is a multi-step process that allows you to thoroughly re-check and update compensation to accomplish company goals. In this section, we’ll review how you can run an effective compensation review process at your organization.
1. Define Your Compensation Philosophy
An effective compensation review begins with a rock-solid compensation philosophy.
A compensation philosophy defines your plan for paying your team. For example:
- Will you pay high performers more, or strive to pay all employees equally?
- What level of compensation should you target? Will you target the 50th percentile of compensation, the 75th, the 90th, or something else? Will this be the same for all roles?
- How frequently will you evaluate and increase compensation?
- How will you handle base salary vs. equity vs. bonuses as part of your compensation mix?
Setting up a compensation philosophy ahead of time will establish a framework for how to make decisions and allocate available resources.
Additionally, having a philosophy in place helps to frame the communication of compensation decisions, ensuring that your team understands the rationale behind their pay.
Allowing your team to understand the logic behind compensation management decisions is an important way to ensure team satisfaction.
2. Data Collection and Analysis
Before you begin, you should collect preliminary data and perform initial analysis to guide the compensation changes that are necessary.
There are myriad factors that should impact compensation decisions. Before conducting a compensation review, you should make sure that you have them on hand.
For example, you should collect information on:
- All employees’ total compensation information. Information on equity valuations and vesting schedules are particularly important. This is surprisingly easy to forget!
- Information on employees’ recent performance reviews. Whether or not employees are high or low performers should factor into your compensation decisions.
- Data on employee locations, particularly if you’re going to compensate employees differently based upon their geographic locations.
- Information on budgets, so that you know how much you can afford to pay particular team members.
Gathering this data ahead of time will give you all of the tools that you need to make high-quality compensation decisions as efficiently as possible, accomplishing one of the primary goals of a robust compensation management system.
3. Analyze and Recommend Compensation Changes
Once you have your data in front of you and your compensation philosophy in place as a guide, it’s time to start making decisions about how compensation on your team needs to change.
During the compensation review process, leaders and managers typically evaluate several different dimensions and recommend compensation changes:
- Are all employees being paid within their designated compensation bands?
- Within bands, are top performers being paid appropriately for their high performance (i.e., receiving higher compensation within a band versus their peers)?
- Are compensation bands set correctly? Do recent offers, employee attrition rates, and market data indicate that compensation bands need to change?
- Is pay equity being preserved as open job roles are filled? Are certain classes of employees being favored over others in terms of their compensation?
After asking these questions and analyzing results, managers typically make recommendations or use software to generate proposed solutions that balance all of the dimensions of compensation across the entire team.
There are several ways to conduct this type of analysis, ranging from spreadsheets to dedicated compensation management platforms.
Aeqium’s pay equity and insights analysis can also help you analyze your compensation information and recommend adjustments automatically.
4. Communicate with Stakeholders and Decision Makers
One critical step that’s easy to miss in the compensation and benefits review process is to update key stakeholders and decision-makers.
In large organizations, it’s typical for mid-level managers to have a certain amount of latitude to make compensation decisions themselves. These decisions ultimately need to be rolled up to and approved by a more senior leader, such as the head of a department.
Department leads typically check for a few particular factors as part of their review:
- Are top performers being adequately compensated?
- Are solid performers being fairly compensated versus lower performers?
- Is the overall departmental budget in line with acceptable expense levels?
The most sensitive part of this process is ensuring that confidential compensation information doesn’t leak, particularly when decisions have yet to be finalized.
With some types of compensation management systems, it can, unfortunately, be easy to accidentally send the wrong information to the wrong person, particularly when using spreadsheets to manage compensation information.
5. Update Compensation Plans
Once decisions have been finalized, it’s time to update compensation in your payroll and equity systems.
For pay changes, it’s common for teams to migrate changes from a system such as spreadsheets or a compensation management product into your payroll provider. Some systems may also be possible to directly flow changes through from one system to another.
For equity changes, it’s common for all stock grants to be held temporarily, pending board approval that is typically required for the issuance of new shares.
6. Communicate With Employees
The final stage of a compensation review process is communication. If you’re going to change employees’ compensation, it’s critical to communicate changes clearly and correctly.
Given the sensitive nature of compensation, it’s crucial that you communicate changes accurately and to exactly the correct audience.
There are typically two ways to communicate compensation:
- Employees receiving compensation changes can automatically receive a clear notification of how their compensation is changing due to a review.
- Managers can receive a full readout of compensation changes for their team and communicate them to employees directly.
In general, we recommend the latter path. While it takes more time, communicating compensation changes to employees provides a way to explain contentious changes (such as an increase that was smaller than anticipated), gauge employee engagement, or reinforce that someone is a valued team member, and celebrate a happy moment.
Regular compensation reviews are a key way in which companies can ensure that their current compensation is achieving their goals.
If you haven’t conducted a review in a while, we recommend that you consider running one in the near future, particularly if you’re seeing slower hiring or higher employee turnover than expected.