We know you were looking for best practices for this year's annual compensation review. Which is why we hosted a live workshop and put together a guide for you! Whereas a manual process could prove complex, an automated compensation system will be more fair and efficient while giving credibility to individual outcomes. Let's get into it...

1. The Ultimate Annual
Compensation Review
Process Guide

2. The ultimate annual compensation review process guide
We know you were looking for best practices for this year's annual compensation
review. Which is why we hosted a live workshop and put together a guide for you!
Whereas a manual process could prove complex, an automated compensation
system will be more fair and efficient while giving credibility to individual
outcomes. Let's get into it...
Compensation review process? What are we talking about exactly…
There are lots of different ways to perform your compensation review, but
eventually, the exercise can be summarized as follows: A review of the company
compensation structure to evaluate whether employees are paid fairly based on
your internal guidelines and equity, and market alignment

3. Doing this review regularly will mitigate potential inequities, whether they are
based on gender, performance, or compared to the market.
We recommend running your salary review at least once a year. Lately, more
companies have been switching to reviews every six months to be sure to evolve
as quickly as the employment market.

4. Now that you’re convinced you should run regular compensation reviews, let’s
see the main steps and tools for success.
1. Budget planning for your annual compensation review process
First, you need to know your salary increase budget to start running it.
Depending on your organization, there can be different owners and ways to
define it:
Ownership
Salary increase budget definition can be owned by Finance, People, CEO; it will
depend on your organization's size and model.

5. No matter who’s the owner, make sure to involve those different functions, as
they’ll all have different views to bring to the table:
● CEO will bring a strategic direction and vision about compensation
● Finance will bring a comprehensive view of the financial capabilities of the
company
● People will bring knowledge of the market and Internal employees’ situation
Budget structure
Your budget can include lots of variables, but if you want to focus on the most
common ones, this will be:

6. ● General increase: some companies allocate a general increase to all
employees or part of their population (fixed amount or, more generally, set
% of basic salary). Lately, we’ve seen an increasing number of companies
using this general increase budget to cope with inflation rates, most of them
to a portion of their population (the lowest paid employees, often).
● Market adjustment increase: This will help close the gap between your
employees’ salaries and your market positioning target. Let’s say you aim at
the 50th percentile of the market for each role, but given market changes,
some are (way) below this target → you will close the gap to bring them back
on track.

7. ● Merit increase: if you want to reward individual performance, you can use
performance ratings to define individual salary increases, differentiating the
increase of an outstanding performer from someone who is “just” meeting
expectations.
At this stage, you can also take a combination of performance and market
positioning to define the merit increase, to be sure that once again you close the
gap to internal inequities putting employees with the same performance at the
same level of salary, even though they were not starting with the same salary.

8. 2. Best tools for your annual compensation review process
Regardless of the Compensation management software or HRIS you’re using; it’s
likely that your salary review is eventually going to happen in a spreadsheet!
The most important things you’ll find out are:
● A global budget tab to access a summary of your budget simulation -
automatically calculated based on what’s done on your Master file tab
● A parameters tab for you to fine-tune the master information you want to
apply afterward: your merit increase matrix, inflation rates per countries,
exchange rates, etc. (check the following section to guide you on these
parameters set up)

9. ● The Master file tab to view individual simulations for each employee and
process potential individual adjustmentIf you’re using Figures, you can pull
out lots of this tab’s information from the Budget Calculator, though you’ll
still have to manually add some more information, such as the employee’s
track record, if you want to
● A calibration tab to be used during your calibration meeting to finish your
process
3. How to define the annual compensation review process parameters
Inflation rates
You may decide to compensate your team for current inflation, which will drive a
flat % increase based on the employee’s location.

10. You can find updated inflation rates from many different sources (one of them
here) and then decide country by country the associated salary increase from
completely aligned to inflation to no compensation at all.
→ Make sure to list all countries where you have employees and the associated
inflation rate in the parameters tab.
Exchange rates
You want to process your compensation review with a common currency all over
the board for consistency issues; this parameter is relatively easy to set up.
→ List all currencies other than your reference one (€ in our template) and the
exchange rate you want to apply.

11. Merit matrix
As explained earlier, you can conceive merit increase in two different ways shown
in the sample charts below:

12. 1. Considering only performance ratings - 1 rating = 1 increase %
With this methodology, two individuals in the same role with the same
performance will receive the same % of increase, which sounds fair (and is more
appropriate than a pure discretionary increase).
If you look one step further, however, if their initial salaries were not the same
for some reason, is it fair that they get a similar increase while one of them is
better compensated than the other? We don’t think so. This is why we encourage
you to…

13. 2. Take performance ratings + market positioning into account to
determine fair individual salary increases
This time, you make sure to take into account potential inequities you had in the
past and correct them moving forward. You will reduce, if not delete, any salary
gaps between two individuals with the same job, same level, and same level of
performance.

14. 4. Collaborating with people managers and calibration for your salary
review process
Managers review
Once you’ve set up general parameters and applied them to each individual,
you’ll have a first version to be reviewed with people managers.
1. Split your master file into sub-files or tabs to be shared with the
manager, so they only have access to their team and sub budget.
You can use tools such as Split Sheet to build your sub-files more easily.

15. 2. Depending on the size of your team and the level of autonomy, you
can either:
→ Plan a compensation review meeting with each manager to go over each
employee and review step by step their:
● Inflation increase
● Market adjustment increase
● Merit increase
→ Or share managers’ files directly with them with a detailed explanation of how
it works (we recommend sending them a Loom or Claap that could look like
this!) and let them do the review work independently.

16. It will be time for managers to overwrite the increase proposition if they want to.
The overwrite could go both ways (higher or lower increase); in any case, we
recommend limiting the number of manual adjustments so that, eventually, the
fair system you build doesn’t lose credibility.
In any case, might it be with you or on their own, make sure managers are giving
factual and clear explanations for their overwrites; you need to be able to justify
objectively any deviation from the standard process!

17. 3. Ensure your master file is updated once all managers’ reviews are
done.
This way, you can keep track of the following:
● Budget post managers’ adjustmentAre you still on track? Are some teams
being way more generous than others? Is it always legitimate?
● How many manual adjustments have been made?As mentioned, the fewer
manual adjustments you make, the more credible and robust your
automated system will be. A good practice would be to set a limit of up to
15% for manual adjustments and stick to it as much as possible.

18. Calibration
Calibration meetings are designed to discuss salary increases proposed by
managers as a group, looking at sub-groups when needed: teams, levels, gender,
etc.
Eventually, the goal is to ensure fairness all over the board and avoid potential
biases: a manager being more generous/harsh than others, some team members
being overly rewarded vs. others being limited for some subjective reasons, any
discrimination, etc. This helps drive greater consistency in the compensation
review process.

19. Methodology
There are lots of different ways to organize your calibration meeting, though here
are some options that can make sense:
1. In larger teams (at least 100 employees), you can run your review team by
team; there will be enough employees at the same level for comparison to make
sense. For smaller teams, you might want to start at step 2.
2. Order employees per level + performance rating
3. Check the proposed final salary and look for discrepancies (same level / same
performance level should land on a similar salary)
4. Check manager overwrites to explain, challenge, and validate them

21. Timing
Depending on how many people you have to review, plan enough time and be a
ruthless timekeeper! Compensation discussion can easily drag on longer than
needed, designate a timekeeper, and be sure they’ll do their job. You shouldn’t
spend time on every employee but more on exceptions and overwrite extremes.
An average of 3 minutes per employee should be enough time.
Accountability
Some managers may come out of the calibration meeting disappointed as they
won’t always get what they expected for their team members; though make sure
they are accountable for the outcome and make it clear they will have to disagree
and commit.

22. You don’t want a manager communicating afterward to the employee saying: “I
wanted to give you more, but the calibration committee decided otherwise…”.
Ownership
Before starting the meeting, be sure everybody knows who will be the final
decision maker. It can be the department head of each team member, moderator,
or people team. No matter who it is, be sure it’s clear to everyone; it will save you
some time afterward.

23. Confidentiality
It may sound obvious to you, but it’s always worth mentioning it; everything
discussed in the calibration meeting remains within the calibration meeting. And
outcomes should only be communicated once the People team has given their
green light for communication.
5. Communicating your compensation review process with employees
Compensation is an emotional topic for most people; it’s then critical that
communication of the compensation review process and outcomes are well
managed and controlled.

24. Communicate before the end of what’s about to happen
Most of the time, this part of the communication will be handled by the People
team
● Compensation philosophy and policy: take this occasion to remind
them about the fundamentals of your compensation approach.
● Timeline: when are you running the review, and when will the outcomes be
individually announced
● Ownership: who is involved in the process, and who is the final decision
maker? Who will then get back to them for the individual announcement

25. ● Parameters: depending on your transparency level, you can consider
communicating about the overall budget, split between
inflation/market/merit budgets, merit matrix, etc. The more you share with
them in advance, the more accountable you are and the more reliable your
system will be.
● Exceptions: except if you decide that there will be no exceptions, you
should still remind everyone that some manual adjustments can be made,
but for instance, you can commit to the fact that there will not be more than
10% of these.

26. Prepare your communication!
Managers usually handle this one
● Disagree and commit! It’s possible that the person announcing the increase
(most likely the manager) is not aligned with the decision that the
calibration committee has taken. Though, they should still disagree and
commit and show a united front to the employee. Getting into the meeting
saying, “I wanted more for you. It’s their fault”, won’t help anyone moving
forward. So make sure you can explain the decision the most factually and
objectively possible.

27. ● Even in the case of good news, it’s an important piece of information you’re
about to deliver! No matter what, prefer 1-to-1 conversation face-to-face
(virtually or in-real-life) rather than written communication
● In most cases, there is a clear link between performance reviews and
compensation, though these should be two separate discussions!
● When talking about performance reviews, you want them to focus on the
core message solely: are they meeting expectations or not? Why? How can
they improve? What are the next steps/action plan?
● Compensation should only come during a second phase once the essence of
your message has been assimilated.

28. ● Detail the increase structure - If you’ve built a system considering several
variables (inflation, market, merit), you want your team members to
understand which part of their increase is coming from which variable. If
your parameters and the breakdown are clear, there should be a tiny room
for negotiation, if any!
Properly follow up…
● Make sure to have a written follow-up to the announcement, might it be with
an email, a formal information letter, or even a contract addendum

29. ● If the discussion was heated, you might want to check in the following day to
make sure the information has been understood and accepted
So with all these tips and resources, we hope that you go forward and conduct
your most efficient, fair and successful compensation review ever!