Benefits of a Compensation Review Process

Managing compensation should be taken seriously and given the attention it deserves. You may think only large businesses need one, but the truth is that businesses of all sizes can benefit from having a well-planned compensation review process. 

Does your organization have a formal compensation review process? It should: for most businesses, labor is the largest expense. The costs are significant, up to 70% of an organization's total operating expenses. Compensation is also a top driver of employee retention and satisfaction. So, it makes sense that managing your most significant expense is directly tied to empowering your workforce to achieve performance goals. 

Perhaps you are an HR professional at a growing company who wants to shift from ad-hoc decisions to a more formal plan. Or, you’ve just gone through a few compensation cycles, and your organization is looking for better ways and best practices to incorporate a clear methodology and overarching strategy into the process.

Either way, what you need is a standardized and well-documented compensation review process.

What is the difference between a compensation review process and a compensation review cycle?

Many companies take an ad-hoc approach to compensation. They either award pay increases on an as-needed basis or don't have a clear methodology or overarching strategy to decide on employee raises. Such an approach can lead to inconsistencies, lack of fairness, and misalignment with the company's long-term objectives.

A compensation review process, however, is a structured evaluation of employee compensation. It’s typically conducted on a regular schedule, often referred to as 'cycles.' This approach ensures that compensation decisions are methodical and aligned with the company's strategic goals.

How an organized compensation review process benefits your organization

Compensation reviews can be a complicated process for everyone involved, but it doesn’t have to be painful. So first, let's review some complexities associated with compensation review cycles.

Why are compensation review cycles complicated?

The steps involved in traditional compensation review processes typically involve manual work in spreadsheets. This makes it difficult to get full visibility of relevant — and current —  data needed to make an informed decision (market, performance, internal fairness, etc.). Also, using spreadsheets is time-consuming and error-prone, and does little to empower those involved. Between the mental effort needed to navigate various tabs or documents, not to mention the many stakeholders involved, everyone can be burnt out and misaligned by the time compensation review comes around. 

And where would we be without mentioning budgets? Want to reward your employees without breaking the bank? Achieving alignment between finance, executives, and managers can be arduous.

How employee retention and morale are tied to your compensation review process

According to a Feb. 28 report from Express Employment Professionals and The Harris Poll, 33% percent of U.S. hiring managers believe employee turnover will increase at their company in 2024, leaving a financial impact and burdening remaining employees. 

Having a dedicated and transparent compensation review process can positively affect your employee experience. When employees can see a clear connection between performance and compensation, it helps reduce dissatisfaction and low morale. Employees who feel rewarded for performance are more likely to focus and be productive. This type of transparent compensation structure can lower turnover rates and the associated recruitment and training costs.

Let’s not forget about how compensation transparency fuels reputation and culture. In a survey from Mercer, 30% of respondents reported embedding transparency as part of their reward and talent philosophies. A dedicated compensation review process demystifies the compensation structure for employees, which protects your organization's reputation and can even aid in talent acquisition. 

With everyone on the same page, it's easier to foster a positive organizational culture, promoting trust and teamwork — that drives your business outcomes.

The bottom line: Making the case for an organized compensation review process

You want to ensure your company's valuable compensation dollars are strategically deployed to support business goals. Retaining key talent is a large factor in driving your company's future success. A standardized compensation process makes identifying and rewarding high performers easier. It also helps prevent overcompensating employees who underperform, are likely to leave, or are already overpaid.

Everyone benefits from a process in place

Here’s how everyone in your organization wins with a compensation review cycle plan:

• HR: A compensation review process avoids diverting management and HR resources from critical tasks. With a review cycle plan in place, compensation decisions feel organized. HR gains control by clearly outlining the process for all the other roles.
  
• Executives: Without a plan in place, compensation can feel like a free-for-all. However, when your high-level employees understand the process, the budget, and how compensation decisions are made, executives have higher confidence that everyone will feel valued and motivated to perform.
  
• Managers: Your management must balance the expectations from above and below. With a compensation review plan in place, they can know what's expected of them and how to balance managing their budget and rewarding their employees. They will feel empowered if they are included in the compensation process of their direct reports rather than shut out.
  
• Finance: When your focus is on money in and money out, you need to understand the reasoning for compensation decisions. With a dedicated compensation review cycle, your finance team gains a clear understanding of compensation spend ROI and how it’s being used to incentivize performance or reward/retain top talent properly. And, they can rest easy knowing the budget is approved and adhered to.
  
• Employees: Most of all, your employees need a compensation review plan that helps them understand the process, where their pay falls, and why. According to a survey by Gartner HR Research, only 38% of  employees understand how their pay is determined. And, when organizations educate employees about how pay is determined, employee trust in the organization increases by 10% and pay equity perceptions increase by 11%. A plan can lend itself to transparency and fairness (internal equity), reducing conflicts. It even improves communication; the process promotes open dialog. 

Not only do your different departments benefit from an organized compensation review cycle process, but the entire company gains an advantage through increased employee retention, incentivized performance, and control of compensation costs.

How to plan for a successful compensation review process

It’s never too soon to evolve your compensation approach. At Comprehensive, we believe there is an art and science in Planning for Your Compensation Review. It involves

• Compensation philosophy
• Budget
• People involved
• Communication
  

At the end of the day, compensation review cycles are critical to aligning different stakeholders and creating a transparent culture that encourages productivity. Your company’s compensation review plan provides the foundation for your compensation decisions during any given compensation review cycle.

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