Tips for Adjusting Compensation During Performance Reviews
Workspan Daily
March 03, 2023
Key Takeaways

  • Communicate compensation adjustments. Whether you simply change your normal performance review cadence or work with a consultant or your internal HR team to make broader adjustments to your strategy, clearly communicate those changes to your employees. This will ensure that everyone is on the same page.  
  • Keep performance reviews and pay adjustment conversations separate. This will send the message that the foremost focus should be on performance rather than pay but will allow you to naturally link any adjustments directly to performance.  
  • Pay attention to the messages you’re sending with compensation adjustments. Whether intended or not, each pay adjustment sends a message. The right messages can encourage employees to further engage and perform in their roles. 

In the modern workplace, compensation and performance management go hand in hand. By tying compensation closely to how an employee performs, employers can be certain that they’re compensating their employees fairly based on the value their employees provide to the organization. Meeting employee expectations and needs in this way can, in turn, fuel overall organizational success and growth as satisfied and impactful employees are retained in their roles.  

This is especially important to consider in 2023, as the compensation landscape has become fraught with challenges, from the tricky post-Great Resignation labor market to high inflation and an impending recession. With salary increases anticipated to rise to 4.6% this year, it’s critical that organizations review their employee compensation strategies, including their approach to making salary adjustments during performance review periods, in order to strike the right balance between employee and organizational needs.  

Keeping that in mind, here are three actionable steps to help fine tune your compensation strategy.  

1. Evaluate your current compensation strategy and communicate changes to your employees.  

Consider working with an HR consultant to evaluate your current strategy. The right consultant can assist you in establishing performance-based pay policies, as well as helping you to characterize your strategy as a total rewards approach.  

Whether your team decides to work with a consultant or not, you should start evaluating your current strategy and planning for the future by asking yourself the following questions: 

  • What is our current retention rate? What is our historical turnover rate? How difficult was it for us to adapt the last time a team member resigned?  
  • Will compensation adjustments include anything related to a promotion? If so, will that salary adjustment be provided separately?  
  • Do compensation adjustments include dollars allocated to market changes, COLA, and/or inflation? 
  • How can we better incorporate both direct and indirect forms of compensation in our strategy? For example, will our new strategy include direct forms of compensation like sales bonuses or indirect forms of compensation like a new corporate philanthropy program?   

Before you start implementing significant changes to your compensation strategy, remember that employees don’t like surprises, especially when it comes to something as sensitive and critical as compensation. As you adjust your compensation strategy based on the questions above, build out your preliminary policies and clearly communicate what employees can expect from your organization well ahead of any changes taking place.  

For example, if you’re incorporating a new performance bonus component into your compensation strategy or moving from annual to twice-yearly performance reviews and compensation adjustment conversations, let your employees know. Doing so gives your employees a chance to plan the change into their financial lives and performance goals, and reconfigure their expectations, as well as ask questions or provide any feedback about the changes to their managers.  

2. Separate performance reviews and pay adjustment conversations.  

When it comes time to conduct performance reviews and inform employees about subsequent compensation adjustments, it’s best to separate the two conversations. Performance reviews should take place first, with compensation adjustment conversations taking place a few weeks later.  

You can set the expectation for how the performance review and compensation adjustment processes will work early on by following these preparation steps:  

  • Share the timeline, plans, and goals for performance reviews and pay adjustments so that all employees, managers, and leaders are on the same page.  
  • Provide self-assessment materials to employees so that they can evaluate their own performance, and then have managers review the self-evaluations and provide and gather additional performance feedback.  
  • Schedule performance and compensation conversations separately.  

This approach allows everyone — employees, managers and leaders — to be fully engaged in both conversations, focusing first on meaningful feedback and setting goals for future performance, and then turning the focus to compensation. This way, the assessment of performance doesn’t feel transactional but still links performance and pay together, with the performance conversation leading into the pay adjustment conversation.  

3. Clearly communicate what compensation adjustments mean and include.  

After you’ve successfully conducted performance reviews, it’s time to hold compensation adjustment conversations. As you do, clearly communicate what each adjustment includes and what it means for the employee based on their current and future performance.  

Here are a few examples of what these adjustment explanations might look like:  

  • This year your performance bonus total is $3,000 based on the value you’ve been providing in your role as a salesperson. You’ll begin earning next year’s performance bonus starting in Q4 of this year, with an increased target amount of $4,500.  
  • The company wants to continue to prioritize employee well-being this year, and to do so, we’ve added three additional days of PTO to everyone’s compensation package. 
  • We’re raising your base salary by 10% based on the average salary for the new role you’ll be stepping into in the new performance period.  

Whether intended or not, every adjustment to an employee’s compensation sends a message. Thus, it’s well worth the effort to be as intentional as possible with your messaging, planning each compensation adjustment with an accompanying message in mind.  

Ask yourself, “What am I trying to communicate to my employees?” If your message is one of encouragement, gratitude and concern for an employee’s well-being, you’ll find that your employees have a more expansive view of their compensation changes, as well as an increased drive to engage and perform in their roles.  

Communicate your message during the pay adjustment conversation and give your employees the chance to ask any questions they may have about particular adjustments. This gives you the opportunity to ensure your intended messages are coming across clearly.  

As you have these important conversations with your team members, keep the big picture in mind. Look for ways to link performance and compensation together so that employees will be encouraged to continue developing their skills, delivering value to your organization and seeking out opportunities to lead. 

Editor’s Note: Additional Content 

For more information and resources related to this article see the pages below, which offer quick access to all WorldatWork content on these topics: 

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