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03 Jan 2023

Are you ready for the annual pay review? Here's 4 tips to help

Deciding on pay rises can be a bit of a balancing act. Here are some steps to make it easier

 Are you ready for the annual pay review? Here's 4 tips to help.jpg 1


For many reward teams, the busiest time of the year is fast approaching – finalising pay review and bonus budgets. How do you balance the challenges of inflation, retention, affordability and the movement in the external market?

While it is tempting to give everyone an inflationary pay rise, decision-making needs to be more tactical, taking into consideration pay philosophy, fairness – and potential unintended consequences.

Use these steps to build an effective pay review process:

1. Define your pay philosophy

Building a particular culture in an organisation means defining a set of values that clarify the behaviours you want to encourage. In the same way, defining reward principles and a pay philosophy will make it clear to employees how you manage pay.

Some employees will demand a 10-15% pay increase because inflation is at record levels. Looking ahead, employees may demand a similar increase because the external benchmark for their particular skills has gone up significantly. Should pay budgets be based on inflation, external marketing, business results or affordability? What is more important?

2. Build a business case for the budget

Once you’ve established the factors that that influence your pay budget, gather the relevant data. If you consider inflation as a factor, gather information on CPI and CPIH (including housing).

Pay budgets should be benchmarked in the in the same way that salaries are benchmarked. We recently published our 2022/23 Global Salary Planning Report, in which more than 500 participating organisations forecast pay increases for 2023. The median number for the UK is 5%.

3. Data and scenario modelling

A lot of data modelling and financial analysis is required once overall pay review and bonus budgets have been set. This depends on answers to the following questions:

  • Does each business area/manager get the same budget or is this differentiated based on positioning against the market, equal pay risks or performance distribution?
  • Do all employees get the same pay increase/bonus or is it differentiated? If it is differentiated, you will need to model various scenarios based on your expected outcomes to provide consistent guidance to managers.

4. Communication and guidance for leaders

Start communicating early, putting together a plan and identifying key messages. It helps to provide line managers with a Q&A document to support any pay conversations they will be having with their team. As well as a letter template for line managers to hand out to their teams, you will also need to put together a communication strategy and timeline.

Consider the following questions for your communication strategy:

  • What are your pay philosophy and reward principles?
  • How is the overall budget determined for pay review/bonus?
  • If performance is a factor, are leaders having regular conversations with their teams?
  • Are you being transparent with employees? Lack of transparency leads to mistrust
  • Do you want to use this as an opportunity to communicate your wider reward offering?

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