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03 May 2016

How to Approach Salary Reviews

Posted By: AIB Business
Salary-review-image-245

With the economy continuing to recover and new job opportunities arising across many sectors, employees are now presenting requests for salary reviews. However, applying a consistent process to address such requests is crucial to ensure a good result for employees and employers, writes Jonathan Callan from the Small Firms Association (SFA). 

Following almost eight years of cost reduction or wage freezes, many managers and, indeed, business owners are often not experienced in holding quality salary discussions. However, we have seen emerging trends amongst our members that indicate a need to hold such discussions and define a salary review process.

There is strong logic for increasing salaries in line with length of service, increased responsibility or in cases where we want to reward or retain talent. It is important for any business to equip managers with the economic context and a consistent process as the backbone to any review.

Economic Context for Salary Discussions

An SFA salary survey in Q4 2015 found that 61% of member companies plan to increase salaries in 2016, with 66% of these increases between 2-3%. 

Our 2015 end-of-year economic report outlined some key findings, which are useful in salary discussions:

  • While Ireland’s economy is generally recovering, recovery is uneven between firms, regions and sectors and there is not a “blanket” increase in revenue for every business.
  • There is little cost-of-living justification for pay rises, with the exception of urban rent increases.
  • Budget 2016 introduced a reduction in tax (increasing take-home pay) and increased the minimum wage.
  • Competitiveness has improved but a high cost base for businesses persists i.e. rates, rents and increasing labour costs, with further costs resulting from new employment legislation and increases to national minimum wage.
  • There is strong price competition, and domestic demand remains lower than in 2006/7 although it is improving.
  • Excessive wage increases will damage both workers and their employers in the long-term if extended at this early stage of recovery, and there is certainly not a blanket case of “better for all” right now. Many regions and sectors are not seeing recovery as of yet.

 

Salary Review Process

Small businesses often do not have a process for reviewing salaries, or they have abandoned a previous process from the Celtic Tiger era. Remember that salary negotiations can be difficult and, if handled poorly, can cause an employee to be demotivated. It is vital for any business to decide on a consistent approach to salary reviews and to train their managers to deliver this process in all cases.

Some businesses prefer to define a clear matrix of criteria to warrant an increase with a regular review cycle, i.e. annually. Others want the flexibility to react to requests as they arise instead.

Managers must recognise the difference between the value of the role that employees perform and their value as an individual. The two are not the same. There can also be reasons that you are unable to offer an increase in pay levels and these need to be clearly outlined. For example, you might find a situation where the limit of the value that can be placed on a particular role has simply been reached, so to decline a salary increase is not a reflection on the value of an individual. Remember, employees could have a very high potential value, but if their role does not enable them to perform to their fullest extent, then their reward level may be suppressed. Managers need to benchmark the remuneration of one employee with others in the same role – both internally and externally – to understand how competitively they are paying an individual.

Salary levels can largely be dictated by market forces too – notably the cost of replacing the employee – and the contribution that the employee makes to organisational performance.

If you find that the gap between your employee’s expectations and your salary limit is too great to bridge, look to find or develop a role which commands a higher value, and therefore salary. You can do this by agreeing wider responsibilities, opportunities and targets for employees to contribute to organisational performance and profit where possible.

Both individual and company performance can equally be a deciding factor in salary reviews. Another positive approach is to devise a performance-related bonus or pay increase subject to achieving more, based on set standards or output greater than current or expected levels. This again should be received positively by the employee because you’re offering something in return by justifying how an increase in pay can be obtained.

Finally, if you are not able to facilitate an increase at the time, then the most positive way to approach this is to re-evaluate an employee’s contribution and responsibility and link this to a pay rise – if not immediately, then in the future. This is an approach that employees often respond to better than simply telling them that they are not entitled to a pay increase either now or in the future. Set a review date down the line. Focus on developing an employee’s value to the organisation, rather than disappointing them by not increasing their salary for what they are already doing.

 

Salary Review Example

We suggest a consistent and transparent salary review process, which has a mechanism to control expectations and determine where an increase is due. This process can be discussed with the employee during the review.

It is a good idea to define that a salary increase request requires each manager to document tangible examples under four deciding factors. Each factor can be equally weighted in the decision. For example:

Salary benchmark (50% of the decision) Internally Are other employees in the same role paid more or less? (without revealing individual packages)
Externally Does the external job market pay more or less for the role the employee is in?
Performance benchmark (50% of the decision) Individual How does the employee’s performance rate, particularly attendance, productivity & conduct? Is there room for improvement or are they exceeding expectations?
Company Has the company or the department met its goals recently? Is the company in a position to extend a salary increase?

The SFA has conducted a detailed rates of pay survey for specific job titles, which will be available to members in May. 

Written by: Jonathan Callan (jonathan.callan@sfa.ie), Executive, Small Firms Association

 

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