How to conduct pay reviews at your small business

How much you pay your employees is one of the most important decisions you need to make as a small business owner.

It can be tricky to strike a balance between paying enough to reflect each employee’s role and what they offer your business, versus the impact of this pay on your profit margins. These decisions are made through the pay review process.

This article will explore how to conduct pay reviews with your staff, including what a pay review involves, how you should prepare, and how best to communicate pay decisions with your employees to avoid pay disputes further down the line.

What is a pay review?

A pay review is a structured formal evaluation of an employee’s salary or hourly pay rate. The review looks at an employee’s performance and tenure at the company to determine whether a pay increase is suitable.

Some employers will also look at market conditions, like inflation or the market value for a person’s role, as part of a pay review.

When done correctly, a pay review can be a powerful tool to boost employee morale, increase loyalty, and act as an opportunity for an open conversation between employer and employee.

Pay reviews tend to happen annually, following a set process for all employees, but they can happen at an employer’s discretion too. For example, some employers may choose to conduct a pay review after a large project is completed, or when they would like to offer an employee a promotion and want to work out how much of a pay increase it should come with.

Read more: How to handle inflation pay rises

What does a pay review actually involve?

Pay reviews tend to follow three key stages: preparation, the review, and communication.

1. Preparation: When an employer sets budgets and the objectives of the review, and does the research into topics like market pay.
2. The review: This involves a performance review with each employee to assess their contribution to the company and their skill set. The outcome of the performance review will play a significant role in determining pay decisions.
3. Communication: The final stage involves sharing your conclusions with the employee and taking any feedback on board. This is also a chance to discuss plans for the future.

How should I prepare for an employee pay review?

The pay review preparation phase is extremely important, and is key to a successful conversation with your employees.

Start by considering the key objectives of the pay review. What do you intend to accomplish from the process? The focus could be boosting your market competitiveness, compensating hard work or tenure, or a combination of multiple different factors.

Next, you need to gather market information, including inflation rates and average salaries, to ensure you understand what pay increases are fair to offer.

After you have done this, the final preparation steps involve deciding:

• Who will take part – usually at least each employee’s manager
• What metrics will be used to measure each employee’s performance, such as targets, KPIs, or their adherence to company values
• How performance will be measured – either via qualitative or quantitative data, or maybe a mixture of both

At this stage, it’s also essential to set a budget for all pay reviews at the company to ensure you offer pay rises you can actually afford. Look at your company’s financial situation, internal policies, and external market factors to determine this.

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How should an employee prepare for a pay review?

A performance review, conducted as part of the overall pay review, is an opportunity to understand each employee’s perspective on their role. Provide them with a self-evaluation form ahead of the performance review, and ask them to return it to you before your scheduled meeting.

How the employee views their contributions and role as a whole will not only help you make decisions about pay, but also offer an opportunity to see any potential weaknesses in a person’s job role and tweak them to boost productivity and output.

What does a performance review entail?

A performance review is a key piece in the puzzle of an overall pay review. It offers employers the chance to understand how an employee feels about their role, including what they believe they contribute to the company and their thoughts on both their role and the company in general.

The process tends to involve the input of both managers and HR managers. Direct line managers should provide an assessment of the employee’s performance, as this information will potentially be more impartial and balanced than an employee’s self-assessment – and it helps to get multiple perspectives on performance. Input from other colleagues can be useful too.

The outcome of a performance review can help employers determine how to compensate overachievers and incentivise those who are struggling a little more.

Remember, businesses should have a set assessment process for employees, their managers, and other stakeholders to follow so that they understand what metrics they are assessing against and how they are to provide that information to you.

How do I make pay review decisions?

Once you have collated your own market research data, objectives, and performance review outcomes, it is time to make a decision regarding pay rises.

To streamline decision making, implement a set process that you can use every year. This will ensure fairness across all pay reviews and give you a simple structure to follow every year.

Which factors will you place the most importance on? This could be the outcome of the performance reviews, market conditions, company finances, or something else. This differs from company to company, and is up to the small business owner to determine what is most important to the success of the business.

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How do I communicate my decisions to employees?

So, you’ve decided on the outcome of the pay reviews – what now? It’s time to communicate these decisions to each employee, both face-to-face and in writing.

For employees who are receiving a pay rise, these conversations will be easier – for those who aren’t, it can be a little tricky. The key to every type of conversation is clear and open communication, and transparency where possible.

With an employee who is receiving a pay rise, this is your opportunity to show your appreciation for their hard work. Articulate the reason they are being rewarded and highlight any particular standout moments for the individual since your last pay review cycle – this boosts morale and helps employees feel valued.

It’s also important to continue to set these employees targets for the coming year to keep them motivated.

When an employee isn’t receiving a pay rise, transparency remains important. Highlight why this decision is being made and use data and other metrics to support this. Provide the employee with targets to meet in order to receive a pay rise in future, to incentivise them to improve.

What should I do after the pay review?

It’s important to put all pay review decisions in writing. A pay review letter should include:

1. The date of the pay review
2. Confirmation of the new pay agreed, where applicable, and when this will be enforced
3. Why the decision was made
4. For those not receiving a pay rise, the targets they need to meet to be eligible for one in future

The written confirmation is the final stage of a pay review, giving employees something to refer back to in the future when they, for example, want to check when their next pay review will be or what they need to work on.

Read more: Want to streamline your in-house payroll process? Visit our guide to the best HR and payroll software

Final thoughts

Having a set method of conducting pay reviews at your small business can streamline the process for years to come. Remember, open communication and transparency is key to successful conversations about pay with employees, and setting targets at every pay review will help guide the next.

Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.