Compensation review: running the annual pay cycle fairly and on budget

A compensation review — often called the annual salary review or pay review — is the cycle in which a company decides pay increases, promotions and variable pay for everyone at once. Running it as a single, structured cycle rather than as individual negotiations through the year is what keeps pay consistent and the budget under control. It is also where most pay inequities are either corrected or quietly made worse, depending on how carefully the review is run.

The compensation review cycle

1. Set the overall budget with finance, split into merit increases, promotions, market adjustments and bonuses.
2. Refresh market data and salary bands before managers make any recommendations.
3. Publish guidelines: a merit matrix that links performance rating and position in band to a recommended increase range.
4. Managers propose increases for their teams within budget, with a short reason for anything outside the guidelines.
5. HR and finance calibrate across teams, checking budget, consistency and pay equity.
6. Approve through the agreed levels of authority, then communicate individually before the new pay takes effect.

The merit matrix: performance and position in band

A merit matrix gives the largest increases to strong performers who are low in their band, and smaller increases to people already high in their band, even with a strong rating. That keeps pay moving towards the market midpoint for good performers without pushing salaries far above the band maximum. Keep the matrix simple enough to explain in a sentence, because managers have to defend its outcome in conversations with their teams.

Run a pay equity check before approval, not after. Compare increases and resulting pay by gender and other protected characteristics within the same level; unexplained gaps are far easier to fix in the proposal spreadsheet than in the payroll.

Common compensation review problems

• Budget spread evenly across everyone, which rewards average performance and loses top performers.
• Managers who never see band data and recommend increases in isolation.
• Promotions handled outside the cycle, so the budget is exhausted before the review starts.
• Increases communicated by a letter with no conversation or explanation.
• No record of why exceptions were approved, making the next year's decisions harder to defend.

Ettex Sheets can carry a small or mid-size compensation review end to end: an employee table with current pay, rating and compa-ratio from the salary bands, a merit matrix that suggests the increase range, manager input columns, and budget totals by team that update as proposals change. Keeping the reviewed sheet as the record of the cycle gives next year's review, and any pay equity audit, a clear starting point.