Many employers are beginning to see the value of merit- or performance-based pay rises over traditional, incremental increases. However, using a system that ties reward to performance also brings challenges. After all, employees who don't receive the review they're wanting or expecting can become despondent and unproductive, and even those who perform well may feel they’re not rewarded adequately enough.

By setting up a robust and transparent process for your pay reviews, you’ll make a significant difference to both employee morale and retention. So, how do you make sure your pay review process is effective?

Begin your pay review process by asking five questions

 An effective pay review should always start by considering: 

1. Performance: Have they contributed more to the business this year compared to last? If they are doing the same job as last year it’s often hard to justify an increase.
2. Legislative requirements: Are increases required due to minimum wage laws, awards or enterprise agreements?
3. External relativity: How does the employee's current salary align with the market?
4. Internal relativity: How does their salary align with those of their peers?
5. Overall business performance: Can the business afford it?

Even if your answers to these questions aren’t answered in the employee’s favour, you can still manage your pay review in a way that it will build confidence in your process – and in those making the final decisions.

 Communicate your expectations early

 If you decide to reward people for high performance, ensure everyone understands exactly how you define this. Make sure employees know your expectations early in the year so that, when pay review time comes, they don't automatically expect a pay rise.

Your expectations should also be reflected in formal measures such as objectives, KPIs or project outcomes. This will allow you to focus staff energy on the areas most valuable to your business, right from the start.

Train and empower managers

If your pay review process is linked to performance appraisals, it’s critical that the people managing these appraisals are trained to be consistent and objective, and their decisions are based on clear benchmarks. Consider holding a benchmarking meeting with all managers before appraisals begin.

 A consistent review process will also help prevent common pitfalls such as awarding salary increases on a case-by-case basis without thinking through the implications for others who may be equally deserving.

Stay transparent

Whether an employee’s pay increase is granted or declined, it’s important they understand the reasons for the decision. If there are issues with their performance, explaining these issues saves you having the same conversation in six months’ time.

Declining a pay rise based on ‘internal relativity’ factors will require a degree of confidentiality, but you’ll should always have an open discussion on external salaries to help employees understand their place in the market.

Be flexible when necessary

Remember that offering a single, structured review each year may not be right for your business. Case-by-case reviews or those initiated by employees may be more appropriate, particularly if your work is project based.

If staff do ask for a pay review outside of your standard cycle, consider these factors:

• Is there a good reason to grant a pay increase now, rather than at the scheduled time?
• Has their position changed so significantly that they would now be benchmarked against a different position in the market?
• Are they a flight risk, i.e. likely to leave? (NB. In most cases this isn’t a good reason to grant a pay rise – you should be careful to consider if there are other options to keep them engaged)
• Has their performance exceeded your expectation

As the EOFY approaches, you could be managing a whole range of pay review requests alongside your existing tasks. Considering some of these options may assist you.