The complete guide to compensation reviews: how to run a successful process (without the stress)

'Fraught'. 'Frenzied'. 'Suffering'. 'Undefined'.

These are the kind of responses received when we asked our community the first word that comes to mind when describing a compensation review.

From determining an unbiased approach to salary raises, to aligning the conflicting opinions of a myriad of stakeholders, to communicating compensation adjustments to hopeful employees, compensation review season can be a tough time of year for People Leaders.

Whether implementing the process for the first time or a seasoned veteran seeking insight on how peers handle the key complexities, this end-to-end guide will help make the next compensation review a little less painful and a little more streamlined.

What is a compensation review?

A compensation review (also known as a pay review, salary review, compensation evaluation, merit cycle) is a formal evaluation of employee compensation packages.

Regular compensation reviews ensure that compensation remains fair and competitive compared to the market, keeping engagement high and avoiding any regrettable attrition. It can also be an opportunity to reward high performance and recognise employee career progression with promotions.

Some companies focus on base salary adjustments during the compensation review, whereas others may include other elements like, for instance, a performance bonus or an equity refresh grant – depending on the overarching compensation philosophy and approach.

How to run a compensation review process: a step-by-step guide

Compensation reviews are typically a complex process, with many steps, that can take months to complete end-to-end. 

The most typical approach is for a large-scale annual compensation review to take place between August (when project kick-off and stakeholder alignment on the approach takes place) and March (when compensation adjustments are rolled out into payroll).

Here's a detailed breakdown of the key steps involved in running a successful compensation review.

Step 1: Leadership alignment on the approach to pay reviews

There are lots of stakeholders involved in the compensation review process, so this theme of alignment, clarity, and communication will come up a lot. 

In terms of leadership alignment, it’s important to agree with your leadership team on the core approach to reviewing compensation at your company – ensuring the plan aligns with the overarching business strategy, goals, and culture. 

This typically involves the executive team (CEO, COO, CFO) as well as departmental leads who own goals for each core team. 

So how do you approach that leadership alignment?

• Work with key stakeholders to understand their business goals and priorities for the upcoming year, and discuss how that relates to talent planning and employee engagement. 
• Revisit your compensation philosophy for clarity on the fundamental principles that define how compensation decisions are made at the company – this should help to define factors like how often compensation should be reviewed, whether employee performance should be included in the review process, how market competitive the company aims to be with compensation, and so on.
• Create a central document which outlines the approach, timeline, decision-making process, responsibilities (including ownership between the People Team and line managers), and key objectives of the compensation review.
• Schedule time with each key stakeholder to run them through the refined plan, and then make sure you get written sign-off before kicking off the review process.

Step 2: Agree the pay review budget with Finance

Getting the budget right is crucial, because it defines the pool available to make salary increases and promotions each year. 

The pay review budget is typically calculated as a percentage of total payroll costs, and there are two common approaches to determining the budget:

• Finance-led / top-down. A set budget for the compensation review is defined by the Finance team based on guidance from the executive team on overall business costs and budget available. This is then handed to the People Team to decide how to best use the set budget to meet goals.
• HR-led / bottom-up. The HR team calculates the budget needed to meet all compensation review objectives e.g. ensure all employees are in-line with market competitive pay, meaningfully reward the top 10% of performers, promote 5% of the employee base to a new level. This is then taken to the executive team and Finance team for budget approval. 

The HR-led model gives a more accurate picture of the costs needed for a successful compensation review that ensures continued alignment with the company’s compensation philosophy and avoids issues with slow hiring or high attrition. 

It’s more complex – but compensation review tools like Ravio can make the budgeting process much easier, enabling you to model different scenarios and understand the impact of various budget allocation choices, and present well-informed options to Finance.

Step 3: Update benchmarks and refresh salary bands

If market competitiveness is an important element of compensation for your company, then sourcing up-to-date compensation data before you kick-off the compensation review is a must, to determine whether employee compensation is still in-line with the market.

The best practice approach is to refresh your salary bands using the latest market benchmarking data, so that the band position of your employees will tell you how far off your target percentile employees now are compared to the real-time talent market – and this can then be fixed during the pay review.

Compensation management software like Ravio’s makes this simple, because your salary bands are already built on the foundation of real-time salary benchmarking data. Refreshing and viewing band position can be done in just the click of a button.

Many companies will then use a merit matrix approach to incorporate market adjustments into the compensation review – factoring in both employee performance and their salary band position to give a fair salary increase.

Step 4: Plan compensation adjustments

Once the budget and market data are in hand, it’s time to get into the details and determine which compensation adjustments need to be made.

Different companies approach this in different ways (depending on the approach agreed in step 1!) but the determining factors include:

• Promotions: employees who are ready to progress to the next level of their role should move into the next salary and receive a promotion-based pay increase to reflect this.
• Performance-based increases: for companies that use a pay for performance model, performance ratings will factor into the salary increases that need to be made – so the performance review process and calibration will need to take place first in order to inform the compensation adjustments needed.
• Market-based increases: the refreshed benchmarking data and bands will show where employee compensation might be falling behind the market, and where they may need a pay increase to bring them back to a competitive position. Many companies will use the compa ratio to assess how an employee’s salary compares to market position – with a merit matrix often used to combine this with the performance ratings input. 
• Inflation increases: some companies give an across-the-board inflation increase to all employees to reflect changes in inflation rate or cost of living.

Once you've decided the key inputs, it’s likely that you’ll need to go through a scenario modelling process to understand how the budget can be allocated across all of these areas – are we able to offer a 10% increase for the highest performance rating, for instance, or is 8% more realistic?

If you use a tool like Ravio to streamline your compensation review, the agreed recommendation logic is then defined within the platform – building those guidelines and guardrails into the process, and helping you check those scenarios against your planned budget.

Step 5: Agree compensation adjustments with stakeholders

The planned compensation adjustments then need to be reviewed and agreed across all stakeholders. 

How this is done will depend on the roles and responsibilities defined in your approach. 

For instance, if the People and Reward team have centralised control over the end-to-end process, then the planned adjustments likely only need to be signed off by the leadership team before rollout.

On the other hand, if there’s an element of manager discretion in approving or changing the planned pay increases for their team (which there is in most companies) then a more involved process of manager reviews and approvals will be needed.

If this is the case for your company, it’s particularly important to ensure there are:

• Clear guidelines and training for managers on how to make compensation review decisions in-line with overall recommendations, and where exceptions are and aren’t acceptable
• Documented responsibilities: defining which parts of the process are owned by the HR team (e.g. initial recommendations for team-wide salary increases) and which are owned by line managers (e.g. final decision on the salary increase per individual)
• Approval tracking to maintain clear records of the discussions around each employee’s salary increase and who approved which adjustments.

A compensation tool like Ravio’s can be helpful to streamline the stakeholder alignment and approvals process. 

Ravio’s compensation review software enables managers to review, adjust, and approve pay changes with context on each employee and defined parameters from the Reward team – and ensures all stakeholders can collaborate seamlessly using comments, flags, and approval history.

Step 6: Communicate compensation adjustments to employees

Once adjustments are signed off and finalised, employees must be informed about any changes to their compensation package. 

This is an absolutely crucial part of the process, and one that can be particularly challenging due to the hand-off between People Team and line managers. 

Typically, the People Team will handle company-wide communications about the compensation review process and timeline, but line managers will handle 1-2-1 conversations with employees about the outcome of the compensation review for their specific case. 

In terms of company-wide communication about the salary review process, it’s important to include:

• Timeline clarity: Communicate key parts of the process including when feedback will be gathered, when pay changes take effect, when employees will see them in payroll.
• Process transparency: Explain the methodology and criteria used for compensation decisions – always linking back to the company’s wider goals, culture, and compensation philosophy. 
• Context setting: Provide market context and budget constraints that influenced decisions.
• Enable two-way dialogue: Pay is inherently personal, so expect lots of questions and clarifications from the team – it can be helpful to communicate via an all-hands meeting, or set up a drop-in session for employees to ask further questions and give feedback on the process.

For managers to feel confident communicating compensation outcomes to their team, it’s important to consider:

• Decision rationale: Ensure managers understand the reasoning and rationale behind compensation adjustments. 
• Conversation guidance: Provide scripts and talking points for the most common difficult conversations.
• Escalation procedures: Establish clear processes for handling employee concerns or appeals.
• Support resources: Offer coaching or role-playing preparation for managers who are nervous about compensation conversations – especially common for new-in-role managers.

Step 7: Update documentation and payroll

The process also involves some logistics: ensuring compensation adjustments are reflected in all documentation, HR systems, and payroll systems.

If you use a compensation management tool like Ravio to conduct your compensation review, then you can rest assured that any pay changes made during the cycle will be reflected in your wider compensation structure, such as updating salary bands to reflect promotions or pay increases.

Step 8: Review the success of the compensation review

Once the compensation review is complete, it’s important to reflect and report on how the eventual outcomes align with the initial objectives of the compensation review that were defined way back in step 1. 

This will likely include reporting against key metrics like:

• Budget adherence: budget vs actual costs
• Market positioning: target percentile vs actual positioning and remaining outliers
• Pay equity analysis: before and after view of pay equity

It should also include stakeholder feedback. Did the leadership team feel the process reflected business priorities? Did line managers feel their team received fair outcomes? Do employees have clarity on why they received the pay increase they did? Which parts of the process felt stressful? 

All of this information helps to ensure you can continue to improve and iterate on the process each time.

Frequently asked questions

How often should compensation reviews take place?

The typical approach is to conduct a compensation review once per year, and we'd definitely recommend no less than this to ensure compensation remains fair and competitive. 

However, it has become more common for companies to conduct compensation reviews more than once a year – which might mean:

• Bi-annual compensation review
• Quarterly compensation review
• Annual large-scale compensation review plus smaller off-cycle review to catch any outliers or significant changes within the year (this is how we do our own merit cycles at Ravio).

Some companies are eliminating the traditional compensation review cycle entirely, opting instead for a continuous model where:

• Up-to-date benchmarking data is regularly monitored throughout the year, with market adjustments made as needed to ensure employee pay remains competitive – companies like Netflix and Buffer have adopted this approach. 
• For companies that have a pay for performance model, manager and employee feedback is also gathered throughout the year via a continuous feedback approach,  with pay and progression conversations an ongoing year-round process rather than something that can happen only once per year – an approach that Luminovo and Soundcloud take. 

Regular compensation reviews are ideal for ensuring employee compensation stays fair and competitive all year round, as well as improving employee engagement and motivation. 

However, it can add administrative complexity, so may not be viable for small teams. 

What's the best time of year to run a compensation review?

Most companies start planning their annual compensation review in Q3 and roll out in Q1. 

However, the right timing very much depends on your budget cycles, performance review alignment, hiring plans, and how often you conduct your pay reviews too.

Whatever timing you choose, stick to it and communicate it clearly, so employees know what to expect.

What compensation review tools and templates can help streamline the process?

Traditionally, People Leaders have relied on several complex spreadsheets to run their compensation reviews – benchmarking data supplied by consultants in large spreadsheets, salary bands created in separate spreadsheets, a spreadsheet for budget planning with the Finance team, a spreadsheet for each team’s compensation adjustments, a spreadsheet to review and report on outcomes like pay equity impact.

It’s overwhelming, and it means that manual errors can easily slip into the process – which is a major issue when you’re dealing with employee paychecks. 

Today, compensation review platforms like Ravio make the whole process infinitely less painful. Here’s how it works:

• Step 1: Configure. Select eligible employees, customise manager approval flows, set budgets, refresh bands in line with the market, and define your recommendation logic and merit matrix.
• Step 2: Run. Empower managers to confidently review, adjust, and approve pay changes with visibility into the employee context and guidance to follow pay practices. Collaborate seamlessly using comments, flags, and approval history.
• Step 3: Finalise. Complete the pay review in line with budget, pay equity, and salary band impacts, understand the success of your review, and sync results back to your HR system for rollouts.

Plus, Ravio doesn’t just do compensation reviews, it’s a full, end-to-end compensation management tool powered by our real-time compensation dataset. That means your compensation review process can be connected to your overall pay structures, all in one place. 

Should compensation reviews include equity compensation and bonuses, or just base salary?

Many companies include compensation levers like equity compensation and performance bonuses in their review cycle. 

The mix depends on your total rewards strategy and budget availability. 

For instance, if rewarding high performers to secure their retention is a top priority, then looking at additional ways to recognise their contributions is crucial – whether that’s an equity refresh grant, a one-off bonus, fast-tracked promotions, or additional benefits such as flexible working hours or a 4-day work week. 

Including other elements of total compensation within the compensation review has the added benefits of helping to keep budgets on track and supporting pay equity – when base salary increases are the sole way to recognise employees, inconsistencies can quickly arise. 

What is the average salary increase from a pay review?

It varies from company to company, but typically the standard annual salary increase is in the region of 3-5%. 

In 2024 the average salary increase in European tech was 5.0% (Ravio compensation dataset, 2024) – but it does of course vary depending on company size, funding stage, job function, etc.

And when we asked People Leaders how much they were planning to increase salaries in 2025, the most common response was between 3-5%. 

How do I justify a salary increase that's below inflation?

Transparent communication is key. Share the budget constraints, explain how performance and market data factored into decisions, and acknowledge economic pressures while reaffirming your commitment to fair pay. 

Showing the data behind the decision can help too – tools like Ravio make it possible to show employees the salary benchmarks that were used to make decisions, and how their salary compares to the market in reality, outside of just inflation as a factor.

What's the difference between a compensation review and a pay rise?

A compensation review is the structured process of evaluating pay across the organisation, whereas a pay rise is an individual outcome. Not all reviews result in a pay rise – but every raise should result from a fair, structured pay review process.

How do I handle employee disappointment with their performance rating or pay increase?

Coach managers to have empathetic, transparent conversations and provide employees with actionable feedback and development goals.

Having clear rationale and process transparency helps mitigate negative reactions, ensuring that managers are well-equipped to explain the 'why' behind decisions using data and clear frameworks.

Should compensation reviews be tied to employee performance?

Most companies do tie compensation reviews to employee performance. 

Compensation is a vital lever for recognising and rewarding the contributions of employees towards company goals – whether through a merit increase to base salary and/or equity compensation, or a performance bonus system. Plus, performance-based salary increases are a way to ensure career development is linked to pay progression within salary bands, as employees work towards a promotion to the next level. 

However, some People Leaders argue that pay for performance isn’t always positive.

The arguments against increasing compensation based on performance are that it can encourage an individualistic workplace culture which reinforces hierarchies, raises feelings of unfairness, and discourages cooperative working. Research also suggests performance raises can damage the intrinsic motivation of employees to engage with their work. 

An alternative to strictly pay for performance models is to adjust compensation to align with changes to market rates, using a data-driven approach to ensure fair and competitive pay for all without being tied to individual performance. Naturally, some companies also opt to combine the two.

Should compensation reviews include an annual across-the-board inflation raise?

The economy has been shaky (to say the least!) in recent years, which has led to much discussion around whether compensation reviews should include an across-the-board inflationary raise.

Inflation brings with it increased cost of living for employees, and a pay raise in line with inflation ensures that employees are no worse off year on year.

However, inflation also brings with it an increased desire for job security, meaning that churn is lower as employees are less willing to change roles and there is less need to incentivise retention through compensation increases. Plus, there’s also the question of what happens when the economy is strong and in negative inflation – companies can’t roll back the inflationary raise at this point.

Ultimately, the decision of whether to give inflationary raises is personal to your company, and is a principle to be agreed as part of the overarching compensation philosophy and approach.

Can we run compensation reviews without performance reviews?

Yes, some companies decouple the two. 

In this scenario, the compensation review focuses on factors like inflation and maintaining alignment with market data, whilst the performance review focuses on employee feedback and progression – which might include compensation increases to reflect progression or promotions. 

The performance review can be a stressful time for employees when it feels like income is on the line, so decoupling the two can help to bring clarity on the factors that go into pay decisions.  

Some companies will also have a salary review model that includes both market adjustments and performance recognition, but through separate mechanisms – for instance, market adjustments might impact base salary increases, but performance is recognised via equity refresh grants or a one-off performance bonus.

What are the biggest challenges when running a compensation review?

Here are the biggest pay review challenges according to three experts: 

• Navigating a myriad of stakeholders who all have different opinions on how the compensation review should be done – Vaso Parisinou, Chief People Officer at Ravio. Read more >
• A lack of overall compensation structure means that the decisions made during compensation review are inconsistent – Becky Brawn, People Partner at People Collective. Read more >
• Poor communication with employees leads to a compensation review that doesn’t feel fair or transparent for the team – Alistair Fraser, Founder and Compensation Consultant at Justly. Read more >

How can you prepare for a compensation review process?

Given the amount of moving parts and stakeholders involved in a compensation review, getting prepared well in advance of kick off is key.

Here’s a few tips to get prepared: 

• Remind the team of your compensation philosophy. A company’s compensation philosophy informs their approach to compensation reviews e.g. how employee compensation should compare to the market, how high-performers are recognised and rewarded, etc. It’s therefore important that all stakeholders have this top of mind. 
• Agree the criteria for compensation adjustments. The two biggest factors in compensation reviews are market benchmarks and performance ratings, but how these are factored into adjustments varies from company to company depending on the philosophy and strategy behind compensation. Getting alignment on this early on in the process is key to avoiding issues with conflicting opinions and human bias later down the line.
• Review your benchmarking data provider(s). Accurate and up-to-date benchmarking data is key to a smooth and fair compensation review. This has historically been a lengthy and painful part of the process due to reliance on complex and outdated salary survey spreadsheets from traditional consultants like Mercer or Radford. With software tools like Ravio now available, this no longer needs to be the case, so we’d recommend reviewing your benchmarking options if you’re still using those traditional salary survey providers.
• Set and communicate timelines to all involved. Compensation reviews can take a long time, exacerbated due to the amount of back-and-forth involved due to many stakeholders. Ensuring that the People Team has enough time to deliver the process is vital. Being clear about the timeline and the key milestones when input will be needed with stakeholders will help to keep the process on track. 
• Communicate transparently with employees. Remember that your employees will also be thinking about how they can prepare for the compensation review. The number one way that you can support them during this time is to communicate transparently and document how the compensation review process will work – including the timeline and the criteria involved in compensation decisions.