How to Run an Annual Remuneration Review Process

Annual remuneration reviews can become unnecessarily complicated.

Managers submit increases, Finance calculates the cost, HR checks market data, employees have expectations about what they should receive, and senior management tries to work out whether the organisation can afford the final number.

A good annual remuneration review brings these decisions into one consistent process.

The objective is not simply to decide who receives a pay increase. It is to make sensible remuneration decisions based on the market, employee performance, internal equity and what the organisation can afford.

Here is a practical way to run the process.

Step 1: Start with the remuneration budget

Before managers start recommending salary increases, determine how much the organisation can afford.

Suppose the organisation has $10 million in base salaries.

Management approves an overall remuneration review budget of 4%.

That gives an initial salary increase pool of approximately:

$10 million × 4% = $400,000

This does not mean every employee receives 4%.

The 4% is the overall budget available to make different remuneration decisions across the workforce.

Some employees may receive 2%, others may receive 5% or 6%, while some employees may receive no increase.

Starting with the budget prevents the organisation from approving increases individually and discovering the total cost after the decisions have already been made.

Step 2: Decide who is eligible

Set the eligibility rules before the review starts.

For example, employees may need to have commenced before a particular date to participate in the full review.

Someone who joined two months ago at a market-competitive salary may not need another increase immediately.

You should also decide how the review will treat employees who are on parental leave, extended leave, serving notice, recently promoted or employed on fixed-term arrangements.

The important thing is to apply the rules consistently rather than deciding employee by employee.

Step 3: Review the market

The annual review is a good opportunity to check whether your salary ranges and key roles remain competitive.

Look at relevant remuneration surveys, recruitment information, recent hiring experience and other credible market sources.

You do not necessarily need to benchmark every individual job every year.

Focus particularly on roles where the organisation is experiencing recruitment difficulties, significant employee turnover or obvious market movement.

If you use salary ranges, decide whether the ranges themselves need to move before assessing individual employee salaries.

Remember that a 4% increase to the salary range does not mean every employee automatically receives a 4% salary increase.

The range represents the market value of the job, while the employee's salary reflects their individual position within that range.

Step 4: Check where employees sit within their salary ranges

Before asking managers for recommendations, calculate each employee's current position within the relevant salary range.

For example:

This immediately gives managers useful context.

Employee A may have more room for salary progression than Employee C.

However, salary position should never be used mechanically.

Someone sitting below the midpoint may be relatively new to the role, while an employee above the midpoint may have considerable experience or specialist capability.

The numbers should inform the decision rather than make it automatically.

Step 5: Consider performance and salary position together

One of the most practical approaches is to consider two things when determining an increase:

How has the employee performed?

and

Where are they already positioned in the salary range?

An employee who performs strongly and sits low in the range may reasonably receive a larger increase.

Someone performing strongly but already positioned near the top of the range may receive a smaller base-salary increase, with performance recognised through a bonus where appropriate.

An employee whose performance is below expectations may receive a limited increase or no increase, subject to applicable employment requirements.

This avoids the common practice of simply giving the highest performers the largest percentage increase every year without considering whether their existing salary is already well above market.

Step 6: Give managers practical guidance

Managers should not be handed a spreadsheet and asked, "What increase do you want to give everyone?"

Give them some boundaries.

For example:

This is guidance rather than a rigid formula.

Managers should still be able to recommend exceptions where there is a genuine business reason.

The difference is that an exception now needs an explanation.

Step 7: Separate promotions from the annual review

Promotions should not be hidden inside normal salary increases.

If an employee is moving into a genuinely larger role, identify the promotion separately.

Suppose an employee earns $95,000 and their normal annual increase would take them to $99,000.

They are also being promoted into a role with a salary range of $105,000 to $135,000.

The organisation should consider the appropriate salary for the new role rather than simply adding another percentage to the annual increase.

Separating promotions also makes the annual remuneration budget much easier to understand.

Management can see how much is being spent on normal salary movement and how much relates to career progression.

Step 8: Identify market and equity adjustments separately

Some employees may need increases for reasons unrelated to annual performance.

An employee may be materially below the market.

Two employees doing comparable work may have an unexplained salary difference.

A critical role may have experienced substantial market movement.

Label these adjustments separately.

For example:

Annual increase: 3%

Market adjustment: 4%

Total increase: 7%

This gives the organisation a much clearer record of why the employee's salary changed.

It also prevents every unusual increase from being described as a performance increase.

Step 9: Conduct a gender pay equity check before final approval

Do not wait until after the remuneration review to discover that the process has increased a gender pay gap.

Before finalising decisions, compare proposed outcomes for women and men.

Look at:

average increase percentages

promotion increases

market adjustments

bonus outcomes

salary positioning

and employees receiving no increase.

Then investigate material differences.

The purpose is not to force identical outcomes.

It is to identify differences that cannot be reasonably explained before they become embedded in remuneration.

The same review can also help identify other unexplained internal equity issues between employees performing comparable work.

Step 10: Calibrate manager recommendations

Once managers have submitted their recommendations, review them together.

This is where inconsistencies usually become visible.

One manager may have recommended 5% for almost everyone.

Another may have used increases between 1% and 7%.

A third may have given the largest increases to employees who are already the highest paid in their roles.

Calibration allows management, HR and Finance to compare these decisions across teams.

Ask practical questions.

Why is this employee receiving 7%?

Why is this employee receiving nothing?

Why are two employees with similar performance and salary positioning receiving very different increases?

Why is this employee moving above the salary range?

The objective is not to remove manager judgement. It is to make sure similar situations are being treated reasonably consistently.

Step 11: Check the final cost

After calibration, calculate the complete cost again.

Do not look only at the percentage increase.

Calculate the annualised dollar impact.

For example:

Current payroll: $10,000,000

Normal increases: $310,000

Market adjustments: $45,000

Promotions: $70,000

Total additional base salary: $425,000

The original 4% budget was $400,000, so management now needs to decide whether to approve the additional $25,000 or make changes.

Also consider associated employment costs such as employer superannuation and other relevant on-costs when assessing the true financial impact.

Step 12: Obtain final approval

Before communicating anything to employees, complete the appropriate approval process.

For a smaller organisation, this might simply involve the CEO and Finance.

For a larger organisation, approval may involve the executive team, CEO, board or remuneration committee depending on the employee population and governance arrangements.

Managers should not communicate proposed increases until approval is complete.

Once an employee has been told they are receiving a particular salary, reversing the decision creates an avoidable problem.

Step 13: Give managers the information they need for the conversation

Managers should receive more than a spreadsheet showing the new salary.

They should understand:

the employee's current salary

the new salary

the percentage increase

when it becomes effective

whether any part relates to promotion or market adjustment

and how to explain the decision.

Managers should also understand what they should not say.

For example, avoid telling an employee that their increase is lower because another employee needed more money, or that the organisation knows they are underpaid but cannot afford to correct it.

The conversation should focus on the employee's remuneration and the factors relevant to their outcome.

Step 14: Communicate the outcome clearly

An employee should leave the remuneration conversation understanding what has changed.

A straightforward conversation might explain that the organisation has completed its annual remuneration review, considered market positioning, performance and internal remuneration relativities, and determined the employee's new salary.

Where appropriate, explain whether the increase includes a market adjustment or reflects a promotion.

Not every employee will be happy with the outcome.

That does not mean the process has failed.

A well-run remuneration review should allow the manager to explain how the decision was reached even when the employee wanted a larger increase.

Step 15: Keep a record of the decisions

Once the review is complete, retain the final data.

Record:

current salary

new salary

increase percentage

increase amount

reason for adjustment

promotion status

market adjustment

and final approval.

This becomes extremely useful during the next remuneration review.

Instead of trying to remember why someone received an 8% increase last year, the organisation has a clear record.

A simple annual remuneration review timetable

For an organisation with salary changes effective from 1 July, the process might look like this:

The exact timing will depend on the organisation, but working backwards from the effective date makes the process considerably easier to manage.

Keep the process practical

A good annual remuneration review does not require a complicated formula that calculates the "correct" increase for every employee.

It requires good information and a consistent decision process.

Start with an affordable budget, check the market, understand where employees sit within salary ranges, consider performance, identify promotions and market adjustments separately, review pay equity, calibrate manager recommendations and confirm the final cost before communicating decisions.

Most importantly, do not treat the annual remuneration review as simply dividing a percentage budget across employees.

The real purpose is to decide where the organisation should invest its remuneration dollars.

Some employees may need additional movement because they are materially below market. Others may require an adjustment because of internal equity. Strong performers may deserve recognition, while promotions need to reflect genuinely larger responsibilities.

When those decisions are made together rather than one employee at a time, the annual remuneration review becomes much easier to manage and considerably easier to explain.