Payroll

Understanding and Administering Salary Adjustments

20 March 2024

9 min read

Amanda Chua
Amanda Chua

A Pew Research study revealed that 63% of respondents cited low pay as a key reason to quit their jobs, with 42% seeking better pay and promotion opportunities. While company culture, leadership, and work-life balance are important, competitive salaries are crucial for retaining employees. 

Salary adjustments are essential for recognizing and rewarding high performers, but they should not be based solely on performance. Market forces must also be considered to ensure competitiveness with industry standards. Let’s explore how to understand and administer salary adjustments for a motivated and successful workforce. 

Understanding Salary Adjustments

Salary adjustments refer to the changes made to an employee’s compensation based on various factors, including performance metrics, shifts in job roles, and changing market conditions. These adjustments typically manifest as salary increases through bonuses, raises, or promotions. However, they may also entail reductions in pay during periods of financial strain within the company. Companies maintain workforce stability and improve employee motivation by opting for salary adjustments instead of resorting to layoffs during lean periods. 

Reasons For a Salary Adjustment

Salary adjustments can occur for various reasons, such as an increase in job responsibilities, changes in industry standards, or shifts in organizational structures. 

Performance-based

Your top performers should be financially rewarded for meeting targets, contributing innovative ideas, and demonstrating exceptional leadership. Regular performance reviews are essential to accurately recognize and compensate these employees. Failing to do so could lead to high cost of recruitment. Conversely, underperformance may warrant a salary decrease. 

Market forces

To attract and retain talented employees, it’s crucial to provide competitive salaries that match industry standards for similar positions. Offering below-market salaries can make it difficult to recruit qualified candidates and may cause high-performing employees to seek better opportunities elsewhere, affecting attrition rates.

Internal adjustments

Internal adjustments refer to changes within a company that impact employees’ salaries, such as shifts in job responsibilities or company structure. For example, a promotion to a higher position with more responsibilities would warrant a salary increase. 

Similarly, if the company reorganizes its departments, salary adjustments would align with the new structure. These adjustments ensure employees’ salaries reflect their roles and contributions within the company.

Types of Salary Adjustments

Let’s explore the types of salary adjustments to ensure comprehensive coverage for employee satisfaction

Merit increases

Merit increases are awarded to employees for exceptional work, meeting or exceeding goals, and going beyond set expectations. These salary adjustments are based on individual performance and contributions to the company. They serve as incentives for employees who consistently excel. An average merit increase is anywhere between 3% to 5% and motivates employees to strive for excellence. They can be awarded annually or directly tied to performance. 

Cost-of-Living Adjustments (COLA)

To ensure your employees can maintain a decent standard of living, it’s essential to offer salaries that match this high cost. For example, Singapore stands out as the priciest city in Asia, with a cost of living surpassing that of 94% of cities worldwide. Monitoring inflation and the rising cost of living in specific geographic regions is essential to prevent employee stress and burnout due to low payouts. Implementing period salary adjustments will help retain top talent and keep them thriving in their roles. 

Market adjustments 

HR departments should conduct and analyze salary surveys, job market reports, and benchmarking data from similar organizations. This data is then compared to the current salary structure to identify any discrepancies. 

Salary adjustments are recommended to align the organization’s salaries with market rates. This may involve increasing salaries that are below the market average or adjusting salaries downward if they exceed market rates.

Equity adjustments

Equity adjustments are made to ensure pay parity and fairness among employees within an organization. It is important that employees in similar roles or with similar skills and experience are equally compensated. 

These adjustments become necessary when disparities exist, such as significant salary differences among employees in the same department. They are intended to rectify pay inequities and eliminate gender discrimination and other biases in the workplace. Organizations must actively identify such issues to promote an equitable working environment. 

Read next:

Key Considerations for a Salary Adjustment

salary adjustment

While making salary adjustments, it is important to consider the following:

Budgeting

When planning for salary adjustments, it is essential to establish a HR budget that takes into account the organization’s financial resources and constraints. Determine the amount that can be allocated towards salary adjustments without compromising other financial commitments. 

Focus on critical job roles that are at higher risk of turnover due to salary disparities. Additionally, maintain flexibility in the budget to accommodate unforeseen circumstances or new priorities that may arise during the year.

Communication

Employees require clear explanations for salary adjustments within the organization, especially if there are reductions or raises for specific positions. Communicate these adjustments in a timely manner, ideally shortly before or when they will take effect, such as the beginning of a fiscal year or performance review cycle.

Consistency

Ensure employees do not perceive favoritism or unconscious bias during salary adjustments by establishing clear guidelines and criteria. Maintain consistency across different departments, roles, and levels. Regularly review salary structures and adjustment processes to identify and address any disparities in compensation.

Compliance

Organizations must ensure that the salary adjustment complies with applicable labor laws, anti-discrimination regulations, and contractual obligations. Thorough audits and reviews of salary adjustment practices can help mitigate compliance risks and ensure alignment with legal standards. 

Confidentiality

Maintaining salary confidentiality prevents gossip and feelings of unfairness among employees. In fact, many jurisdictions have laws governing this. Ensure confidentiality during salary adjustments by: 

  • Limiting access to salary information to HR and relevant managers.
  • Using secure communication channels like encrypted emails or password-protected documents.
  • Emphasizing confidentiality with employees involved in the process.
  • Establishing clear policies for handling salary information.

Steps to Administer a Salary Adjustment

Administering salary adjustments requires focusing on many different areas to ensure the calculation and implementation align with the business objectives. Here’s how:

1. Set objectives and budget

What are your salary adjustment goals? Do you aim to reduce turnover by offering competitive packages to enhance employee engagement or boost employee morale by rewarding high performers? Clarifying these objectives helps determine who receives adjustments, how much, and when. Communicating these goals ensures transparency.

After setting your objectives, budget for adjustments within your means. For example, to stay competitive, a 5% increase might be necessary. Calculate your total salary expenditure for the upcoming year. For example, if it’s $10 million, a 5% increase would require a $500,000 budget for adjustments. Distribute this based on performance and market competitiveness.

2. Define criteria and policies

Clarity is crucial among all stakeholders regarding who will receive salary adjustments. Clear guidelines and policies should be in place, considering factors like performance metrics, experience levels, internal equity, and more. 

When setting criteria, ensure policies are in place to manage salary adjustments: 

  • Allocate the total adjustment budget annually based on priorities and financial capabilities.
  • Maintain pay parity for fairness among employees in similar roles.
  • Determine increment percentages based on demonstrated improvement.
  • Make adjustment decisions through comprehensive reviews considering performance and goals.
  • Ensure salary adjustments comply with relevant employment laws and regulations.

3. Collect data and conduct reviews

With your budget set, gathering employee information is key for salary adjustments. Identify top performers with critical roles and assess their improvement. Use credible sources like:

  • Performance evaluations: supervisor reviews provide insights into contributions, strengths, and areas for growth
  • Employee records: review tenure, promotions, and past salary adjustments to ensure fairness
  • Employee feedback: gather input through employee satisfaction surveys or meetings to gauge perceptions of compensation relative to contribution

Analyze this data for trends and patterns. Discuss findings with HR, department managers, and senior leaders to determine adjustments. 

Calculate and communicate adjustments

With clarity on which employees will receive salary adjustments, use the collected data to calculate each adjustment based on set criteria. Ensure adjustments align with budgetary constraints while keeping top talent satisfied. 

After calculating salary adjustments, notify employees promptly and clearly. Schedule individual meetings or send personalized communications to discuss adjustments confidentially. Clearly communicate the factors considered in the calculation and the effective date of the adjustments.

Omni Tip:
Keep precise records of each employee’s salary adjustments, supported by data, for future reference.

Implement adjustment and monitor

After approval, HR oversees salary adjustment implementation. Update records and payroll systems accurately, which can be simplified with payroll systems

Monitor adjustments for fairness, transparency, and policy adherence. Regularly review decisions for compliance with performance criteria, budgets, and tenure guidelines. Ensure fair distributions across departments or demographics.

Perform reviews and adaptation

Regularly review the salary adjustment process to ensure alignment with organizational goals. The process should enhance current employee satisfaction and attract potential talent.

Involve relevant stakeholders, including HR managers and employees, to gather diverse perspectives and improve the process.

Harnessing HRIS for Efficient Salary Adjustment

salary adjustment

Administering salary adjustments requires careful planning, clear communication, and adherence to policies and regulations. While this can pose a challenge, utilizing the rightHR tools can streamline the process, ensuring efficient management of salary adjustments.

All-in-one HR softwares like Omni can help you and your company efficiently tackle salary adjustments. By streamlining processes and gathering valuable insights through data analytics, our software can provide an ideal framework for businesses invested in creating a fair and transparent workplace. 

Omni allows you to design, schedule, and conduct performance reviews that offer insights on promotions and advancement. From defining performance metrics to conducting evaluations, our solution provides you with real-time feedback to enhance salary adjustments, foster high performance, attract top talent, and drive growth for your modern business. 

To explore why Omni is the preferred tool for modern businesses aiming to cultivate an inclusive and fair culture, book a demo with our team today.

Get started today!

Get a 14-day free trial and see how Omni can work for your business.