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Performance reviews first became a Standardisedsystem in companies in the early 20th century, mainly to decide on promotions and pay. By the mid-1960s, they had become widespread, with more than 90% of large U.S. companies using some form of performance review. Over time, however, it became clear that linking performance reviews directly to salary could lead to biased feedback and reduce their effectiveness.
In this blog post, we will discuss what performance reviews and salary reviews are, why it’s a good idea to separate them, and best practices for conducting both.
What Is a Performance Review?
A performance review is a regular evaluation where a manager and employee discuss job performance, achievements, and goals. During this process, they share feedback, identify areas for improvement, and ensure the employee’s work aligns with the company’s goals.
Key Components of a Performance Review
Evaluation of Goals & KPIs
During a performance review, managers evaluate how well an employee has met established goals and KPIs, assessing both the quality and quantity of work. This helps determine alignment with expectations and highlights areas where goals may need adjustment to support organisational priorities and individual growth.
Feedback on Strengths & Weaknesses
Feedback is a key part of the review process, where managers highlight employees’ strengths to reinforce good practices and recognise accomplishments. They also identify areas for improvement, offering constructive guidance to address challenges. This balanced approach ensures employees understand what they do well and where they can grow.
Setting Future Objectives
A key outcome of a performance review is setting goals for the next review period. These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART). These goals help employees stay focused, motivated, and aligned with the company’s strategic direction, while giving managers a framework for assessing progress in the future.
Career Development Planning
Performance reviews also provide an opportunity to discuss long-term career aspirations. Managers and employees can identify skill gaps, training opportunities, promotions, or new responsibilities. This planning ensures that employees are supported in their professional growth and helps the organisation retain talent by showing a clear path for advancement.
Key Components of a Performance Review
Performance reviews are conducted at regular intervals, and their frequency can vary depending on an organisation’s policies and management style. They may be conducted:
- Annually, offering a comprehensive overview of an employee’s performance over the year.
- Bi-annually, allowing for more frequent feedback and adjustments.
- Quarterly, often in more dynamic workplaces, providing continuous feedback and enabling quicker alignment with changing business goals.
Ultimately, there is no single “right” approach. The ideal frequency depends on each company’s specific needs, priorities, and work environment, which can differ widely from one organisation to another.
What Is a Salary Review?
A salary review is a regular assessment of an employee’s compensation that is carried out to ensure it remains fair and competitive. It considers factors such as performance, market benchmarks, and internal equity, along with company budget, to determine any salary adjustments or increases.
Key Factors Considered in Salary Reviews
Market Salary Benchmarks
Employers compare salaries with industry standards to stay competitive, analysing data from similar roles, industries, and locations. If an employee’s pay is below market average, it may be adjusted to help attract and retain talent.
Market Salary Benchmarks
A company’s ability to offer salary increases depends on its financial health. Strong revenue and profitability allow for raises and bonuses, while budget constraints or economic challenges may limit adjustments, regardless of individual performance.
Employee’s Role & Responsibilities
Salary reviews take into account the scope and complexity of an employee’s role, such as leadership, project management, or increased workload can justify a higher salary to reflect the role’s added value.
Individual contributions
High performers who consistently meet or exceed expectations, contribute to key projects, or drive measurable results are more likely to be rewarded through salary increases or bonuses.
Internal pay equity
Organisations that strive for fairness in compensation across similar roles. Internal pay equity ensures salaries are balanced and consistent, preventing dissatisfaction or retention issues, with adjustments made to align pay within teams or departments.
Frequency of Salary Reviews
The timing of salary reviews varies based on company policies, financial situations, and market conditions. Common triggers include:
- Annual Cycles: Most companies review salaries once a year, often aligned with the financial year, to assess performance and budget.
- Promotion or Role Change: Reviews occur when an employee takes on new responsibilities, a higher-level role, or additional tasks.
- Market Shifts: Rapid changes in industry pay rates may prompt adjustments to remain competitive.
- High Turnover: Difficulty retaining or hiring key employees may indicate that compensation needs to be adjusted.
Organisations set the frequency of reviews according to their financial capacity, workforce needs, and overall strategy, so practices can differ widely.
Why Performance and Salary Reviews Should be Conducted Separately
Many Organisations debate whether to combine performance and salary discussions into a single meeting. While it may seem convenient, separating these two reviews offers several key benefits:
Reduces Pressure and Anxiety
When performance feedback is tied directly to pay, employees may become defensive or overly focused on salary, rather than learning from constructive feedback. Separating the meetings allows employees to focus on professional growth first and discuss compensation in a more objective context later.
Encourages More Honest Feedback
Managers are more likely to provide candid feedback on areas for improvement when the conversation isn’t overshadowed by salary negotiations. This transparency leads to better development plans and improved performance over time.
Flexibility in Timing
Separating the reviews allows organisations to schedule salary reviews based on financial cycles or budget availability, without delaying important performance discussions. Employees receive timely feedback on their work, while compensation decisions can be made when resources allow.
While performance and salary reviews are connected, conducting them separately promotes clarity, reduces stress, and leads to fairer, more strategic decisions for both employees and the organisation.
Main Differences Between Performance and Salary Reviews
While performance reviews and salary reviews are closely related, they serve distinct purposes. One focuses on growth and development, while the other focuses on compensation and rewards. Understanding the difference helps employees set realistic expectations and empowers employers to create fair, transparent processes.
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