Pay reviews: A complete guide for HR managers

A pay review is a formal assessment of an employee’s work performance used to determine whether they have merited a pay increase. Typically, a pay review may also factor in an employee’s tenure, changes in the market for talent, or incoming budgetary concerns. 

Conducting effective pay reviews is important for employees because:

• It motivates: Employees who know that a rise may be around the corner may invest more time and effort into their role.

• It helps employees reach goals: Knowing there are benchmarks to hit — and hitting those benchmarks — can be quite fulfilling for employees.

• It improves retention rates: Employees that know they have room to grow, both in title and in salary, are more likely to stay with your organisation.

• It encourages fairness: If all employees are eligible for a pay rise based on performance, this levels the playing field.

Pay reviews are typically conducted annually, but some managers will perform one after the completion of a large project. They may also be performed if someone receives a promotion. 

Several factors are considered during the review, including market data, available budget and personal and professional goals. There’s no legal obligation to hold a pay review, but many companies do so as an added perk of their reward programme. 

A salary or pay review is often conducted in three phases. These include: 

• The planning phase

• The review phase

• The information phase

Let’s take a deeper look at them to gain a better understanding of the pay review process.

Gain access to HR analytics that power people strategies

To inform and empower your people strategy, your HR team needs to have constant access to clean and custom analytics and reports. Learn about HR analytics and reporting with Personio today.

Drive strategy through custom reports

The starting point for a smooth pay review process is good preparation. These are the steps to follow:

Figure out what the pay review is meant to accomplish. Share the objectives of the meeting with everyone involved in the process. This helps manage expectations while guiding employees and other stakeholders on how to prepare for an upcoming pay review.

Conduct an audit of employment contracts to determine if certain clauses could impact the process if ignored. For example, are they entitled to a certain pay rise per year? Is their pay frozen due to a probationary period? Confirming any restrictions or obligations before the pay review process helps avoid a breach of their agreement and serious legal penalties.

Managers should log every decision, data source, and approval rationale ahead of a pay review discussion or decision. A clear explanation of how you arrive at a pay decision is essential for employee trust and to manage the potential of risk — especially if legislation like the Equality Act (2010) or the EU Pay Transparency Directive apply.  

Next, evaluate the job descriptions for each employee’s position and determine if they properly fulfill the expectations for that role. Each description should clearly represent the level of responsibility, the tasks they’ll perform and the anticipated level of job performance. This helps create a benchmark for your employee’s achievements. 

After examining a job description, go to an external job site and find if the employee’s current salary falls within industry standards. An internal audit of employees’ salaries can uncover serious wage discrepancies between people with similar roles, which the pay review can help correct.

Before any company-wide salary review process, it’s wise to complete a salary benchmarking exercise. An in-depth benchmarking review allows you to compare data points like scope, seniority, job family, and job title to find the average salary across your industry and the wider market, and calculate compa-ratios before your internal pay review discussions take place. 

Define the budget you’re working with during the salary review by measuring against your established goal for the meeting. Whether offering pay increases to keep up with inflation or to reward overachieving employees, knowing your budget and the schedule for appraisal helps ensure every salary is increased fairly. 

Once all your planning is finished, leadership within your organisation can begin to conduct performance reviews. During the process, they evaluate how well employee performance aligns with their expectations. This framework is then used to guide the pay reviews.

It’s important for your managers or HR representatives to accurately measure an employee’s performance to avoid unfairness or accusations of discrimination. Below is an overview of how to rate your worker’s accomplishments during the pay review process.

Employees should be kept informed about what the pay review process will entail as the planning stage evolves. They should know exactly what to expect from the pay review process, including which aspects of their position will be reviewed. Springing a performance review on your staff makes it feel more like a penalty, especially if there are extenuating circumstances for a drop in performance.  

Issue survey and self-evaluation forms before the pay reviews take place to gain greater insight into your staff. How they view their responsibilities and performance can help you identify weaknesses in their job description and find solutions for them to increase productivity. Additionally, surveys can also work as an announcement that a review is underway and give employees time to raise concerns in advance. 

An Employee performance rating scale splits the responsibilities of a position into several categories you can use to rate employees in those areas. Establishing a standardised scoring system makes it easier to indicate when an employee’s performance falls above or below expectations in one or more areas. 

Remember that performance rating scales are just one of many inputs to help decide where an employee falls on the salary scale. Market data, internal equity, tenure, and other data points are all valuable to consider alongside feedback and ratings.  

The last step of the typical pay review process is to communicate results and feedback to your staff. Employers generally send out salary review letters containing the review’s outcome, any ensuing changes to the employee’s pay and the exact reason why their pay is being increased. This helps ensure that the process is seen as transparent, fair and objective. 

Salary reviews face many challenges, including planning and organisational issues, a lack of data and documentation, and underdeveloped feedback processes. There’s also the opportunity for bias to creep in — especially if you don’t offer clear guidance to managers.

Common pitfalls include: 

• Manager favouritism and bias: Individual opinions can distort pay decisions by rewarding visibility, likeability, or personal relationships over evidenced contributions.

• Overlooking stable performers: Quiet yet effective team members are passed over for pay increases, even though their work is stable and appreciated by others.

• Incomplete documentation: A lack of evidence, feedback, or policy information means that salary reviews aren’t handled as effectively as they should be.

• Over-reliance on performance ratings: Managers give more weight to performance metrics and less to other success factors like skill development, innovation, or process improvement.

• Ignoring industry salary benchmarks: Industry standards aren’t checked or followed, so in-demand talent is more likely to pursue opportunities elsewhere — especially ones that offer above-market compensation.

• Unmonitored compliance risks: Mistakes in the review process can trigger compliance risks, especially around transparency and gender pay gaps for UK and EU employees.

Comprehensive salary review documentation provides a traceable audit trail that defends compensation decisions, proves compliance with equal pay laws, and ensures year-over-year operational continuity. Logging written rationales, market benchmark sources, approval chains, and performance metrics protects organizations against tribunal disputes and manager bias.

Fair and easy compensation management

Make fairer decisions with visible performance data, salary bands, and built-in guidelines.

See it in action

Artificial intelligence (AI) can improve the salary review process for HR, managers, and employees. AI can remove barriers, improve transparency, and remove the repetitive admin of annual pay reviews — but, as with any technology, it needs to be used intentionally.

AI can support improvements like: 

• Improved pattern recognition: Detects pay compression, regional slippage, and other anomalies faster than traditional compensation management systems.

• Real-time modelling: Model multiple merit matrix scenarios at once, so you can see the impact on the budget before you go live with proposed compensation changes.

• Continuous market benchmarking: Receive fresh data on market averages to inform upcoming pay reviews.

• Always-on approach vs. annual reviews: Switch from manual one-time yearly reviews to a system where pay and benefits are updated regularly based on real market insights.

• Skills-based pay decisions: Collect and analyse data on capability, proficiency, and skill scarcity, instead of relying solely on traditional signals like job title or tenure.

• Improved risk awareness: Automatically scans for pay equity issues and flag them as potential risks before they become a problem.

AI enhances salary reviews by identifying anomalies, detecting salary compression, and comparing different budget scenarios in real time. AI tools can analyse data and introduce findings quickly, allowing managers and senior leaders to focus on the human and strategic elements of compensation management.

Whether your organisation is all-in with AI or approaching it with caution, human oversight and governance should be a priority. Transparent guidance on how to use AI, what it’s used for, and what it’s used alongside is essential.

Combine AI use with: 

• Strict algorithmic guardrails: Define what the AI assistant has access to, how it uses data, and what actions it can take alone (e.g. can it make changes without human approval?)

• Human oversight: Keep humans as an essential part of the process — either at the lead (supported by AI) or in the loop (as a final reviewer before changes go live).

• Bias testing: Run regular tests to ensure that the algorithm isn’t introducing bias instead of removing it.

• Strategic judgment: Retain senior leaders as owners of the compensation management process, including deciding how AI is used and who is held accountable.

• Clear audit logs: Keep transparent audit logs that cover how the AI found data, applied logic, and arrived at the final decision.

For most teams, AI is best used alongside clear guidelines and solid judgment from senior leadership and HR. AI can analyse data at scale and remove bias from the process, but teams still need a human in the loop to make the right decisions.

Understand compensation at a glance

Turn complex numbers around salary and bonuses into a simple view of how your employees are being paid with Personio Assistant.

Discover Personio Assistant

The pay review process can be time-consuming, but having access to the right tools helps. Personio's compensation management feature adds a fairer way to handle compensation reviews, using the data you already hold in your HRIS.

Personio's compensation management highlights include:

• Compensation cycle management and monitoring

• Support for multi-currency and complex scenarios

• Salary bands, performance ratings, and compa-ratios

• Supervisor guidelines for decision-makers

• Clear privacy and access controls

• A single interface for salaries across teams

• Instant notifications and reward letters

Software built for how HR really works

Discover the AI-powered platform that connects core HR, talent, and payroll preparation. See why 16,000+ companies trust Personio as their HRIS.

Book your free demo

The salary review process for individuals typically takes between 2-8 weeks, depending on the size of the organisation and how structured the experience is. The full compensation review cycle can take up to six months, including planning, benchmarking, and salary reviews.

Most UK businesses conduct pay reviews annually, and they become an expected part of the year for employees. Some organisations run biannual reviews every six months instead — this is common for businesses focused on innovation and growth, or where retaining talent with market-benchmarked salaries is essential.

UK organisations aren’t required by law to hold pay reviews, but there are two situations where they must be performed: if it’s part of a collective bargaining agreement, or if it’s part of an employee’s contract. If annual pay reviews are part of a contract, they must be completed — otherwise it can be seen as a breach of contract.

The pay review process looks at a number of data points, including individual contributions and goal performance, talent retention and salary benchmarking, and how well the business is performing.

The planning phase in a pay review process involves setting objectives, reviewing employee contracts and job descriptions, examining pay conditions in the market, confirming budgets, and making arrangements for the pay reviews themselves.

The performance review phase includes a transparent process, self-evaluation forms, manager and peer feedback, employee performance rating scales, goal progress and setting, and an open discussion between employee and manager as part of a scheduled review meeting.