Performance Review and Merit Increases

performance and reward processes

Performance management, salary reviews, desired behavior of leaders and employees and reward and recognition mechanisms are all very much connected and very much over-lapping with each other. Making changes to any one of these areas without considering how the other areas will be impacted would be foolish. People will always adjust their behaviors and efforts to ensure the best personal outcome for themselves. It is up to the company to ensure that these interlinking areas are in harmony with each other in order to reward and drive towards desired behavior and outcomes.

The resource I have here ties a specific overall individual performance review score to a specific range of possible merit increases. Management demand to have a fixed and structured approach for this is easily recognized, but it is also true that more than one aspect should be factored into selecting overall increases for employees. Some additional factors could include what is the budget for increases that year? How did the company perform in the last year (overall)? What is the labor market like at that time – are some jobs in high demand and do you risk retention issues if you do NOT ensure good compensation packages that compare well to the local market?

I would caution anyone to consider unintended outcomes when attempting to standardize and establish rigid structures for considering individual performance and linking that in a fixed way to increase percentages. Be careful what you specify and indirectly require from managers and employees. Your intentions may be good: to reward your best performers for their contributions and to ensure those with lesser performance improve or leave the company. You may end up with people for example not sharing information or not collaborating with others if doing so could hurt their own income potential.

One approach to tying the performance review process directly to the merit increase process is attached here. This example does not take into account some of the considerations highlighted above when it comes to selecting the actual increase percentage and I chose to share this resource anyway, because it does happen that HR is asked for a process like the attached on a regular basis and I want to make an example available to you if you find yourself in that situation. I do suggest you consider ways to incorporate the other aspects as outlined above when you finalize your proposal to implement a more structured approach to tie performance management to compensation review.

Performance Review process linked to Merit Increases resource link.

My main advice is to think it through carefully to ensure your good intentions have the best chance of being reinforced by your performance management and salary (or compensation) review processes. And I would also add that you should remain flexible in working with your documented process. Be ready and willing to adjust and update it as you gather input about how successful your process is in driving desired outcomes – results and behavior that you and the executives would like to see in your pool of employees.


Performance Management Process

final perf imp

One of the most fundamental areas where HR has to add value to companies/organizations is to manage and improve the outcomes of the Performance Management Process. HR’s accountability clearly goes beyond the setting and maintenance of  a process to manage individual performance outcomes. The resource I will share here is however mainly focused on the individual aspect of the Performance Management Process – including some links to the salary/compensation review process and the individual development process.

This generic Performance Management Process shows the various basic steps that would need to be followed over a 12 month period to create an annual process. There are references to the link with a salary/compensation review process and also the link with identifying and reviewing individual development needs and progress along achieving improvement goals.

Performance Management Process resource link.

Implementing a process like this would need a change management plan if your organization has never done anything like this before. Even if you have had some form of a performance management process in place, but would now like to expand on it to include some of the elements shown in the attachment, a change management plan would be recommended. Before you start you would of course ensure that the manager/director, who is accountable for the performance management process at your organization, is aligned with your ideas and suggestions and strongly supports the direction you would like to take.

The benefits of having a documented process for Performance Management (like the shared resource) are:

  • It is easy for HR to ensure new employees, current employees, new supervisors and existing managers understand the process and their role in the process.
  • It is a way to help stakeholders understand and then prepare for the input and activities that need to be completed in order to support the process.
  • Linked to a balanced score card, this process can make it clear to individuals/departments how they collectively and as individuals support the attainment of larger organizational performance goals.
  • Knowing that there are check-in moments or feedback and discussion moments around performance expectations, progress and development needs and activities can be a strong way to reinforce employee engagement as many employees tend to consider other employment options when they feel that their development and career progression goals are not being met by their current employer.

This list is not exhaustive. For more information about benefits see links like Benefits of performance management or Importance of Performance Management


Employee Feedback Planning Template


Giving and receiving feedback especially around undesired behavior can be a daunting task. Not only is it typically hard for employees to hear corrective feedback, but it is also typically hard for managers and supervisors to give that kind of feedback. It nevertheless remains an important part of ensuring that performance expectations are set and met.

This template helps a manager or supervisor think through the important aspects of giving feedback to an employee and helps to plan the actual feedback meeting.

Employee Feedback Planning Template

The template and approach also helps plan positive feedback to employees. This aspect is often neglected, but equally valuable in helping employees understand what specific actions and communications are valued and should be continued.

Some reminders:

  • Never give important feedback via an email or sending this worksheet to the employee. It should always be done in person or at least by phone or skype – if you have remote team members.
  • The feedback should be given as soon as possible after the event to minimize surprises at the annual performance feedback meetings and to ensure the employee still has a good recollection of the situation or event that took place.
  • Do allow the employee to respond once you have shared the feedback to ensure that your message is understood and that you get an opportunity to understand any nuances which you may not have been aware of.
  • It is always a good idea to agree on a check-in moment at some time in the future. This is an opportunity to see if the employee may have further questions or comments at that time or perhaps he or she worked on improving a particular skill and may have some successes to share.

Salary Review Template

salary review2

Arguably the most contentious two processes in the HR world have to be performance feedback (part of Performance Management processes) and salary reviews (part of Reward and Recognition processes).  Most employees and managers and of course writers of trendsetting articles around these topics have strong opinions in all directions about what should be happening and how bad a specific approach is. I will refrain from picking sides at this time, but I will instead share a simple template with you for conducting a salary review for those reporting to you and who are most likely then a part of your budget.

Many HR departments of large companies have access to an online tool for salary reviews, but I know there are also many smaller companies who do not have the deep pockets and may have some use for a tool/template like this one.

The basic principles for using this tool are:

  • When you hired someone, some years earlier, his or her salary was X, let’s say that represents 30,000 EUR per year. Some years later there may have been inflation meaning the person’s buying power went down and perhaps to hire someone new for the same role the average market price may now be 32,000 EUR per year.  You need to make sure to retain the person you hired and avoid having to find someone new for the role by reviewing his or her salary on a regular basis. Typically once per year.
  • Your employee has been delivering work for you over the last year and he or she maybe did it better than others in the same role. That performance which exceeded your expectations deserves to be rewarded. You could do it as a discretionary bonus or you could review the person’s annual salary and consider an increase.
  • Some employees bring increase requests to their bosses on a regular basis while others may just be waiting for their bosses to realize how much effort they put in and how many good results they are achieving. Without a solid salary review process which is run uniformly on an annual basis (at least) you could run the risk of not treating all of your employees in the same fair manner when it comes to salary reviews. It could happen that only those employees requesting regular increases are receiving them while those who do not ask do not.

Salary Review Template

The template shows all of the current employees on your budget plus what they are earning now, what their last performance review overall score was, and some basic employment history in terms of experience years and last promotions. Hopefully you have budgeted for annual salary increases and you have planned for at least between 2 and 3% in overall annual salary increases.  (This could vary by country/region in terms of local labor laws, minimum wage adjustments, inflation, scarcity of resources as applicable to those working for you etc).

Giving everyone a standard increase may seem fair and easy to you, but it comes with some risks. If you reward those who work harder and achieve better results the same way as you do those who do not, you risk demotivating your hard workers and may eventually lose them to your competition. Those who are not working very hard or very smart are not motivated to change anything either since they know they will get their standard increase no matter what they do. So don’t go for the “one size fits all” approach. 

This template assumes that you will use all of your budget and you will distribute it among your employees depending on the factors that you have decided to take into account i.e. performance review scores, years of experience, specific role (if there is a scarcity and steep inflation in salaries for that role in the marketplace around you) etc. The sheet keeps track of your overall budget so you can see if you have overspent or underspent overall.

The difference between the types of increases are simple – merit increase relates to the performance of the person while equity increase relates to the person being basically too far below what that job pays at this given moment in time. This could be either because you hired the person in at a too low a salary or you have neglected to review his or her salary for too long and the current market pays much more for someone with the same sets of skills and abilities as the person in your group.

Performing a fair overall salary review is not easy to do since many factors will present themselves as you go through this sheet as a manager. You will wonder if person A would leave if you don’t give them the increase which he or she requested or demanded some weeks before. You will wonder if you can give another person a zero increase since he or she already earns so much more than the others. You will be worried that a lot of angry employees will want to talk to you after these increases are communicated (by private letter from HR or discussion with you).

Do talk to the most senior HR person in your region/location for support in helping you make sure you have made the best choices for each of the employees concerned. A best practice that can also help with fairness is to have a round-table review with other managers at the same level as yourself to ensure all of you are using the same principles for determining salary reviews.  I strongly recommend that you include the most senior HR person supporting these managers in the round-table review to help with guidance and support when there are opposing views or concerns.

Note: This template is a simple tool and could help you start up an annual salary review process, but beware that the topic and the best approach to use is a hot and touchy subject for most and it would take a lot more than just this template to ensure you have a solid and fair process in place.