Separating Pay Increases From Performance Reviews: Why It Matters

Quick Hits

  • Splitting compensation and performance reviews into two conversations removes pay as a distraction and allows employees to be fully present to receive feedback.
  • Untethering salary increases from performance reviews completely ensures employees aren’t being unfairly penalized for biased reviews and unrealistic objectives without the chance to learn from mistakes and grow.
  • The one-size-fits-all approach no longer works. Employers need to rethink incentive structures and offer more options to account for the needs of every employee.

The annual performance review dangles the ever-enticing carrot of more money for a job well done. However, separating pay raises from employee reviews can be a more effective strategy to navigate this anxiety-inducing yearly process.

Compensation often creates unnecessary distraction during reviews. It’s difficult for employees to stay present and focus on managerial feedback when potential money is on the table. That’s why moving the discussion about pay increases to a later, lower-stakes one-on-one meeting ensures the performance review remains focused on just that: performance.

“If employees understand the point of reviews isn’t about compensation—it’s about developing them into where they’re going to be the most strategic fit in the organization, they don’t get so tense and anxious about: what does this all mean? What’s behind these questions?” says Kirk Davis, Tandem HR’s Senior Director of HR Client Relations.

Performance reviews show employees you’re invested in their professional and personal growth. Compensation becomes a natural follow-up conversation once that constructive feedback and accountability is provided. Davis recommends spacing out these two discussions by one to two months.

There’s also an argument for separating salary increases from reviews entirely. Employee reviews can be biased, binding pay to unrealistic objectives can be problematic, and if on-going opportunities for employees to grow and course correct aren’t provided, any review quickly loses its meaning.

Rethinking Incentive Structures for Employees

Keeping employees happy at work means recognizing that different things motivate different people. As generational shifts transform workplace culture—with baby boomers, Gen X, millennials, and Gen Z all coalescing around the water cooler—finding alternative incentive structures is necessary.

Instead of more money, some employees are looking for additional PTO, sabbatical opportunities, flexible work arrangements that support a better work-life balance, paid volunteer days, and other options that reflect their morals and values.

“It’s not a one-size-fits-all approach in the workforce anymore, and we need to recognize that in the performance process,” Davis said. “One practical suggestion I make is to find things that align with your organization’s mission, vision, and values. It doesn’t have to be the same thing for every person but make sure you can make the connection between the incentive and what drives your company’s mission.”

However organizations choose to implement performance reviews and pay increases, transparency is imperative. Communicating expectations to employees beforehand so they clearly understand how they’re being measured and how those measures are defined ensures there are no surprises or unwanted anxiety come review time.

“Never hide the ball, never hide the metrics,” Davis said. “The more information you can give people, the better equipped they are to understand what the process is going to look like, what their expectations are coming out of it, and how they can link and change their behavior to secure a pay increase.”

A few questions to ask your organization:

  • What does the organization’s annual compensation structure look like?
  • Are salary increases part of an annual review? Or part of a bonus cycle?
  • How are pay raises determined? Does the organization reward people for seniority? Do they incentivize people for extraordinary work? Or are pay raises determined solely by market adjustment?
  • How are incentive pay increases calculated (i.e. bonus metrics, ratings scale, manager feedback)?
  • What other incentives does the organization offer outside of pay increases?