How to Deal with Salary Reviews 💰
A detailed guide about a tricky, often overlooked topic.
Talking about money has always been one of the most challenging parts of my career as an engineering manager.
Namely, that includes three things:
Negotiating the yearly budget
Deciding how much to pay people
Regularly review compensations
In fact, if not handled well, these three processes can have an awful impact on your team's productivity, morale, retention, and of course, on your career.
So, while these activities are all connected one to another, in today’s article we will focus on compensation, and in particular on how to deal with salary reviews.
That’s because, despite its importance, in many engineering teams this topic is often still a taboo, or at least a very sensitive one. Conversely, in my experience, bringing transparency to salary discussions is incredibly helpful in fostering a positive and healthy work environment.
So, here is the agenda:
🙋♂️ What is a salary review
🔬 How to prepare for a salary review
🔧 How to perform a salary review
📚 How other companies do salary reviews
Let's dive in!
🙋♂️ What is a Salary Review?
A salary review is a structured process to evaluate and adjust employee compensation.
It has three main goals:
📈 Market alignment— ensuring that employee compensation is competitive with industry standards and market conditions.
🌟 Performance reward — recognizing and financially rewarding employees for their achievements, hard work, and contributions to the organization.
⚖️ Internal fairness — maintaining consistency in pay among team members to promote a sense of equity and prevent dissatisfaction.
The ownership of salary reviews can vary depending on the organization’s size, structure, and culture. However, let’s see what the typical stakeholders are, and what’s their role in the process:
1) Human Resources (HR) 🏢
Ownership — HR usually oversees the whole process. They establish guidelines, provide market salary data, and ensure the process aligns with company policies and legal requirements.
Coordination — HR coordinates with other departments to gather necessary data and ensure consistency in salary adjustments across the organization.
2) Engineering Managers and Team Leads 🧑💻
Implementation — EMs and team leads gather performance data, provide input on individual contributions, and make recommendations for salary adjustments.
Communication — EMs communicate the outcomes of the reviews to their team members, providing feedback, and addressing any concerns.
3) Senior Management and Executives 👑
Approval — senior management and execs often have the final approval on budget allocations for salary adjustments. They ensure that the salary review process aligns with the company's strategic goals and financial constraints.
Policy Setting — they may also set high-level policies for the process itself, such as target compensation percentiles and overall compensation strategy.
4) Finance 🏦
Budget Management — finally, the finance department ensures that the salary adjustments fit within the overall budget. They provide oversight and help balance the raises with other financial priorities.
🔬 How to prepare for salary reviews
You might think that a salary review is just a negotiation between you and your team members to decide if and how they should have their compensation increased.
Instead, there's a lot more to do.
Before you even start negotiating, there's a good amount of prep work that goes into it, which you can organize in three stages:
🔍 Market Research
📊 Performance Data Collection
🧮 Budget Planning
Let's see each of them in detail 👇
1) Market Research 🔍
A critical starting point for salary reviews is understanding what a fair salary looks like for your team members. This can depends on many factors, the first of which is market.
Market is constantly moving and, based on demand vs supply for specific roles, average salaries can change every year. That's why it becomes crucial to have regular benchmarks to ensure your salaries are competitive enough to retain people.
Depending on your company’s size and structure, this research can be performed by:
👥 HR — conducts continuous market salary surveys and benchmarking to ensure competitive compensation.
🧑💼 Engineering Managers — if the company doesn't include an organized HR dept, managers might have to gather the data themselves to make informed salary decisions.
In case you have to take care of market research, here are some of the best websites to gather salary data:
All these sites can give you a good range that you can use as a base when you negotiate salary raises with the upper management or the finance team.
2) Performance Data Collection 📊
Over the past decade, there has been ongoing debate about the connection between performance reviews and salary raises.
Some advocate that performance should be the sole driver for salary increases, while others believe the two things should remain separate.
Aidan Curley, Engineering Manager, shared his perspective on the question: "What elements do you consider when negotiating salaries with your team members?"
Performance. Of course, affordability is the controlling factor of the size of your team’s allocation, but performance is the driver of what % of the allocation each IC receives.
As it is often the case, there is no one-size-fits-all solution, and completely decoupling performance from salary is, in my opinion, challenging.
Personally, I apply the following principles:
💰 Consistent Raises — if the budget allows, I aim to give a minimum yearly raise to every team member, including those with average performance. Of course, there may be years when this minimum raise cannot be met.
🎯 Encouraging Improvement — if minimum performance standards are not met, I may delay or forgo the salary raise. However, I avoid using this as a punishment and prefer to use raises as an incentive for improvement.
🌟 Rewarding Excellence — for exceptional performers, I aim to provide a bonus in addition to the minimum yearly raise.
🗣️ Seeking Feedback — I never rely solely on my judgment. I seek feedback from colleagues who have worked closely with the person being reviewed.
By following these principles, I strive to create a fair and motivating environment for my team.
Related to performance, we wrote a full piece about performance reviews last year 👇
3) Budget Planning 🧮
Once you have a clear understanding of what fair compensation looks like, it’s time to plan your budget.
This step varies based on your company’s size, reporting structure, and your specific role, but you will likely need to develop a plan that outlines all the raises you intend to give in the next year.
In this phase, consider the following factors:
💰 Financial constraints — understand the overall budget limitations and financial health of the company.
🔄 Competition — keep up with industry salary trends to ensure competitiveness.
💡 Strategic priorities — consider the company’s strategic goals and how salary adjustments can support these objectives (or not).
🌟 Employee retention — factor in the importance of retaining top talent and how competitive salaries can help.
🏢 Departmental needs — evaluate the specific needs and contributions of different departments to allocate raises appropriately.
Whenever I prepare my yearly budget I try to be extremely specific about the reasons behind my planned salary raises, by considering all the factors above.
The more grounded your arguments, the better you can negotiate the budget with upper management and the finance dept.
🔧 How to perform the review
Once you have gathered all the necessary data and completed your preparatory work, you are ready to move forward with the actual review process.
This phase is crucial as it directly impacts employee satisfaction, retention, and overall team morale.
So let’s look at what you should take into account:
1) Frequency ⏱️
The first thing to establish is the frequency of salary reviews.
Most companies conduct salary reviews once a year. However, in larger organizations, this process can occur even twice a year.
Setting a regular cadence ensures consistency and allows employees to anticipate and prepare for their reviews.
2) How much should you raise? 📈
This is one of the most frequent questions I receive, and the truth is that there's no one-size-fits-all answer. The appropriate raise depends on several factors, many of which are part of your prep work:
💰 Budget — financial constraints and allowances negotiated with upper management.
📊 Market — current market trends and benchmarks for similar roles. Aligning with market rates is essential to retain talent.
🌟 Performance — based on the data you collected, you may want to reward high-performers.
📈 Role and level — salaries cannot grow exponentially, so you can’t expect to apply the same percentile increases to all roles, especially on higher-level ones.
🎯 Strategic value — finally, aside from all of the above, you might need to consider the strategic importance of specific team members.
So, each year, I define a minimum raise percentile and, based on these elements, determine the appropriate raise for each team member.
3) Communication 💬
Beyond the numbers, one of the most critical aspects of the whole process is communication.
In fact, in my experience, the biggest cause of frustration is not unmet expectations regarding raises, but rather a lack of communication.
Effective communication includes:
📄 Documentation — writing down the various steps and how the whole process works.
🗣️ Rationales — explaining the reasons behind salary decisions.
❗ Issues — transparently addressing any issues that could result in lower-than-expected raises or no raises at all, such as performance or financial constraints.
Salary conversations are stressful for the whole team — good communication helps you manage expectations and reduce some of the (sometimes inevitable) frustration that comes with them.
📚 Examples from Big Tech
Finding good benchmarks is always tricky, especially about salaries and how they are reviewed, but here are some good examples:
1) GitLab 💻
GitLab is renowned for its transparent and inclusive salary review process, detailed in their GitLab Handbook.
Base Budget — at the time of writing, they have a funded budget of 4% of overall payroll.
Merit — they have some recommendations based on various levels of performance (developing, performing, exceeding).
Open Salary Calculator — they provide a public salary calculator that allows employees to see how their pay is determined.
Comprehensive Guidelines — the GitLab Handbook includes extensive guidelines on compensation, ensuring employees understand the factors influencing their salaries.
Remote Work Considerations — they adjust salaries based on geographic location, ensuring fair compensation for remote employees.
2) Google 🔍
Google's compensation review process is designed to be transparent, fair, and performance-driven, focusing on three main components: salary, bonus, and equity.
Market-Based Salary Adjustments — Salaries are determined based on role, location, and market conditions, ensuring competitiveness.
Performance Bonuses — bonuses are awarded based on individual performance and contributions, with different plans for various roles.
Equity Awards — new employees receive restricted stock units (GSUs), and ongoing equity refresh grants are provided based on performance.
Annual Pay Equity Review — Google conducts a rigorous pay equity analysis annually to ensure fairness across gender and racial lines (Levels FYI) (blog.google) (blog.google)
3) Facebook 👥
Facebook (Meta) combines rigorous performance reviews with a compensation structure that includes salary, bonuses, and stock refreshers.
Performance Reviews — Conducted semi-annually, involving self-assessment, peer reviews, and manager evaluations.
Calibration Process — managers meet to ensure fair ratings across teams, with performance bonuses and stock refreshers determined based on these reviews.
Stock Refreshers — additional stock grants are awarded to high performers, promoting long-term retention (RSUs simplified) (Robots.net).
4) Netflix 🎞️
Netflix emphasizes transparency and market alignment in its compensation practices.
Market-Based Pay — they pay top of market salaries.
No Bonus Philosophy — having salaries reflecting top of market value, they eliminate the need for bonuses.
The "Keeper Test" — managers decide if they would fight to keep an employee, with those not making the cut offered a severance package.
As always, what works for other companies, particularly large tech firms, may not necessarily apply to your situation, especially regarding sensitive topics like salaries.
My primary advice is to communicate openly with your teams. Listen to their thoughts and work towards finding a good solution that aligns with both your company's goals and their own satisfaction.
And that’s it for today! If you are finding this newsletter valuable, consider doing any of these:
1) 🔒 Subscribe to the full version — if you aren’t already, consider becoming a paid subscriber. You can learn more about the benefits of the paid plan here.
2) ❤️ Share it — The Hybrid Hacker lives thanks to word of mouth. Share the article with your team or with someone to whom it might be useful!
We wish you a great week! ☀️
Luca & Nicola