Salary Review

What a salary review is

A salary review is a cycle, held on a known date, in which an amount fixed in advance is shared out across the pay of the employees currently in post. It is not a decision about one particular employee. It is the division of a closed amount among those entitled to some part of it.

That description is what sets a salary review apart. It has an amount that is not exceeded, a rule for sharing it out that is written before the results are seen, and an effective date. Where any one of the three is missing, the review becomes a series of individual decisions that are added up at the end to see what they came to, an arrangement in which no request can be refused.

The salary review budget is set on the wage base, not on headcount

When a salary review is described as a 4 percent review, the figure means four percent of the total monthly pay of the employees it covers, not an average rise per person. The difference between those two meanings is where an overspend can begin.

Take 100 employees whose combined monthly pay is SAR 1,130,000. The amount available is SAR 45,200 a month, and that is the ceiling against which every way of sharing it out is measured.

That 4 percent is an assumed figure, not a recommended rate. The size of a review budget follows the state of the market and of the organisation together, and the example proposes no rate for it.

A salary review matrix that averages 4 percent and spends more

One rule for sharing out the amount is a matrix with two inputs: the level of performance, and where an employee’s pay sits within the range for their grade, which the compa ratio measures. Applied to the same 100 employees, a matrix of this kind could look like this:

• High performance, below the midpoint: 10 employees on an average of SAR 10,000, at 8 percent, costing SAR 8,000.
• High performance, above the midpoint: 25 employees on an average of SAR 14,000, at 5 percent, costing SAR 17,500.
• Expected performance, below the midpoint: 20 employees on an average of SAR 9,000, at 4.5 percent, costing SAR 8,100.
• Expected performance, above the midpoint: 35 employees on an average of SAR 12,000, at 3 percent, costing SAR 12,600.
• Below expected performance: 10 employees, at zero.

Averaged over headcount, the rates come to exactly 4.00 percent, the figure that reassures when the matrix is presented. What the matrix actually spends is SAR 46,200, or 4.09 percent of the wage base. That is SAR 1,000 a month over the amount available, and SAR 12,000 a year.

The rates in this matrix are assumed, chosen to show the calculation. They are not a benchmark, and they are not taken from any source.

Why the two averages in a salary review differ

An average over headcount gives every employee the same weight. The amount spent gives every riyal of pay the same weight. So long as the people on the higher rates are also paid more than the rest, the matrix spends more than its average suggests, and the reverse holds when they are paid less.

Presenting the matrix by its headcount average is therefore not an approximation of what it will spend. It is a different number, answering a question nobody asked. The sound check is this: multiply each cell’s rate by the total pay of the people in that cell, add the results, and compare the sum with the amount available. A cell whose total pay is not known should not have a rate set for it at all.

Bringing a salary review matrix back to its budget

When the matrix exceeds the amount available, the remedy is to multiply all of its rates by 0.9784, which is the amount available divided by the amount the matrix spends. The 8 percent becomes 7.83 percent, 5 percent becomes 4.89 percent, 4.5 percent becomes 4.40 percent and 3 percent becomes 2.94 percent. Applied with the unrounded factor, spending comes to exactly SAR 45,200; on the rates as rounded to two decimal places it comes to SAR 45,213.

This remedy keeps the order the matrix intended and the proportions between its cells, which is why it is preferable to cutting a single cell. Cutting one cell changes the meaning: it makes one particular group carry the cost of the estimating error, which is a decision about internal pay equity taken without anyone saying that it has been taken.

Two opposite errors in a salary review that hide each other

A policy may reduce the share of recent joiners in proportion to the part of the year they have served. Suppose that 8 of the 25 employees in the high performance, above midpoint cell have served only eight months, and so receive two thirds of their cell’s rate.

Their full share is SAR 5,600 a month and their prorated share is SAR 3,733.33, a saving of SAR 1,866.67 a month, or SAR 22,400 a year.

This is the point that deserves attention. The matrix was SAR 1,000 over the amount available, and proration saves more than that, so spending falls to SAR 44,333.33, or 3.92 percent, and ends up SAR 866.67 under the amount available.

The cycle closes within its budget, the division is declared to have been under control, and the matrix is not corrected, because nobody knew it needed correcting. In a following year with fewer recent joiners, the overspend appears in full with nothing to hide it. That is why the effect of the matrix and the effect of proration are checked separately: the final figure alone cannot tell a correct division from two errors that cancelled out.

Percentages and riyals can rank people differently in a salary review

Employees look at riyals, while the matrix is written in percentages, and the two can produce different rankings. In the matrix above, the employee on the top rate receives SAR 800, which is 8 percent of 10,000, while 5 percent of 14,000 comes to SAR 700, so the two rankings agree.

They do not have to agree. The 3 percent cell overtakes the 8 percent cell in riyals once pay in it is more than 2.67 times pay in the other, that is, above SAR 26,666.67 against SAR 10,000. An organisation that puts grades with widely separated pay into a single matrix can see this reversal happen without any sign of it in the table of rates, and it may first come to light in a conversation between two employees.

The effective date can hide half the annual cost of a salary review

A budget is drawn up by financial year, but an increase stays in pay after that year ends. If a review takes effect in the middle of the year, it costs SAR 271,200 in that year, which is six months of SAR 45,200. In the following year it costs SAR 542,400, twelve months of the same amount, without any new decision being taken.

So the figure that appears in the budget for the year of approval is half the commitment that was created, and the other half appears in the following year before that year’s review has begun. Whoever prepares the second year’s review as if it starts from zero finds the start of that budget already taken up by a decision made the year before.

Who a salary review covers, and what it leaves out

• Covered: employees in post on the date the amount is shared out who have served long enough for their performance to be assessed.
• Not covered: anyone who received an increase outside the review in the same year, unless a written rule says how they are to be handled. Without such a rule, they are paid twice for a single reason.
• Not handled in the review: pay that falls outside the limits of its range. Pay above the top of the range is handled as red circled pay, and pay below the minimum as green circled pay. Both are adjustments to the pay table, not rewards for performance, and mixing them into the review uses up its budget on corrections that nobody recognises as corrections.

How a salary review differs from its neighbours

The ideas closest to a salary review sort along one axis: what each one is. An annual increment is a form of increase, a lump sum increase is a payment that stays outside pay, a pay survey is an input about the market, and wage drift is a measured result. A salary review is the division of an internal amount.

An annual increment is one form an increase can take, with a separate basis and source. It may be what a salary review produces, or it may precede the review. Its standing in law is a separate question, and the definition of a salary review does not decide it.

A lump sum increase is paid out but does not enter pay, so it does not enter the following year’s base either. By contrast, a salary review in its basic form raises the base itself, and its effect accumulates.

A pay survey says where the organisation stands against the market, while a salary review shares out an internal amount. Its findings may change the size of that amount; they do not divide it.

In sequence, wage drift comes after a salary review. A salary review decides the amount and how it is shared out; wage drift measures how far the wage base grew beyond what that decision alone allowed, for example through promotions, replacements and adjustments made outside the cycle.

What undermines a salary review cycle

• Rates approved before the distribution of pay is known. A matrix can only be judged against the actual wage base, and, as shown above, its average says nothing about what it spends.
• Assessments carried out after the matrix rates are known. Ratings are then chosen to reach the amount hoped for, and the matrix turns from a rule for sharing out into a means of reaching a number. What controls this is performance calibration before the amount is shared out, not after.
• Exceptions approved late. An exception approved after the division has closed is paid from an amount with nothing left in it, so it is funded from another cell without a written decision.
• Leavers overlooked between the division and the effective date. Their share stays counted as spent although it is not paid, and the difference shows up at the first reconciliation.

What a salary review document keeps apart

A salary review document keeps three things apart: the amount available, the rule for sharing it out, and the effective date. The first is a financial decision, the second a decision about internal pay equity, and the third a budget decision. All three are presented together and decided separately, and anyone who folds them into a single decision cannot review any one of them separately the following year.

The definition of a salary review takes no position on whether an employee is legally entitled to an increase, a question that has its own sources, and it does not settle how often a review must be held. In the sources we reviewed we found no requirement to hold a salary review at a set frequency, and we draw no conclusion from that silence.

Before the salary review matrix is presented

The quickest check on a matrix is to calculate what it spends on the actual wage base before it is presented, not after it has been approved. The calculation takes little time, and the gap it uncovers in the example above is SAR 12,000 a year. A gap of this kind can grow with the size of the organisation while staying just as hidden.

The effective date and the cost of the matrix over a full year are then written down beside it, because the two figures together are the commitment. For a review that takes effect halfway through the year, the figure presented alone is half of that commitment. What arithmetic cannot fix is a division decided on ratings that were never calibrated: a matrix that is accurate in its arithmetic but runs on uncontrolled inputs divides the amount precisely, but not among those who earned it.

This is an explanation of the concept, not legal advice.

Related terms

• Wage Drift
• Performance Calibration
• Job Classification
• Geographic Pay Differentials
• Budgeting