Employees increasingly expect visibility on the factors that determine their overall compensation. Gone are the days of working with the same company for thirty years and retiring with a gold watch and a full pension; trends like quiet quitting and rage applying make it clear that the relationship between employees and employers has changed. Employees expect to maximize their ROI in a role, whether that’s through compensation, job satisfaction, or growth opportunities. A regular compensation review process is now seen as essential for building trust and retaining top talent.
Tying compensation with performance can motivate employees, boost employee engagement, clearly communicate the value of each employee’s contribution, and help justify every pay increase. Better yet, making performance a larger part of determining an employee’s compensation can eliminate other, more biased factors, improving equity throughout your organization.
Simply making compensation dependent on performance isn’t enough. You need regular performance and compensation reviews to make this work. A performance management platform like 15Five turns performance data into insights you need to make informed compensation decisions and reminds you when compensation reviews are needed.
Employees need to know exactly what goes into compensation. Employers need to benchmark to align compensation with market data and across departments.
Want to learn more? See how 15Five makes compensation benchmarking and optimization easier.
Key takeaways:
Tying compensation to performance is essential for employee retention and engagement.
Compensation reviews have a clear role in driving transparency and pay equity.
An effective compensation review is structured to create transparency and combat bias.
Compensation benchmarking with accurate salary data streamlines compensation reviews.
15Five’s compensation management software empowers HR leaders to properly reward top performers.
Linking performance and compensation requires fairness and clarity.
The importance of compensation reviews in today’s workplace
Compensation reviews are structured evaluations of employee pay against multiple factors, including individual performance, equity, market rates, and organizational budget constraints. Unlike traditional annual salary adjustments, modern compensation reviews integrate directly with continuous performance management, creating a robust feedback loop between contribution and reward.
Traditionally, salary reviews happened independently from performance discussions, creating a disconnect between employee contributions and compensation. This can lead to a decline in employee engagement as employees aren’t clear on how their day-to-day work impacts their compensation.
Today, effective organizations have reimagined this process by:
Aligning compensation reviews with performance review cycles.
Incorporating specific performance metrics into compensation decisions.
Creating visibility into how an employee’s contributions translate to rewards.
Implementing regular compensation conversations in development planning.
This approach isn’t just crucial for properly compensating employees for their work. It also impacts equity throughout your organization. Unstructured, subjective approaches to compensation have historically disadvantaged underrepresented groups. Regular, data-driven compensation reviews combat this by allowing organizations to analyze pay across demographic groups, removing subjective elements that contribute to bias, and establishing clear criteria for determining compensation adjustments.
Complete salary transparency might not be right for every organization, but it generally improves employee engagement and voluntary turnover. It also allows employees at every level of your hierarchy to have open, honest conversations about compensation, promoting progress and change.
The contributors who drive growth at your organization approach employment as a value exchange. They expect compensation to reflect how you value their skills, effort, and results. This means they appreciate data-backed explanations for compensation decisions and regular feedback on where they stand relative to expectations. Combined, these elements allow them to strive to reach the next milestone. Fail to meet these expectations and you’ll lose top talent to competitors who won’t.
Why linking performance with compensation matters
The fundamental concept behind linking performance with compensation is simple. Those who contribute the most to your organization should get the most rewards. Performance-based compensation creates a positive feedback loop where motivated employees achieve more, are rewarded consequently, and are motivated to keep growing.
By linking performance with compensation, organizations send a clear message about their values. They show that they reward merit over tenure, that results matter more than activity, and that continuous improvement matters. This all leads to greater innovation and high effort across teams.
Regarding compensation, few things can be as frustrating as an employee feeling like their contributions aren’t properly rewarded. Getting properly recognized can feel like an uphill battle, especially when it involves overcoming these challenges:
Recency bias: Managers overvaluing recent achievements compared to current contributions.
Halo effects: Allowing one positive trait to influence the overall evaluation of an employee.
Similarity bias: In which similar people are rated more favorably.
Inconsistency: Varying standards from manager to manager.
Linking performance directly with compensation goes a long way towards improving objectivity in compensation reviews, which can help mitigate these challenges. However, it’s important to balance objective metrics with contextual understanding to get a complete picture of an employee’s performance. This means:
Considering both what was achieved and how it was done.
Acknowledging factors outside an employee’s control and how they affect performance.
Recognizing different types of contributions.
Understanding how team dynamics influence individual results.
Making compensation reviews as objective and fair as possible can’t be done in a vacuum, and legacy tools are rarely enough. 15Five’s performance data integrations put performance review data at every manager’s fingertips, reducing bias and giving every employee a clearer understanding of what they need to do to reach compensation milestones.
Compensation benchmarking: Making pay decisions with confidence
Even with a clear understanding of an employee’s performance, HR professionals and managers need benchmarks to ground compensation decisions. Without this, organizations risk losing top talent or becoming unprofitable. With compensation benchmarking, companies compare internal pay rates with market data for similar roles, accounting for different industries and locations.
Compensation benchmarking evaluates total compensation packages, including base pay, bonuses, equity, and benefits. Additionally, HR professionals need to consider the differences in pay across geographic locations and the impact of remote work policies on compensation. Industry-specific compensation practices and trends need to be properly reviewed, as well as role-level compensation progression. This market intelligence transforms compensation discussions from subjective negotiations into data-informed decisions both parties can understand and accept.
While compensation benchmarking is already common, many organizations still rely on outdated benchmarking methods. These create significant disadvantages:
Annual survey data quickly becomes obsolete in dynamic labor markets, especially for high-demand roles.
Generic industry classifications don’t capture role-specific nuances, especially for positions that combine multiple skill sets.
Spreadsheet-based compensation management creates version control issues, security problems, and makes it difficult to maintain current data across the organization.
Limited sample sizes in traditional surveys may not provide reliable data for specialized roles or emerging positions.
15Five’s performance management software allows organizations to surpass these challenges by giving them access to real-time benchmarking data from over 5,000 companies. This places the essential information they need for compensation benchmarking in the same platform they use for other performance management initiatives.
Streamlining the compensation review process with 15Five
Even organizations with clear compensation philosophies and robust market data often struggle with properly tying compensation to performance. The administrative complexity of compensation reviews can overwhelm HR teams and managers, leading to delays, inconsistencies, and frustration. 15Five transforms this traditionally cumbersome process into a streamlined, data-driven workflow.
Effective compensation reviews don’t start with talking about money. They begin with a thorough understanding of performance. 15Five allows you to create this foundation by:
Automatically aggregating performance data from continuous feedback, check-ins, and formal reviews.
Presenting performance trends over time rather than ad-hoc assessments.
Highlighting specific achievements and development areas relevant to compensation decisions.
Connecting individual performance to team and organizational outcomes.
By centralizing performance data from throughout your organization, 15Five eliminates the disconnect between performance management and compensation processes. From there, 15Five gives managers detailed calibration tools that ensure fairness throughout teams and departments. This facilitates structured discussions among leadership to align on performance standards, surfaces potential bias patterns, and provides historical context on past compensation decisions.
Additionally, 15Five automates the manual processes involved in compensation review, from keeping stakeholders in the loop to gathering necessary documentation.
15Five’s performance management platform makes it easier for organizations to define a fair compensation range for every team, role, and seniority level. With tools to create and manage job architecture, integrate benchmark data, visualize current compensation, and more, 15Five is the best way to build a better compensation framework based on performance.
Driving retention and engagement with fair, data-driven pay
Linking compensation with performance creates an environment where top talent feels valued, understood, and motivated to stay with you for the long run. Employee engagement ties directly to compensation, and by making performance an essential element of how employees are rewarded, you give them a framework to understand what they need to do to shine.
Top performers have options. They need to know their contributions are recognized and valued, and that their compensation accurately reflects their impact. They need a clear growth trajectory that feels achievable and clear signs that the organization is committed to rewarding them when they excel. In practice, this means creating a visible difference between compensation for top performers and for the rest of your organization. Part of that means having clear, transparent reviews with employees so they know exactly what they’re shooting for.
Curious what that looks like in practice? Here’s a scenario showing how compensation reviews happen with a high-performing marketing manager named Sarah:
Throughout the performance cycle, Sarah receives regular feedback via 15Five check-ins about her contributions to key projects and development areas.
During the formal review, her manager documents specific achievements, like exceeding campaign performance metrics by 32%, successfully launching new product lines, and mentoring two junior team members.
In a calibration session, leadership confirms Sarah’s performance rating, placing her in the top 10% of contributors at her level.
Using 15Five’s compensation tools, HR provides Sarah’s manager with:
Current market data for similar roles.
Historical context about Sarah’s compensation trajectory.
Pay equity analysis to ensure the recommendation is fair.
In the compensation discussion, Sarah’s manager clearly explains:
The specific performance factors that led to her increase.
How her new compensation compares to market rates.
The connection between her future performance and compensation growth.
Additional rewards beyond base compensation, like bonuses and equity.
This transparent, data-driven approach leaves Sarah feeling valued. The rewards for her continued high performance are clear, increasing the likelihood that she’ll remain engaged and committed to the organization.
Compensate appropriately with performance management
Regular compensation reviews allow organizations to ensure their overall compensation packages are fair when compared to market data and perfectly matched to each employee’s performance. For this framework to succeed, reviews must be as objective as possible, based on performance data, and completely transparent. HR leaders should examine their current compensation review process, find opportunities to improve, and make compensation fairer.
Want to see how 15Five can make this happen for your organization? Check out our compensation tools here.
