Salary Review Process: A 12-Week Step-by-Step Playbook for HR

A salary review process is the annual cycle in which an employer checks every employee’s pay against the market, internal equity and performance, then decides and pays increases within an agreed budget. Done well, it takes 10 to 12 weeks from scoping to the first payslip with the new salary: if you start in mid-October, increases can land in January payroll.

This playbook walks through the salary review cycle step by step: a week-by-week timeline, who does what (including works councils and unions), how to prepare data, set budget pools and simulate a merit matrix, run calibration and approvals, communicate decisions, handle off-cycle requests, and check pay equity before sign-off, as the EU Pay Transparency Directive will require once transposed. For the size of the 2027 budget itself, see our salary increase budget 2027 guide.

Key takeaways

• Plan the annual pay review as a 12-week project with fixed owners and deadlines, and keep a post-cycle review in weeks 13–16.
• Data first, percentages second: clean job architecture, current market benchmarks, compa-ratios and closed performance ratings before anyone talks about increases.
• Split the budget into separate pools (mandatory, merit, market and equity, promotion) and simulate the merit matrix against your real population.
• Posted pay for one job title is wide: in TalentUp’s 2026 data the 75th percentile is 25% to 81% above the 25th, so set market adjustments against a range, not one number.
• Calibrate and run a gender pay gap check by category of workers before sign-off, not after the letters are sent.
• Where the Directive is transposed, progression criteria must be objective, gender-neutral and accessible, and every decision should be documented.

The Salary Review Cycle at a Glance: 12-Week Timeline

Most companies run one annual pay review, aligned with the fiscal year and effective on 1 January or 1 April. The timeline below assumes a company of a few hundred to a few thousand employees in several European countries. Smaller companies can compress it to 6–8 weeks; groups with unions in several countries should add 2–4 weeks for consultation.

Weeks 13–16: post-cycle analysis and lessons learned, while memories are fresh.

Three dates drive everything else: the payroll cut-off for the effective month, the date performance ratings are final, and any mandatory increase you must wait for. In Belgium, for example, the January indexation percentage for joint committee 200 is only known at the end of December, so the merit decision has to leave room for it (see the 2027 budget guide). Work backwards from those dates and publish the calendar to managers in week 1.

Who Does What: Roles in the Salary Review Process

A salary review fails most often at the hand-offs. Agree owners up front and write them in the calendar.

Works councils and collective bargaining change the calendar. Two examples:

• Germany: under section 87(1) no. 10 of the Works Constitution Act (BetrVG), the works council has a co-determination right over pay-setting principles. Case law from the Federal Labour Court leaves the total budget of a voluntary increase to the employer, but the rules for distributing it across employees, such as a merit matrix, require works council agreement where one exists and no collective agreement already fixes them.
• France: companies with union delegates must hold mandatory negotiations on pay (négociation annuelle obligatoire, NAO) every year, unless a company agreement sets a different frequency of up to four years. The NAO also covers professional equality between women and men.

Elsewhere, sector or company collective agreements (Spanish convenios, Dutch CAOs, Italian CCNL) may fix general increases and dates before your merit cycle starts. Budget these first so they do not silently consume the merit pool.

Step 1: Prepare the Data Before Anyone Talks About Percentages

The quality of the cycle is decided before managers see a single number. Four inputs need to be clean.

1. Job architecture. Every employee mapped to a job family, level and salary band. Without levels, you cannot compare like with like, and under the Directive you cannot define “work of equal value”. See how to create a good salary band.
2. Market benchmarks. Current market pay by role, level and location, refreshed before the cycle, not last year’s survey. Update band midpoints first, then measure people against them.
3. Internal position. For each employee, the compa-ratio (salary ÷ band midpoint) and range penetration (where the salary sits between band minimum and maximum), plus a flag for anyone below minimum, above maximum or affected by pay compression.
4. Performance ratings. Closed and calibrated before the pay review starts. Rating and pay decisions made in the same meeting tend to be justified backwards.

What market inputs look like: TalentUp data

When you set a market adjustment, the question is not “what is the market salary?” but “where in the market range do we want this role to be?”. Posted salaries for the same job title vary widely, so use the 25th, 50th and 75th percentiles, not a single figure.

Source: TalentUp job postings database, January–September 2026. Employee contracts with a structured annual or monthly salary.

Median annual gross salary posted in 2026 employee job ads, in EUR (UK converted from GBP), with the 25th–75th percentile in brackets. “–” means fewer than 75 ads or one employer posting more than a quarter of them.

How a reviewer uses this:

• Spread depends on the role. The middle half of the market is narrow for maintenance technicians in Spain (+25% from P25 to P75) and accountants in Italy (+28%), and wide for software engineers in Spain (+81%) and the Netherlands (+70%). Wide spreads mean title alone says little: level, scope and company size matter more.
• Worked example. A data analyst in Spain earns €33,000. Against the posted median of €37,800, the market ratio is 0.87: inside the market range, above P25, but below the middle. If your policy is to pay at least 95% of median for solid performers (€35,900), the gap is €2,900 (8.8%). A 3% merit increase alone will not close it, so the case goes to the market adjustment pool, for example 5% now and the rest in the next cycle.
• Check before you act. Posted salaries describe open roles, not your employees. Confirm the level match with your own benchmark before any adjustment, and see our playbook for when an employee says their salary is too low.
• Say you review pay. In a random sample of about 22,500 job ads from 2026, only 0.7% promise an annual or regular salary review (data and country breakdown in the 2027 budget guide). If you run a structured cycle, it is a cheap differentiator in hiring.

Step 2: Set Budget Pools and Build the Merit Matrix

Finance usually sets the total envelope; the review team decides how it is split. Keep at least four separate pools: mandatory (indexation, collective agreements, minimum wage), merit, market and pay equity adjustments, and promotions. Our 2027 budget guide covers country figures and how to present scenarios to the CFO, and budget planning with real-time salary data shows how to feed market data into each pool.

Worked example: simulating a merit matrix

A merit matrix sets a guideline increase for each combination of performance rating and compa-ratio. The hard part is not drawing it, but making sure the weighted average fits the budget. Take a population of 100 employees with similar salaries and a 3.0% merit budget:

Weighted average: (6 × 5.5 + 10 × 4.5 + 4 × 3.0 + 18 × 4.0 + 30 × 3.0 + 17 × 2.0 + 5 × 1.0) ÷ 100 = 2.91%. That leaves 0.09 points for manager discretion within the 3.0% budget. A first draft with 3.5/2.5/1.5% in the middle row would have averaged only 2.59%, leaving money unspent; one more iteration fixed it.

Three rules make the matrix work in practice:

• Weight by payroll, not headcount. People above midpoint usually earn more, so the same percentage costs more in their cells. Run the simulation on real salaries.
• Give ranges, not points. For example 4.5–6.5% instead of 5.5%, so managers can differentiate within a cell and explain why.
• Keep the matrix out of the equity pool. Corrections for people below market or for unexplained gender gaps should come from their own pool, or managers will be forced to choose between rewarding performance and fixing structure. See internal equity vs external competitiveness.

Step 3: Manager Guidelines, Calibration and Approvals

Manager guidelines

Before recommendations open, give every manager a one-page guideline and a file with their team: current salary, band, compa-ratio, range penetration, performance rating, last increase date and the matrix range for each person. Include:

• the budget available for their team and how it was calculated;
• the criteria that can justify going outside the matrix range (scope change, market data, retention risk) and the evidence required;
• what is not allowed (for example, increases above band maximum without approval, or promises before sign-off);
• the deadline and who to call.

A 45-minute training session is enough if the file is clear. Spend most of it on explaining decisions, not on the tool.

Calibration

Calibration sessions compare recommendations across teams with the same rules. HR business partners and department leaders review outliers: increases far from the matrix, zero increases for solid performers, people still below band minimum after the cycle, and differences by gender within the same level and job family. Ask managers for the rationale in writing; under the Directive this becomes evidence.

Lori Nishiura Mackenzie, co-founder of the Stanford VMware Women’s Leadership Innovation Lab, explains why calling the process merit-based is not enough without these checks:

As Emilio J Castilla and Stephen Benard found, meritocracy can be a paradox. When organizations assume they are acting meritocratically — without the practices that keep bias in check — people inadvertently feel free to act on their biases, contributing to gender and racial pay gaps. […] At the Lab, we’ve found that criteria is the key — focusing on the right criteria, holding the bar steady, and monitoring to ensure it’s applied consistently for everyone.

April 2026 Read on LinkedIn →

Approvals

Use two approval levels at most: department leader, then an executive and finance sign-off of the whole cycle. Before sign-off, C&B presents a short pack:

1. spend vs budget by pool and country;
2. distribution of increases by performance rating and compa-ratio;
3. people below band minimum after the cycle;
4. gender pay gap by category of workers before and after the cycle, with any gap of 5% or more explained or corrected (see our pay equity audit guide).

Step 4: Communicate Decisions: Letters and Conversations

The conversation matters as much as the number. Managers should meet each employee before the letter arrives, and the letter should confirm, not surprise.

What the salary review letter should include:

• new base salary, percentage increase and effective date;
• the components: general or collective increase, merit, market or equity adjustment, promotion;
• position in the salary band after the increase, where your transparency policy allows it;
• other pay elements affected, such as bonus target or pension contributions;
• where to find the criteria used for pay and progression, and who to ask.

How managers should run the conversation: start with the decision, then the reasons (performance, position in band, market), then what the employee can do to progress. For low or zero increases, explain the criteria and agree concrete next steps; when the budget cannot stretch, our guide on what HR can offer when there is no raise budget lists alternatives. A total reward statement helps show the full package, including benefits and variable compensation.

Off-Cycle Requests and Post-Cycle Analysis

Off-cycle increases

Not every pay decision can wait twelve months. Write an off-cycle policy that limits the reasons and the budget:

Keep the same criteria as the annual cycle, record every decision and its rationale, and re-run the equity check on off-cycle changes each quarter. Counter-offers made under pressure are the most common source of unexplained gaps.

Post-cycle analysis

Within four weeks of the payroll run, review the cycle while memories are fresh:

• Spend vs budget by pool, country and department.
• Differentiation: did top performers really receive more? Did people below midpoint move up?
• Equity: gender pay gap by category of workers, and the share of people below band minimum, before and after.
• Process: missed deadlines, late ratings, tool issues, manager feedback.
• Outcome tracking: regretted turnover and offer acceptance in the following six months.

Feed the results into next year’s calendar and matrix. Many teams also move from a once-a-year snapshot to continuous market monitoring; see the end of the annual salary review.

What Changes Under the EU Pay Transparency Directive

The EU Pay Transparency Directive (2023/970) had to be transposed into national law by 7 June 2026. Its obligations apply through national laws once each member state has transposed them, so check the status in every country where you run a review. Once they apply, the salary review process changes in five ways:

• Objective criteria. Pay structures must allow pay to be assessed on objective, gender-neutral criteria such as skills, effort, responsibility and working conditions (Article 4). The merit matrix, eligibility rules and exception criteria are part of that structure.
• Accessible progression criteria. Employers must make available to workers the criteria used to determine pay, pay levels and pay progression (Article 6). Member states may exempt employers with fewer than 50 workers from the progression part.
• Right to information. Workers can request their own pay level and the average pay levels by sex for workers doing the same work or work of equal value, and employers must inform all workers of this right every year (Article 7). Pay secrecy clauses are not allowed.
• Reporting and joint pay assessment. Employers with 250 or more workers report their gender pay gap every year from 7 June 2027; those with 150–249 every three years from 7 June 2027; those with 100–149 every three years from 7 June 2031. If an unexplained gap of 5% or more in any category of workers is not remedied within six months, a joint pay assessment with workers’ representatives follows (Articles 9 and 10).
• Burden of proof. In pay discrimination claims, the burden of proof shifts to the employer (Article 18), so undocumented decisions become a liability.

Sharon Peake, chartered psychologist and CEO of the UK consultancy Shape Talent, sums up what that shift means for reward teams:

The Directive flips the burden of proof - it’s now up to employers, not employees, to justify pay differences. That means deep changes are coming in how you manage reward, recruitment, and reporting. […] Be ready to justify differences in pay - for performance, experience, geography - with clear, defensible logic.

December 2025 Read on LinkedIn →

In practice: document the rationale for every increase, run the gender gap check before sign-off, use the equity pool to close unexplained gaps, and make the annual information on employees’ rights part of your review communication. Our guides on how HR teams can prepare for the Directive and our pay transparency resources go further. To benchmark roles across countries before your next cycle, see our methodology, the European Salary Benchmark Report and our plans.

Sources

• TalentUp. Job postings database, January–September 2026: posted salary percentiles by role and country (see methodology above), and a random sample of about 22,500 job ads in 10 countries for salary review mentions.
• European Union. Directive (EU) 2023/970 on pay transparency. EUR-Lex.
• Federal Ministry of Justice (Germany). Betriebsverfassungsgesetz, § 87 Mitbestimmungsrechte.
• Rechtslupe. Gehaltsanpassung – und die Mitbestimmung des Betriebsrats (Federal Labour Court case law on distributing pay increases).
• Ministère du Travail (France). Les négociations obligatoires dans l’entreprise : thème, périodicité et déroulement.