Many staff return to work in January feeling they deserve to be paid more, yet even seasoned managers find pay reviews a process they would rather avoid. How do you cope when you simply haven’t got the budget to pay for the rises that your employees want? Kat Knight asks the difficult questions.

If the wages you pay are competitive and your company has policies and procedures already in place relating to pay and performance appraisals, annual salary reviews will be much easier.

“Individual pay reviews should be partly related to individual objectives, which can only be set if you have a proper review policy in place and carry out regular employee appraisals,” says Jan Scrine of workplace mediation provider Consensus Mediation. “You can then state in your pay policy that part of the review process is based on whether individuals have met or exceeded their objectives.”

Rewarding performance

Relating your decisions to performance will help you to justify rewarding employees you feel have made a greater contribution to your business.

“Be very clear at the outset why pay increases have been given,” advises Scrine. “Your reasons must be transparent and there must be evidence for your decisions.” This will protect you from potential claims of favouritism or discrimination.

Think about your company’s pay policy and how that relates to business objectives. “What do you want to achieve?” asks Scrine. “Does your company want to make a firm commitment to increasing deserving employees’ salary when possible? If directors think it more necessary to put money back into another aspect of the business, how will employees react?”

Remember, wages are an emotive subject. Employees are likely to become disillusioned if they see more money being spent on marketing or new PCs, rather than on staff wages. Be careful and tactful, but above all – be honest.

Alternative rewards and benefits

Inevitably, your ability to offer pay increases will be linked to your firm’s financial performance. “If the finances are simply not there,” Scrine says, “be honest from the outset and tell employees. Honesty is always the best policy.”

If you cannot offer pay rises to employees who you feel genuinely deserve them, try to find alternative ways of rewarding them; for example, extra paid holiday, a cash bonus, an improved pension scheme or a flexible working arrangement.

Let employees state their case and listen to what they have to say. If you agree with them, but can’t afford to increase their salary, make a firm commitment to reassess the situation at an agreed time in the near future.

If you disagree, make sure you explain why. “Always relate decisions back to the facts,” Scrine stresses, “whether these are an individual’s failure to meet objectives or proof that the wages you pay match the going rate.”

• For detailed advice on handling pay reviews, read our briefing on Remuneration