Salary revision policy

What is salary revision?

Salary revision is the process of changing an employee's existing salary or compensation structure. The change may be an increase in salary, a restructuring of salary components, or an adjustment made because of a change in the employee's role or compensation policy.

Salary revision does not always mean the same percentage increase for everyone. Companies may consider several factors before deciding the revised salary, including:

• Employee performance
• Current salary
• Job role and level
• Promotion or change in responsibilities
• Market salary benchmarks
• Internal salary bands
• Company performance
• Available compensation budget
• Location and skill requirements

Why do companies revise salaries?

Salary revisions can happen for several reasons. While annual appraisals are one of the most common, they are not the only reason for changing an employee's compensation.

Annual performance reviews

Many companies review employee compensation as part of their annual appraisal cycle. The revision may be based on performance ratings, individual goals, contribution to the business, and the company's overall appraisal budget. For example, an employee who consistently meets or exceeds their goals may receive a higher revision than someone whose performance has been below expectations.

Promotions

A promotion usually brings additional responsibilities, a higher level of accountability, or a change in job grade. Companies may revise the employee's salary along with the promotion. The salary change in this case may be different from the annual increment given during the regular appraisal cycle.

Market adjustments

Salary revisions can also be used to bring compensation closer to current market levels. If an organization finds that employees in a particular role are being paid significantly below comparable market salaries, it may make an adjustment even when the employee is not going through a promotion.

Changes in responsibilities

An employee's responsibilities may increase without a formal promotion. For example, an employee may take ownership of a larger team, a new market, or an additional business function. HR may review compensation in such cases to ensure that the salary reflects the expanded role.

Internal pay parity

Companies may periodically review salaries across similar roles and levels to identify significant inconsistencies. A salary revision can be used to address genuine gaps and maintain a more consistent compensation structure.

Retention

Salary adjustments may also form part of a company's employee retention strategy, particularly for roles where market demand is high. However, companies should ideally have clear compensation guidelines rather than making salary decisions only when an employee receives an external offer.

How does the salary revision process work?

There is no single salary revision process followed by every company. However, a process looks like this:

1. Review employee performance

The process often starts with a review of the employee's performance during the relevant period.

HR and managers may consider:

• Performance against goals
• Quality of work
• Responsibilities handled
• Skills and competencies
• Business impact
• Role expectations
• Performance rating

2. Review the company's salary budget

Before deciding individual revisions, the company usually determines how much it can allocate toward salary increases. For example, an organization may set an overall annual increment budget and then distribute it across different teams, roles, and performance categories. This helps HR maintain consistency and ensures that the total compensation cost remains within the approved budget.

3. Review current compensation

HR should look at the employee's existing compensation before calculating the revision.

This can include:

• Basic salary
• Fixed allowances
• Variable pay
• Employer contributions
• Existing CTC
• Salary band
• Position within the salary range

4. Decide the revised salary

The company then determines the revised compensation based on its compensation policy and the employee's circumstances.

The revision may be expressed as:

• A percentage increase
• A fixed annual amount
• A revised monthly salary
• A change in CTC
• A combination of fixed and variable compensation

5. Approve the revision

Depending on the company's approval structure, the revised salary may need approval from the manager, department head, HR, finance, or leadership team.

6. Issue the salary revision letter

Once approved, HR communicates the change formally through a salary revision letter. The letter should clearly state the effective date and revised compensation.

7. Update payroll and HR records

Finally, HR and payroll need to update the employee's compensation in the relevant systems. The revised salary should be reflected correctly in subsequent payroll calculations and employee records.

How is salary revision calculated?

Salary revision is commonly calculated as a percentage of the employee's existing salary.

Salary revision formula

Salary increase = Current salary × Revision percentage ÷ 100

Revised salary = Current salary + Salary increase

For example, suppose an employee's current annual salary is ₹6,00,000 and the company approves a 10% revision.

Salary increase:

₹6,00,000 × 10% = ₹60,000

Revised annual salary:

₹6,00,000 + ₹60,000 = ₹6,60,000

The monthly equivalent of the annual salary would be ₹55,000, before applicable deductions and other adjustments.

Check your salary hike percentage

Salary revision calculation example

The actual impact on take-home salary can be different because deductions, taxes, benefits, and the structure of compensation also affect the amount an employee receives.

What is a revised salary structure?

A revised salary structure shows how an employee's compensation is distributed across different salary components after the revision.

For example, a company may structure an employee's monthly salary as follows:

What is a salary revision letter?

A salary revision letter is a formal communication from an employer informing an employee about a change in their salary. It provides a written record of the revision and helps the employee understand the new compensation and effective date.

A salary revision letter usually includes:

• Employee name
• Employee ID
• Designation
• Date of the letter
• Effective date of revision
• Revised annual compensation
• Revised salary structure, where applicable
• Relevant terms and conditions
• Name and designation of the authorized signatory

The letter should be clear enough for the employee to understand what has changed without having to interpret complicated payroll terminology.

What is the 8th Pay Commission salary revision?

The 8th Pay Commission salary revision is a separate topic from salary revisions in private companies. A Pay Commission deals with the pay structure and related allowances of government employees covered by the relevant government framework. A private company does not automatically have to revise employee salaries based on Pay Commission recommendations. Private-sector salary revisions are generally determined by the employer's compensation policy, performance review process, market conditions, role requirements, and budget.