Salary adjustments are an important part of maintaining fair and competitive pay. Whether adjusting pay due to a cost-of-living increase, a market realignment or an internal equity correction, making sure you’re paying fairly is crucial for attracting and retaining talent. 

But how do salary adjustments work in practice? When should they be applied? And how can HR teams ensure they’re making informed decisions? 

This guide breaks down the essentials, from calculating salary adjustments to handling employee questions.

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Quick Facts About Salary Adjustments in 2025

• Our October 2024 annual pay planning survey of 120 HR decision-makers showed projected 2025 pay increases averaging at 3.5%.
• Pay growth is slowing: buoyant sectors like Tech, Media, and Professional Services expect the highest rises, while Transport and Distribution expect the lowest.
• As of 1st April 2025, the National Living Wage has risen by 6.7% to £12.21 per hour for workers aged 21+, while workers aged 18-20 have seen increases of up to 16.3%.
• Employers are balancing competitive pay pressures while facing tighter budgets, a hike in National Insurance (from 13.8% to 15%) and lower profit margins in a low-growth economy. 
• 45% of companies are responding to the rise in employers' National Insurance by reducing pay budgets, while 17% are delaying hiring or reducing headcount.

‍Read more about 2025 pay trends here.

What is a Salary Adjustment?

A salary adjustment is a change to an employee’s base pay, typically made to reflect market rates, internal pay equity or cost-of-living increases. While most adjustments result in pay increases, in rare cases, salaries may be adjusted downward due to restructuring, job role changes or financial constraints. Adjustments to salary can be for an individual or an entire workforce, depending on the scenario.

Unlike a pay rise, which is usually linked to performance, salary adjustments help make sure you offer fair and competitive compensation for your employees. They can be temporary or permanent and may appear on a payslip as a basic pay adjustment or payroll adjustment. 

‍For example:

A mid-sized UK business reviews market salaries and finds that software engineers are being paid 5% below the industry average. To stay competitive, the company applies a market rate adjustment to align pay with current salary trends.

Why Do Companies Adjust Salaries?

Salary adjustments are a strategic tool that businesses use to manage pay structures effectively. While annual pay reviews are common, many organisations adjust salaries throughout the year in response to market shifts, talent retention needs, legal requirements and internal pay equity concerns. 

Here are the key reasons for a salary adjustment review:

1. Market Rate Adjustments

If salaries fall below industry benchmarks, companies risk losing talent to competitors. Conducting regular market analysis helps HR teams identify pay gaps and take necessary action to ensure a company remains competitive without overpaying.

2. Internal Equity Adjustments

Salary adjustments help maintain fair pay structures within teams and departments. If an employee is being paid significantly less than their peers for the same role and job duties, an adjustment ensures consistency and fairness. This also helps avoid legal risks related to pay equity laws.

3. Cost-of-Living Adjustments (COLA)

During periods of high inflation, businesses may increase salaries to protect employees’ purchasing power. While COLA adjustments are not always guaranteed, they can boost retention and employee morale. 

A study conducted by Visier during the height of the cost-of-living crisis in 2022 showed that 17% of employees planned to leave their current employment for a better-paid role to handle the rising cost of living.

4. Retention & Counteroffers

A key challenge for HR teams is reacting to external job offers. When employees receive higher pay offers elsewhere, some companies respond with salary adjustments to retain them. 

But, it’s worth bearing in mind that knee-jerk reactions - such as offering a significant pay increase without considering internal pay alignment - can create long-term issues, including disrupting pay equity and creating resentment among employees.

5. Role Changes & Promotions

When employees take on increased responsibilities, their pay should reflect the increased workload. Promotions naturally come with salary increases, but even lateral moves can need adjustments if the role demands a new skill set or higher expertise.

6. Legal & Compliance Adjustments

Regulatory changes, such as minimum wage increases or new pay transparency laws, often require salary adjustments to ensure compliance.

For example, from April 2025, the National Living Wage for workers aged 21+ rose, requiring businesses to review and adjust salary structures to meet new legal requirements.

To ensure fair and competitive pay, companies should benchmark salaries regularly. HR DataHub provides real-time UK market data to help HR teams make informed and up-to-date salary decisions.

How Do Salary Adjustments Typically Work?

Salary adjustments often depend on how a company structures its pay governance. Some companies have a strict once-a-year review cycle, while others adjust salaries throughout the year depending on the economy and business conditions. 

To be most effective, salary adjustments need to be structured, data-driven and aligned with company policies. Without clear processes, businesses risk budget mismanagement, internal pay disparities and potentially even compliance or pay discrimination issues.

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“Pay adjustments need to be structured, fair, and financially sustainable.”

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How to Calculate a Salary Adjustment

Pay adjustments need to be structured, fair and financially sustainable. Whether adjusting pay for an individual or an entire workforce, HR teams should take a data-driven approach to make sure salaries stay competitive without causing internal pay disparities.

Here’s a step-by-step process for calculating salary adjustments:

1. Identify the Need for an Adjustment

Salary adjustments can be triggered by the following:

• Annual salary reviews - Most companies conduct yearly reviews to align pay with market rates.
• Market benchmarking - If competitors are offering significantly higher salaries, adjustments may be needed to retain talent.
• Cost-of-living changes - High inflation may prompt across-the-board adjustments to protect employee wages.
• Internal equity concerns - Addressing pay gaps within teams or across demographics (e.g., gender pay disparities or ethnicity pay gaps).
• Retention risks - If employees receive competing job offers, businesses may adjust salaries in response to prevent talent loss.

2. Evaluate Current Salaries Against Market Data

Conduct market research to benchmark salaries against competitors. Compare salaries with industry standards and competitors, and consider factors such as job role, seniority, location and sector-specific pay trends. 

Using the most comprehensive and most up-to-date data set will give you more accurate benchmarking - HR Datahub gives you real-time market data based on 30 million job posts.

Read more about how to use live market data in your salary review process here.

3. Assess Internal Pay Structures

Ensure pay equity within teams and across similar roles to prevent discrepancies. Check whether employees in similar positions are being paid fairly, especially when adjusting salaries due to external market shifts.

4. Factor in Other Key Considerations

• Company Budget: Can the business afford the adjustment in the long term?
• Legal Compliance: Check salaries comply with minimum wage laws, pay transparency laws (e.g., the EU Pay Transparency Directive) and any other relevant laws.
• Retention & Employee Value: Is the adjustment necessary to retain critical employees or reflect new job responsibilities?

4. Determine the Type & Scale of the Adjustment

• Market Adjustment: If an employee earns 10% below the industry average, an adjustment of 5-10% may be necessary.
• Cost-of-Living Adjustment (COLA): If inflation is at 4%, a company might apply a 3-5% increase to maintain purchasing power.
• Performance-Based Adjustment: Make sure increases align with internal pay bands to prevent overcorrection.

Example calculation:

If an employee earns £45,000 per year and a market adjustment of 5% is needed, the new salary would be:

£45,000 × 1.05 = £47,250 per year

Pay adjustments can be both permanent and temporary. Here’s when you might use either of these options:

• Permanent salary adjustment: A long-term increase in base pay, such as a market realignment or a performance-based adjustment.
• Temporary salary adjustment: Short-term pay increases, such as a cost-of-living bonus or a one-off retention payment.

5. Adjust Payroll Systems

Once a salary adjustment is approved, it’s important to update payroll records to ensure accurate payments in the next pay cycle.

• Permanent salary adjustments - Update base pay in payroll software to reflect the new salary from the next pay period.
• Temporary salary adjustments - Process one-off payments, bonuses or temporary increases separately, ensuring clear start and end dates.

Payroll teams should also check for tax implications, pension contributions and compliance with reporting requirements to avoid administrative errors.

6. Communicate Adjustments to Affected Employees

Transparency around pay adjustment is the key. Poor communication often leads to misunderstandings and disgruntled employees. 

Employees need to know the following:

• Why their salary is changing - Whether due to market realignment, internal equity or legal compliance.
• How the new salary is calculated - Providing clear reasoning helps maintain trust.
• What this means for future pay reviews - Ensuring employees understand whether the adjustment is a one-time change or part of a structured progression plan.

A simple message to employees might be:

"As part of our ongoing commitment to fair and competitive pay, we’ve reviewed salaries across [department/company] to ensure alignment with market trends and internal equity. Based on this review, your salary has been adjusted to [new salary], effective [date]. This adjustment reflects [reason, e.g., market benchmarking, cost-of-living increase], and we remain committed to regular pay reviews to ensure fairness and transparency."

If a salary adjustment results in a permanent change to base pay, employers should update the employment contract or provide a written confirmation of the change, as required under the Employment Rights Act 1996. 

For temporary adjustments, a formal contract revision may not be necessary, but it’s best practice to document the change in writing.

Managing Off-Cycle Salary Adjustments

While most salary changes happen during annual pay reviews, businesses sometimes need to make off-cycle adjustments – salary changes that occur outside the usual review period. These adjustments should be exceptional and strategic, making sure to serve a clear purpose rather than being reactive.

By managing off-cycle adjustments strategically, businesses can retain top talent, make sure they’re paying employees fairly and remain compliant with evolving regulations, without unnecessary budget strain.

When Should Companies Consider Off-Cycle Adjustments?

• Market Misalignment: If salaries fall significantly below market rates, waiting until the next review cycle could lead to losing your talent.

• Retention Risks: If a high-value employee receives a competitive offer, an adjustment may be needed to retain them. However, as mentioned above, knee-jerk salary increases for a single employee can create internal pay disparities.

• Internal Pay Equity Adjustments: When businesses identify pay gaps between employees in similar roles, an off-cycle adjustment can correct unfair pay structures and improve transparency.

• Legal Compliance: Changes in minimum wage laws or pay transparency regulations (such as the EU Pay Transparency Directive) may require pay adjustments outside the normal cycle.

• Job Role Changes: If an employee takes on more responsibilities or shifts into a new position mid-year, waiting for an annual review may not reflect their new contribution accurately.

Best Practices for Managing Off-Cycle Adjustments

• Have a Clear Policy - Define the specific conditions under which off-cycle salary changes can be made to prevent favouritism and ensure consistency.

• Ensure Internal Pay Alignment - Before adjusting an individual salary, review similar roles to prevent pay compression issues (where a less experienced employee is paid close to or more than a senior colleague).
  
  
• Implement mid-year reviews - Salary issues come up throughout the year, and if you wait 11 months to fix them, you’re already too late. Employees will have left for better offers. HR teams should consider structured mid-year adjustments to stay ahead of pay misalignments.

• Use Data to Support Decisions - Benchmark salaries to justify adjustments and ensure they align with industry trends. Real-time salary insights from HR DataHub can help you do this.

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An example of off-cycle adjustment:

A business identifies that its data analysts are earning 7% below market rates. To prevent employee turnover, it makes a 5% pay adjustment in October (outside of the annual pay review cycle), ensuring employees remain engaged while keeping costs controlled.

Our CEO, David Whitfield and Meghann Robson, Head of HR at KP Snacks, shared their insights into pay compression and strategies for staying competitive amidst rising costs in this webinar. Watch free on-demand now!

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How to Respond to Employee Questions About Salary Adjustments

Salary adjustments can create uncertainty among employees. HR teams should anticipate common questions and make sure they are clear on how to answer them:

Here are some common employee questions you may get, along with suggested sample answers:

1. Why did my salary change?

Pay adjustments are based on business-wide pay reviews, market forces and internal pay structures. If your salary has changed, it’s because the company has reviewed and adjusted employee pay levels to remain competitive, ensure fairness or comply with legal requirements.

2. What does this adjustment mean for my future pay?

This adjustment ensures your pay remains aligned with company benchmarks. Future increases will still be determined through regular salary reviews, performance assessments and industry changes.

3. Can I request a salary review?

Employees can request a salary review in line with company policy. However, adjustments are typically made based on structured benchmarking and internal pay equity considerations. If you believe your salary is misaligned with your role or market rates, you should discuss this with your manager.

4. How does this affect my performance-based pay increases?

Pay adjustments are separate from performance-based pay raises. This adjustment ensures fairness across the company, while individual performance reviews will continue to determine merit-based increases.

5. Why is my salary adjustment different from my colleague’s?

Pay adjustments are based on various factors, including market comparisons, role responsibilities and internal pay alignment. While adjustments aim to ensure fairness, they are not always uniform across roles or departments.

“Counteroffers to retain employees can sometimes backfire. Reacting quickly with a large salary increase to prevent someone from leaving can create long-term problems, such as internal pay inequities and increased turnover among employees who feel undervalued.” 

Avoiding Common Mistakes with Salary Adjustments

Salary adjustments play a crucial role in retaining talent and maintaining fairness, but when handled poorly, they can lead to budget issues, internal pay disparities and employee dissatisfaction. 

Here are some common mistakes to avoid:

1. Making Knee-Jerk Retention Adjustments

Counteroffers to retain employees can sometimes backfire. Reacting quickly with a large salary increase to prevent someone from leaving can create long-term problems, such as internal pay inequities and increased turnover among employees who feel undervalued. Instead, businesses should take a structured approach to retention, ensuring pay adjustments align with market benchmarks and internal salary structures.

2. Ignoring Market Data

Failing to benchmark salaries against real-time market data can result in overpaying or underpaying employees. Without accurate external comparisons, companies risk falling behind industry pay standards, leading to high turnover or unnecessary budget strain.

‍HR DataHub provides real-time benchmarking data to help businesses make informed, data-driven salary decisions. Get your free trial today!

3. Overlooking Internal Pay Equity

Pay adjustments should not be made in isolation. Raising one employee’s salary without reviewing internal pay structures can lead to wage compression, where less experienced employees earn close to or more than senior colleagues. Regular pay audits and structured salary bands help prevent this issue.

4. Lack of Structure & Governance

If managers are allowed to hand out pay rises without oversight, favouritism can creep in, and businesses may unknowingly violate pay equity laws. Proper governance ensures salary adjustments are fair, legal and aligned with company strategy. Without structured benchmarking, salaries can also drift upwards as pay adjustments happen inconsistently and without real justification, costing the company millions over time. 

5. Lack of Clear Communication with Employees

Employees need to understand why salary adjustments happen and how they fit into the company’s broader pay strategy. Vague or inconsistent messaging can lead to confusion and dissatisfaction. HR teams should provide transparent explanations and ensure managers are equipped to discuss pay adjustments confidently with their teams.

6. Failing to Budget for Salary Adjustments

Unplanned or poorly managed salary adjustments can lead to financial strain. Salary reviews should be factored into annual compensation budgets, ensuring businesses can make adjustments without disrupting financial stability.

“Failing to benchmark salaries against real-time market data can result in overpaying or underpaying employees.”

FAQs on Salary Adjustments

We’ve covered some of the most burning questions HR professionals tend to have around salary adjustments below:

1. How do I respond to an employee's request for a salary adjustment?

Salary adjustments are typically based on structured pay reviews rather than individual requests. But, if an employee believes their pay is misaligned with market rates or internal equity, Human resources should assess the request against benchmarking data, company pay structures and performance criteria before making a decision.

2. What is a cost-of-living adjustment, and when should it be implemented?

A cost-of-living adjustment (COLA) is an increase in salary to help employees keep up with inflation. Many businesses implement COLAs when inflation rises significantly or as part of an annual salary review. The increase is usually a percentage of the employee’s base salary, aligned with economic indicators.

3. How should pay adjustments be managed across multiple employees or teams?

Adjustments should be data-driven and applied consistently across the business. Using a structured pay review process and benchmarking against market rates makes sure you’re paying fairly, while preventing internal pay disparities. Large-scale adjustments should be planned in advance and communicated transparently.

4. How can market data help inform salary adjustments?

Market data provides a real-time view of salary trends across industries, helping businesses determine whether their pay structures are competitive. By analysing external salary benchmarks, HR teams can identify where adjustments are needed to retain talent, attract new hires and ensure internal equity. 

Market data also helps prevent overpaying or underpaying employees, which can lead to either unnecessary pay bill costs or increased turnover. Regularly reviewing salary benchmarks ensures that businesses stay aligned with economic conditions, sector trends and evolving pay expectations, allowing for strategic and data-driven salary decisions.

5. Can pay adjustments help prevent layoffs?

Yes, in some cases. Companies experiencing financial difficulties may use salary adjustments - such as temporary pay reductions or restructuring salary bands - to preserve jobs while managing costs. However, this approach must be carefully communicated to maintain employee trust.

6. What is an equity adjustment, and when should it be considered?

An equity adjustment is a salary change made to correct internal pay disparities. For example, ensuring employees in similar roles receive equal pay, regardless of gender or background. These adjustments help companies comply with equal pay laws and improve fairness across the workforce.

7. How do salary adjustments relate to performance reviews?

Salary adjustments are often separate from performance-based raises. While an individual performance review may lead to a merit increase, salary adjustments are typically driven by market conditions, internal equity, or compliance requirements. Companies should ensure that both processes are well-defined and clearly communicated.

8. How do I address employee dissatisfaction after a salary adjustment?

If an employee feels their adjustment was unfair, HR should provide a clear explanation of the decision-making process. Transparency around market benchmarking, internal pay structures, and company policy can help employees understand how salary adjustments are determined.

Benchmark Salaries with HR DataHub

Accurate, real-time market data is essential for making informed salary adjustments. Without it, businesses risk paying too little and losing talent, or overpaying and straining budgets.

HR DataHub provides live salary benchmarking insights, enabling HR teams to:

• Compare salaries against real-time market data rather than relying on outdated salary surveys.
• Identify pay gaps and internal equity issues before they become retention risks.
• Ensure salary adjustments are fair, competitive, and aligned with economic trends.
• Stay ahead of regulatory changes, including the EU Pay Transparency Directive and National Living Wage increases.

HR professionals need accurate data to make salary adjustments with confidence. With HR DataHub, businesses can take a proactive approach to compensation strategy, making sure they are paying employees fairly and improving retention and long-term workforce stability.

Want to make smarter salary decisions? Get a free trial of HR DataHub today.