Performance reviews typically involve increased salary expectations, and that’s a process you must manage carefully. Low expectations can create unmotivated employees. High expectations, on the other hand, may set the stage for disappointment. As you work to retain your best talent and keep everyone motivated and engaged, your salary reviews need to be part of that process. Here are several examples:

Jeffrey is a recent hire. He came onboard less than a year ago, taking less than he wanted for the promise of raises as he came up to speed. He’s met his goals, but didn’t exceed them. When you tell him he’s getting a three percent raise, you discover he was expecting at least five. How do you keep him motivated for the next year?

Amy is a front-line supervisor who is excellent at directing a small team. Her projects are done right the first time and often come in under budget. She’s eager to move up, but there are no openings. When you tell her she’s getting a seven percent raise but no promotion, she sulks. What steps can you take now to keep her motivated?

Delivering Good News and Bad

When it’s time for a salary review, managers are often ill prepared for the conversations. While performance is only one factor in determining pay raise, employees frequently base their entire self-worth on the figure. If the news is good and the employee is given a big raise, the pressure is on the manager to make sure the investment pays off. If the news is bad and the employee is given a raise below expectations, the pressure is still on the manager to keep the employee motivated.

According to the Harvard Business Review,too often managers don’t know how to communicate worth to their employees. Even good news can come across as depressing when you put a figure on a person’s value. Jeffrey might be left thinking: “Is this all I’m worth to the company?” And Amy may believe the company is just throwing money at her to placate her. Salary reviews are difficult conversations to manage.

Determining Employees’ Worth

Employees often determine their value to the company by how much you pay them. That’s natural. Jeffrey, for example, definitely ties his worth to the pay he’s getting and the amount of his raise. Amy bases her worthiness on her title. But money and promotions are tied to a number of factors that employees don’t or can’t imagine, especially when they don’t have all the information. Considerations that go into performance-based reviews and compensation usually include:

• Job title
• Organizational structure
• Company size
• Company budget
• Industry standards
• Location/cost of living adjustment
• Market data
• Years of experience
• Competitive analysis
• Length of service
• Employee record
• Known past performance
• Recent performance

An employee’s recent performance may be just the last rung on the ladder of factors you are bound to rate. It’s not that performance doesn’t matter — of course it does — it’s just that there are many other factors that go into the final decisions about salary reviews.

Managing Employee Expectations

To keep salary reviews from becoming an emotional rollercoaster, the time to start talking about money and value is on the employee’s first day on the job. Front-line managers should schedule frequent conversations from that day forward to set expectations regarding pay scale and raises. This would have helped in Jeffrey’s case. His manager should have asked him what he expected long before the meeting to discuss his raise.

A similar approach could have worked better with Amy as well. As her manager, you should have explained to her that the chances of a promotion were slim this year and explain why, adding that the company values her skills. You then could offer other ways to promote her growth within the company to keep her engaged and motivated.

Salary reviews can be motivational tools, since your company likely will reward high performers more than those who merely meet expectations. Set goals in early meetings with your employees, and set realistic expectations about compensation. The last thing you want to do is to negatively surprise an employee at an annual salary review.

Discussing Performance and Money

The best strategy is to discuss an employee’s performance and salary… but not at the same time. This technique would help keep both Jeffrey and Amy motivated.

Schedule a meeting to talk only about the employee’s recent performance. Most companies have standardized HR forms for evaluating performance. Stick to the script when you discuss performance. Set goals and look at performance to date to determine whether the employee met or surpassed previous expectations. Look for potential areas of growth or the need for more training.

By the time you get to the annual salary reviews (in a separate meeting), your employees should have a pretty good idea of what to expect. Chart a clear course for the conversation. Include factors from the bulleted list above. Put the employee’s position and accomplishments into the perspective of the company’s results in the past year. If the employee wants to increase his value to the company, it’s up to you to help him find a way to benefit both of you.

Keep the conversation objective, which is not to say emotionless. Most people experience joy when hearing good news, sadness at bad news. Emotions may come into play, but your goal is to set and maintain an objective tone in the meeting. Prepare employees for salary reviews and you will reduce the risk of emotional outbursts that could lead to rash decisions, like quitting or making ultimatums.

Accentuating the Positive

Barring disciplinary action up to and including firing the employee, you should stress the real good news you bring to salary review meetings: your company wants the employee to continue working, learning and growing. While both Jeffrey and Amy may be a bit disappointed, both are solid performers. The company doesn’t want to lose them. Make sure they know how valued they are.

Whether you are delivering good news or bad news in salary reviews, your employees should have a clear understanding of what went into their compensation decisions. Be honest with them. People can tell, and your employees deserve the truth. Also, keep it just about one employee at a time; don’t talk about others. It’s not appropriate.

And if you competently describe the big picture, your employees ultimately will understand their places within it, as well as why they received a specific review. They should also understand what they have to do to improve their earnings in the following year. Hope and hard work will set higher, realistic expectations for the next salary review.

Taking Time to Listen

Good or bad, employees will want to have their say — whether to defend their records, explain their mistakes or make promises for future growth. At these moments, a manager’s job is to listen carefully to what employees have to say. Not only can you learn a lot about an employee’s character and integrity, but you also can learn what best motivates him. Besides, people feel good when they know they’ve been heard.

This also provides a good opportunity for you to express your expectations in the employee’s performance. Pursue a line of questioning that brings a mutual understanding. Determine what type of work the employee enjoys or if a mentor may help his progress. Provide a clear direction for how the employee can further his career at the company. By the end of the meeting, your employee will have a deeper understanding of what goes into his pay level and how to increase it.

Salary Reviews and Beyond

Once you’ve completed your salary reviews, don’t let the matter just drop. Discuss your meetings with your superiors and Human Resources. Providing company leadership with this information helps everyone in the long run. If your employees asked questions you couldn’t answer at the time, find the answers and report back to those employees. This shows your integrity while inspiring trust and respect. By being thorough and clear, you create a positive environment for all employees to prosper. And Jeffrey and Amy may just stick around to achieve their own objectives, as well.