There are all kinds of ways to rate and compensate employees during the annual review process. For example, you could go out and do industry salary surveys for what the position is currently paying and adjust wages up or down accordingly. This could work great when wages are going sharply upward but be a disaster when you start adjusting wages downward.

So that being said, I tend to use a fairly simple base guideline in my annual review of employees, although I may deviate from it in extreme circumstances. Also, this simple base guideline is assuming that consumer inflation is running about 2 to 4 percent, and of course that the company is not in dire straits and can afford to pay salary increases.

Unsatisfactory

Employee’s performance is below minimum acceptable levels in major areas. Employee’s performance must improve quickly and dramatically to allow for continued employment. Suggested Pay Raise: 0 percent.

Below Average

Employee’s performance meets minimum requirements but is below the average expected performance for the position. Employee is expected to improve his or her performance. Suggested Pay Raise: 0 to 3 percent.

Satisfactory

Employee’s performance is either generally satisfactory or at least meets minimum requirements in all areas. Any less than satisfactory performance in one area is offset by a greater than satisfactory performance in another area. Suggested Pay Raise: 4 to 5 percent. 

Good

Employee’s performance is at least satisfactory in all major aspects of the position and measurably higher in some areas. Suggested Pay Raise: 6 to 7 percent.

Excellent

Employee’s performance is measurably higher than satisfactory in all of the most important aspects of the position. In addition, the employee’s performance is truly exceptional in one or more key areas. Suggested Pay Raise: 8 to 10 percent.

Exceptional/Promotion

Employee’s performance is excellent in all major dimensions of his or her position. In addition, the employee has achieved a major accomplishment above the scope of his or her job description. Suggested Pay Raise: +10 percent.