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Compensation Letters: Part 1 – Introduction to Compensation Letters

3 mins read

This article was written to provide you a high-level understanding of the compensation letters used by HR and the purpose for each one.

A compensation letter is a document that is often given to the employee either on an annual basis (once the business completes their annual compensation review process) or when required (when an employee’s compensation changes). It is a common practice for businesses to complete their compensation review process and changes made effective April 1, however, every business administers their compensation process differently.

These letters are a valuable resource to the business, as well as its employees, because it outlines any changes made to the employee’s total direct compensation such as base salary/hourly wage rate and/or incentive plans. In addition to this information, the letter can also state what the employee’s performance score rating was along with the pay that reflects their great work.

When any changes are made to an employee’s compensation, it is important to communicate these changes prior to when the effective date of change is. Below are two examples of letters which can be given to employees.

    • Compensation Review Letter: is a comprehensive letter that outlines salary changes, performance score, and incentive compensation changes and payouts. Generally, these letters are generated during the regular compensation review cycle because they can reflect details regarding their performance score and/or payouts.

    • Salary Increase Letter: is a letter that outlines salary changes only. These letters can be generated during the regular compensation review cycle or when an off-cycle compensation change takes place.

It is important that any changes made to the employees’ compensation are communicated to them and documented accordingly. If there are any other changes made outside of the base salary/hourly wage rate and/or incentive plan payouts, then an addendum letter should be generated.

An Addendum Letter: officially notifies the employee of the changes made to their total rewards or the new terms and conditions to their employment such as: allowances, work schedule, work location, hours of work, etc.

This article is the first in our series about the Compensation Review Letters, over the next 3 parts we will be breaking down each letter further and providing templates to use, with an example letter. Look for Part 2 – Compensation Review Letters.

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