Why Relying on Annual Salary Reviews Won’t Retain Your Best People

Key Takeaways

• Local Vietnamese companies pay higher performance bonuses than MNCs, yet their voluntary turnover rate (9.6%) remains higher than MNCs (6.5%) in H1 2025 (Talentnet-Mercer). Budget is not the root cause.
• Top performers typically decide to leave mid-year, well before the annual review takes place. By the time a review occurs, companies are often responding to a decision that has already been made.
• Replacing one employee costs 50 to 60% of their annual salary, while the average annual pay increase is only 5 to 10%. Retention is always less expensive than replacement.
• The two leading reasons talent leaves are lack of career development opportunities and a poor work environment, each cited by 47% of respondents (Talentnet-Mercer). Neither is addressed by an annual salary review.

The problem is not spending more. It is how companies allocate value and when they do it. An annual salary review is an accounting cycle, not a retention strategy. Top performers make their decisions mid-year, but companies only respond at year-end – and by then it is usually too late.

The paradox of higher bonuses and higher turnover

Understanding why annual reviews fall short begins with a paradox that many Vietnamese businesses are experiencing firsthand.

Local companies pay more but still lose more people

According to the 2025 Vietnam Total Remuneration Survey by Talentnet-Mercer (covering 678 companies), local firms apply performance-based bonuses at higher rates than MNCs, yet voluntary turnover remains 9.6% versus 6.5%. That gap has not narrowed despite increased bonus budgets. In fact, base salaries at local companies are up to 43% lower than MNCs at the leadership level – a gap that performance bonuses do not fully offset over the long term.

The cost of losing people far exceeds the cost of keeping them

Employee turnover at the mid-level costs 50 to 60% of the departing employee’s annual salary, accounting for recruitment, training, and lost productivity during the transition period. The average annual pay increase through a salary review is only 5 to 10%. That arithmetic does not balance. A small, timely investment in retention is almost always less expensive than a full replacement process.

Three reasons annual salary reviews fail to retain talent

Companies and employees are measuring different things. Talentnet’s analysis in the 2025 TRS identifies a significant gap between what employees prioritize (comprehensive benefits, long-term stability, career development) and what companies are investing in (expanding recruitment channels, employer branding, with salary improvement ranked third). Annual salary reviews address only a fraction of what employees actually value.

Top performers have already decided to leave before the review happens

Strong performers do not wait for a bonus envelope to decide whether to stay or go. They make that decision mid-year, when they feel burned out, unrecognized, or unable to see a path forward. By the time the review arrives, it is in most cases confirming a decision that was already made. A 12-month cycle creates too long a gap for companies to detect and respond to disengagement signals in time.

Opaque evaluation criteria erode trust

When employees do not understand why they received X% instead of Y%, and when bonus distribution results are not clearly communicated, suspicion replaces motivation. Research on HR practices in Vietnam consistently points to qualitative rather than quantitative evaluation, combined with seniority-based increases over contribution-based ones, as drivers of perceived unfairness – even when total compensation is competitive. Pay compression, where new hires are paid more than existing employees in equivalent roles, is a direct consequence of poorly structured review processes and one of the fastest ways to erode trust among long-tenured performers.

The real reasons talent leaves have nothing to do with numbers

According to the Talentnet-Mercer survey, lack of career development opportunities and a negative work environment are the two leading drivers of resignation, each affecting 47% of employees. Compensation does not lead that list. Companies offering market-rate pay but lacking clear promotion pathways, a culture of recognition, and meaningful autonomy will still lose people. An annual salary review has no mechanism to address any of those three factors.

Three things companies should do beyond the annual salary review

The solution is not spending more – it is allocating resources more precisely and more continuously. This is the approach companies that retain well are already taking.

Adjust review frequency and introduce stay interviews

Rather than waiting until year-end, companies benefit from establishing quarterly check-ins and, critically, stay interviews – proactive conversations with employees about what would keep them engaged, rather than exit interviews conducted after they have already decided to leave. Compensation data also needs to be benchmarked against the market on a quarterly basis rather than updated once a year. When a critical role falls below market rate, adjustment should happen immediately, not at the next review cycle.

Connect reviews to individual development milestones

Salary reviews carry the most meaning when tied to specific development markers. The message “You have completed the leadership development program and here is the corresponding adjustment alongside your new assignment” lands very differently from “The company average this year is 7% and you are receiving 7.5%.” When a review is anchored to a clear development path, it becomes evidence of the organization’s commitment to that individual – not just a number adjustment.

Build a total compensation package rather than adjusting base salary alone

An effective compensation strategy does not win by paying the most – it wins by creating the highest overall value. Internal training programs, flexible working arrangements, health and wellness benefits, and transparent promotion criteria are often less costly than continuous base salary increases, but generate stronger and more durable engagement. Local companies cannot always match MNC base salaries, but they can compete effectively on total value if the package is well designed.

Conclusion

Companies do not need to spend more to retain talent more effectively. They need to spend more precisely and more consistently throughout the year. Annual salary reviews remain a necessary tool, but they work best as one component within a broader compensation management system, not as the primary retention mechanism. Talentnet supports businesses in building a total rewards strategy grounded in data from the Talentnet-Mercer Salary Survey, helping companies understand their market position and make targeted adjustments that actually move retention outcomes.