2021 Compensation Strategy Benchmarking

According to a recent Willis Towers Watson Salary planning survey during the pandemic, one-third of companies halted their salary increases through freezing or postponement, while the rest implemented salary adjustments that on average are 0.6% lower than the pre-crisis level.

As the world steadily moves towards restoring stability, many organizations are relying on extreme cautiousness and cost-saving strategies to navigate through the rest of 2020 and to create optimism for 2021.

The survey data indicated that the majority of organizations are optimistic that their cash preservation decisions in 2020 will yield positive outcomes for their 2021 budgets.

It could still be too early to predict the 2021 budgets, as the pandemic is still ongoing and markets remain volatile. Organizations are taking a balanced and thoughtful approach, looking at their own company affordability in order to determine the final 2021 budgets. In early Fall, more data on 2021 forecasts will become available as some industries did well and surpassed budget targets and others fared poorly.

In an immediate effort to curtail costs this year, many companies adopted various cost-containment strategies. Willis’ survey found that the most prevalent strategy across all markets was to implement an immediate hiring freeze, accompanied by reductions on pay and bonuses, workforce reduction and furloughs.

Some observations, based on survey data, show that the U.S.’s COVID-19 response and recovery outlook seems to be a major factor influencing the types of cost-saving strategies used most widely in each market.

The effects of the ongoing COVID-19 crisis bear similarities to the economic uncertainties during the 2008 global recession. However, a major difference this time around is the use of digitalization and AI technologies to predict the economic impact, which may have helped many organizations to act faster and more prudently throughout the crisis. As the next salary-review cycle approaches, organizations are remaining cautious and especially mindful of a key difference between the 2008 and 2020 recessions – the previous one was caused by a banking crisis, while the current recession is caused by a health crisis which is far from over.

Planning for Recovery

There are three key considerations as companies plan for recovery in 2021. These could also help to weigh the potential long-term impact of decisions post-crisis:

1. Company Affordability

In determining the appropriate budget for your organization, the first step should be to look at company affordability. Have the revenue expectations surpassed the cost? For companies experiencing a tougher business environment, there’s a greater need to prioritize and look after critical segments of your employees, such as top performers and essential workers.

The Willis survey indicated that it is crucial that companies put focus on defining appropriate rewards for critical segments. Fifty-five per cent of organizations have employees who are required to work on-site; however, only 28% have identified specific rewards for front-liners. Cash allowance is by far the most common type of reward. As the health crisis wears on, companies must work on addressing pay and reward gaps that will be brought to light as essential workers continue risking their health and safety.

2. Rethink and Restructure Total Compensation

Consider restructuring compensation (to avoid further impacting base pay) and to look at implementing bolder and differentiated changes to performance based variable pay. This will ensure that the total compensation remains competitive and performance-based.

It’s a good idea to simulate pay decisions before implementing any cost-saving approach or pay adjustment. This could provide insight into the potential impact on the business and workforce, thereby helping to manage employee and stakeholder expectations for 2021.

3. Timely and Transparent Communications Around the Salary Review Process

The survey indicated that globally, 61% of employees say they are dealing with new financial concerns brought on by the pandemic. This will surely compel employees to question how they feel about their compensation, and all the more so when they inevitably compare their experience with that of their peers.

Even in these unusual times, organizations must remain on top of this conversation and continually provide clear, timely information about the salary review process. Ensure that employees understand your organization’s pay philosophy and the factors that affect pay decisions, including the actions that the business is taking to better maximize limited cash flow and to protect human capital throughout the crisis.

Amidst ongoing uncertainties, employees feel less anxious when leaders are being upfront, even if it’s about bad news. Prioritizing this connection point can have a profound impact on employee engagement and trust.

Written by: Barbara Manny, BCR President and Consultant