Budgeting compensation strategy

Plan Ahead: Compensation Strategies for 2021

Marked by extreme changes and uncertainty, 2020 has been a year unlike any other. Compensation and total rewards are no different.

In the past a 3% salary increase budget would have been typical. But as you know, this year is not typical.

Despite more than three quarters of organizations giving salary increases earlier in 2020 (per webinar poll data), almost half of HR professionals don’t yet know whether they’re going to implement salary increases this year. However, of those who anticipate giving increases to their employees in 2021, many say they’re drastically lower than last year’s.

ICYMI — To help you budget and plan for the upcoming year, I hosted a webinar on compensation strategy. To gain access to the replay and resources (including a salary increase planning tool and a compensation discussion guide), submit your info here.

Regardless of whether you’re giving salary increases, now is the time to budget, plan and strategize for your upcoming year.

Guiding principles for your compensation strategy

Before you begin budgeting and planning your compensation strategy for the upcoming year, consider these guiding principles.

Does your organization have the financial ability to pay increases this year?

First and foremost, you need to know whether your organization has the funds to give your employees salary increases. If so, will those increases be spread functions, groups or populations across the organization? Or will they be more targeted based on trends and data? More to come on this below.

What is the economic outlook for your industry?

Is your organization in a field that’s struggled during COVID-19? Typically, now is not the best time to invest in pay increases if your industry is seeing a decline in business.

An extreme example is the airline industry, whose outlook is not overly optimistic of the coming months and years.

If you’d like more questions to ask yourself before budgeting and planning for 2021, gain access here.

Total rewards focus

Obviously, compensation is a tremendous factor in why we all do what we do, why we go to work every single day. However, it’s not the only factor that contributes to an overall employee experience.

Because every individual has different experiences and prefers different elements of their career, the total rewards model comprises every facet of the employee experience. For example I expect my organization to support me in my passions of not only continued learning and professional growth but also my well-being and work environment.

Relevant to the current state of the economy, job security is becoming increasingly important to employees: Only 36% of the American workforce trust the U.S. economy to recover quickly (Aon). Yet, had you asked your employees about the market a year ago, they would’ve had fewer concerns.

Realize when crafting your compensation and total rewards strategy that your employees are motivated by different things. Furthermore, current events will shift their perceptions of those benefits and perks.

According to a WorldatWork report from April 2020, the top five benefits employees desire from their employer are:

  1. Continued pay and benefits
  2. Additional time off and paid sick leave
  3. Other financial assistance
  4. Paid family care leave
  5. More frequent communication and transparency from leadership

Salary increase data

Although 3% is the norm for salary increases year-over-year, this year is different. After almost ten consecutive years of steady growth since 2009, the national total salary increase budget dropped from an anticipated 3.3% to just 2.9% due to the uncertainty created by COVID-19.

In fact, the number of organizations reporting no salary increases at all has risen 10x!When we compare these numbers to the national average for merit increases, it’s even a bit lower at 2.7%.

For those who budget salary increases dependent on inflation, last year, inflation was increasing at a 1.6% rate around this time compared to just 0.6% this summer.

What’s unique to 2020 is that 69% of organizations are budgeting for pay equity remediation, perhaps driven by the public discourse around social injustice. And when we asked our webinar attendees, 70% said they were set to review their pay equity – on par with the national average.

Better inform your strategy by getting more info about salary and budget increases here.

Salary increase trends

Let’s face it – trends drive our strategies. To read more into the trends, register for the webinar replay and resources below.

Industry

As we move into 2021, industries across the board are seeing a high level of variability in salary increases. Considered lagging indicators of the economy, publicly-funded organizations such as educational services and government institutions are set to see drastic salary increase budgets – some 2% lower than in 2019.

In contrast with the public industry, fields like finance, construction and manufacturing are all seeing relatively steady salary increase budgets. These trends should and will affect your compensation strategy in 2021.

Geography

Although trends are fairly consistent among state and metropolitan regions across the country, the sudden switch to remote work for many organizations begs more questions. Employees may move to an area with lower cost of living and still demand the same salary they received before.

We haven’t quite tackled this subject yet, but when we do, you’ll be the first to know.Internationally, nations across the world are seeing decreasing budgets. The United States is not alone.

Organization size

Due in part to the influence of the CARES Act and PPP funds, smaller organizations with 1-499 employees have had higher increases in 2020 than those larger than them.

To learn more about salary structure adjustments, pay-for-performance, variable pay programs and other compensation trends, gain access to the webinar replay and resources here.

Recommendations and next steps

Almost half of our webinar attendees did not have a defined compensation or total rewards philosophy. Our FirstPerson experts strongly suggest you create one or learn from one of the strategies we outlined.

If you will be giving increases in 2021, here are three rules to follow:

  1. Focus on high performers in competitive jobs first (e.g. IT and niche skills).
  2. Look at pay equity and make adjustments as needed.
  3. Re-examine COLA increases and variable pay programs.

If you aren’t giving salary increases in the upcoming year, that’s okay! However, communicate early and often with your employees to clarify the changes. Determine if you might “revisit” increases later in the year if your organization or the economy recovers quicker than expected. Finally, re-examine variable pay programs if you’re not able to commit to increased fixed costs in order to continue to incentivize high performers.

From a total rewards standpoint, define your employee value proposition. What do they value? What do they need? Align your total rewards strategy with what they desire.

To download our guide for talking to your employees about compensation – whether you’re giving increases or not –, enter your information below.


Struggling with any of these issues?

Have you heard any of the following statements around your [virtual] office lately?

  • I want to have a compensation program but don’t know where to start.
  • I can’t pay for all of this in my budget.
  • It’s too expensive to hire a compensation expert internally.
  • I don’t want to buy expensive salary survey data.

I can help! With our new outsourced compensation service, I can lend my expertise and knowledge for a far lower price than paying an internal employee.

If you want any assistance building a market-based compensation benchmark, salary structure, compensation and total rewards strategy manager training or merit matrix, you’ve come to the right place.

To learn more about our services, click here.

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