The global pandemic and economic downturn, coupled with a recent new surge in cases, has created additional reasons for organizations to ensure that their compensation strategies and compensation plans reflect the needs of 2021.
Throughout 2020, we have seen extraordinary unemployment and changes to business operations to survive the pandemic. A vast number of organizations and industries have experienced these changes:
- Hiring freezes
- Layoffs and furloughs
- Executive pay cuts and freezes
- Non-executive pay cuts and freezes
- Work from home arrangements
- Delayed and/or reduced salary increases
- Incentive plan design and payout modifications providing greater management discretion
- Time off without pay
We have also seen businesses and industries that have thrived as a result of the pandemic. This includes essential workers and businesses that provided critical products and services during this unusual time. When appropriate, many organizations have provided the following to their critical staff:
- Temporary increases in pay
- Hazard pay
- Cash bonuses
- Increased overtime
It is now timely to determine key changes to your 2021 compensation plan. Obtaining top executive insight and aligning with finance is always a good place to start the compensation planning process. This step is especially important since high unemployment and cash flow are such critical issues today for compensation planning purposes.
The fall 2020 edition of ERI’s Coronavirus Compensation Survey of 262 organizations provides a summary of the latest compensation practices and trends as a result of the pandemic. The survey is split into five sections: Compensation Changes, Workforce Changes, Remote Work, Benefits and Permanence, and Demographics. ERI’s National Compensation Forecast, last published in October 2020, is also a valuable analysis of the market movement of salaries. It includes a brief summary of the August 2020 results of ERI’s 2021 Salary Increase Survey.
| Description | Percent |
| 2021 Projected Salary Budget Increase | 3.00% |
| 2021 Projected Salary Structure Increase | 2.20% |
| 1-Year Actual Salary Movement* | 2.38% |
| October 2020 Actual Salary Movement | 0.45% |
*October 2019 – October 2020
Base Pay
The market projects that median base salary increases will remain at 3% in 2020 and 2021. Many companies have already deferred or will defer salary increase implementation dates or even freeze or cut salaries for cost containment purposes.
The pandemic has affected industries and locations differently. Consider reviewing the market movement of salaries nationally, with breakouts by industry and/or location when developing your salary increase budget recommendations. It is also important to address whether essential versus non-essential workers will be recognized differently in your compensation plan.
Salary Structure
The projected 2021 salary structure increase is 2.20%. Given the high unemployment rate, industries significantly impacted by the pandemic would most likely remain competitive without a salary structure adjustment for 2021.
Geographic Pay
With businesses operating remotely, there is a trend in adjusting pay based on geographic work locations for “permanently assigned” remote employee workplaces. Companies such as VMWare, Facebook, and Twitter are just a few of the companies planning on these changes. For example, if a place of business is in San Francisco, but an employee is permanently working remotely 150 miles away in a lower cost-of-labor location, then many companies are eliminating the pay premiums that have traditionally accompanied a high cost-of-labor location. This can be accomplished through geographic differentials or geographic salary structures.
ERI’s Geographic Assessor is an excellent tool to fairly and accurately calculate the differences in cost of labor and cost of living between over 9,000 locations in the United States, Canada, Europe, and other countries worldwide. Utilize our Geographic Assessor to help find geographic salary differentials and help price jobs based on geographic location.
Short-Term Incentives
Companies may adapt plan designs so that the compensation committee of the board of directors maintains discretionary authority. This ensures the ability to adapt to changing business conditions as required in 2021. Consider shorter performance periods as they are typically more predictable during these uncertain times. In addition, strategic performance metrics may be used instead of financial performance metrics (or a combination of the two). You may also consider deferring goal setting until the business outlook is clearer. Finally, look into lowering the threshold and maximum payouts. Modeling possible business scenarios is always worth the time and effort – this is important for both sales and non-sales plans.
When short-term incentive targets are too liberal as compared to the marketplace, base salary may then be set too low and affect employees’ ability to pay for fixed personal expenses (e.g., housing, food, etc.). Consider targets that are truly pay at risk.
Pay Equity
Executives are embracing their responsibilities for pay equity and even adopting a pay equity culture. It is important to discuss legal requirements and pay equity objectives with C-Suite executives while incorporating key goals and requirements into the compensation strategy.
Equity Compensation
Stock price volatility is projected to continue into 2021, affecting equity plans and equity compensation. This environment continues to make stock price forecasting a challenge. Carefully assess the situation prior to making any changes. Also, consider the high unemployment rate and if employee retention is at risk in this unique environment.
During the 2008 financial crisis, there was a tendency for companies to shift from stock options to restricted shares. Repricing and exchanges of options are more complex. Companies may feel that restricted stock may lack retention value during stock price suppression. If employee retention is an issue during these volatile times, supplemental grants may be an option to consider.
Performance Management
Performance management continues to be a high priority for 2021. In today’s new performance management programs, the once-a-year program is being replaced with ongoing processes and discussions. Consider the example below:
- Q1 provides an opportunity for goal setting and planning.
- Q2 and Q3 allow for progress towards objectives and performance achievement feedback.
- Q4 allows for year-end attainment while having ongoing coaching, feedback, and development discussions.
Today’s programs are less rigid and instead focus on performance achievement, future potential, teamwork, and the big picture. These programs also support more frequent communication than the traditional annual performance review. Online and mobile technology are also utilized in best-in-class programs today.
Conclusion
The COVID-19 pandemic requires us to carefully review and update our compensation strategies in order to design annual compensation plans that meets the unique needs of 2021. It is important to examine the following plans to ensure that your business requirements are attained:
- Base pay
- Salary structure
- Geographic pay
- Short-term incentives
- Pay equity
- Equity compensation
- Performance management
ERI Economic Research Institute has a broad range of software solutions to meet your data requirements, including the Salary Assessor, Executive Compensation Assessor, and Geographic Assessor.
The fall 2020 edition of ERI’s Coronavirus Compensation Survey, ERI’s National Compensation Forecast, and the ERI’s 2021 Salary Increase Survey are all important data resources to support you in meeting your 2021 compensation requirements.
