It will not be business-as-usual for organizations developing their 2021 compensation plans, but that is not easy to discern from leading consultants’ just-released competitive survey data. Surveys from WorldatWork, Mercer and other big consulting firms and associations are projecting a median average budget hike of 3.0% for salaries and an average salary increase of 2.9% in 2021.

Although this is down slightly from a five-year trend, many business leaders may find the research overly optimistic given current unemployment rates of nearly 9% and the uncertainty about when to expect a full recovery from the pandemic’s devastating economic effects. In addition, since data for these surveys was collected between March and June of this year when business needs and the response to the economic downturn was still evolving, results may be even more suspect.

Meanwhile, dynamic forces are spurring cultural and social change. These trends are translating into new policies and initiatives in the private and public sectors, affecting recruiting, hiring and retention efforts. As purpose winds its way deeper into the workplace, companies are relying more heavily on internal opportunities than on competitive salary movement for their 2021 strategic compensation plans. According to a recent survey conducted by Korn Ferry, purpose-driven reward strategies are the highest-rated change for the next two years.

So, what will really happen to salary budgets? We believe that companies will downplay following the national market and focus instead on more immediate business needs while doing what is economically feasible for future growth and sustainability. They will decide on what they want to invest in people rather than the market deciding. Following are actions to consider:

1) Align purpose with environmental, social and governess (ESG) objectives. Many companies have reestablished their purpose by looking beyond financial metrics to include ESG targets. Corporate responsibility is now a key part of executive compensation, performance management, salary administration, and incentive program design. According to the Korn Ferry study, purpose-driven companies grew their sales at an average annual rate that was 6.5% higher than their peers. And when surveyed, 90% of executives said a commitment to purpose-driven leadership produces long-term financial benefits.

Organizations often use a percentile to express their compensation competitiveness targets. A ridged target of say the median is being replaced by a competitiveness target range. For example, an organization might set a target for base salary between 96% and 104% of the median. This approach offers greater flexibility to focus on business needs rather than year-to-year market movement.

2) Pay close attention to High-Potential, High-Demand, High-Performing employees. Even in a challenging employment market, your team members with sought-after skills are likely to be recruited away. And they are difficult to replace. We recommend developing higher competitive targets to fund salary increases.

3) Do away with a pay entitlement mentality. To achieve your desired goals, tie them to key performance metrics and reward employees who deliver results versus making blanket annual base-pay increases. This means differentiating both within employee groups and across industry sectors by specifying expected contributions at all employment levels.

As base salaries stagnate, more companies are implementing incentive compensation programs, a trend that shows no sign of abating. One advantage: incentives can be self-funding after goals are reached. And if goals are not reached, fixed costs are minimized.

4) Prioritize diversity and inclusion goals along with pay equity practices. These are becoming a key part of annual incentive plans. Develop meaningful and measurable metrics to support recruiting, hiring and retention goals for greater accountability of D&I initiatives. But do not neglect making salary adjustments to bring organizations on firmer footing for pay equity. This can also be a competitive advantage in attracting, engaging, and retaining talent if you can be transparent and show that in fact you have fair pay practices.

Although realistic competitive salary information may be harder to come by in our current environment, it still should be a factor in 2021 compensation planning decisions. Alternatives to annual salary surveys are spot surveys that capture salary expectations in real time and data provided by industry trade associations.

What happens to 2020 Pay? Prior to developing a salary budget plan for 2021, companies who have reduced salaries or suspended incentive programs must decide under what conditions and when to restore pay. Of course, each company must determine what is appropriate for them based on their financial circumstances and prospects.

How to Pay for 2021 Salary Budget Increases

Until companies return to profitability, paying for salary increases may require some hard choices. Some companies are considering reductions in benefit programs to fund increases for star employees. Others have suspended employee match programs for 401(k) contributions and may extend these measures.

An employee survey can offer candid insight when assessing your workforce options and how your employees may react to proposed changes.

In Conclusion

For companies looking ahead to 2021, salary surveys can still provide a reference point for benchmarking and comparison. However, it is essential to look beyond traditional salary surveys to incorporate goals and metrics that support purpose and address societal challenges. These are the drivers of long-term success in an era that demands more from business leaders.

About Lappley & Associates

Lappley & Associates is a management consulting firm advising manufacturers, service companies, utilities, and non-profits about how to get the maximum return from their compensation programs and deliver on their organizations’ strategic vision. Services include: Reward Strategy Development; Executive Compensation; Incentive Compensation; Salesforce Compensation; Base Salary Structures; and Market Pricing.

Contact Us

If you would like to discuss 2021 compensation planning, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.