Compensation Strategy 2021: Salary Woes Likely to Continue, Reveals PayScale’s Survey

The year 2020 was marked by transformative shifts in businesses, which called for a diverse workforce, flexible working hours, and new laws around transparent pay practices. All these are reshaping people strategy, including compensation, and are expected to have a lasting impact.

PayScale’s annual survey, Navigating Compensation in a Changing WorldOpens a new window , explored various themes like compensation strategy, pay equity, and transparency. It also studied the reduction in base pay increases and total compensation’s impact on income inequality.

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Here is what the survey observed.

Salary Woes To Continue In 2021

At a time when 45% of companies reported a drop in revenue, employees are likely to face salary cuts. The study noted, “Although most organizations did not make changes to pay in response to COVID-19 in 2020, a sizable chunk did—one fifth to one-third of organizations depending on the type of change. Going into 2021, a smaller percentage of organizations plan to continue these changes, with the most common response being pay freezes rather than pay cuts.”

 

 

 

 

 

Actions Taken on Pay in Response to COVID-19

  Source: PayScale

Following the pandemic’s impact, 65.3% of the companies surveyed held that changing the approach to compensation should be their priority for the next 12-18 months. But, nearly 30% are not ready to make those changes. The study also noted that the drivers which are likely to bring in the change are:

• • Economy (47.1%)
  • Talent retention (44.9%)
  • Talent recruitment (42.3%)
  • Pay equity (34.7%)

How Were Employees Compensated in 2020?

The pandemic not only forced organizations to reduce the annual wage increases for 2020, but this trend is likely to continue in 2021. A little more than 63.7% of companies surveyed said they offered a base pay increase in 2020. This is significantly less than the 85% of companies who were looking forward to giving a raise last year. It also marks a sharp reduction from the 82.3% of companies that gave base pay increases in 2019.

The PayScale study notes, “A majority of organizations (74.3%) said that they gave an average pay increase of 3% or less to employees in 2020, which is slightly higher than the 7% that predicted they would give 3% or less in 2020.”

                                                       

 

Employees response to whether their base pay increased in 2020

Source: PayScale

However, the reduction in base pay was not compensated with bonuses in 2020. The number of companies giving variable pay dropped by 4 points in 2020 (69.6%) from 2019 (73%). Also, while individual performance bonuses (53.1%) were the most popular last year, employee referral bonuses (34.2%) ranked second.

This is troubling for employees, especially lower-wage earners, as they are still feeling the impact of the recession (2007-2008), which was marked by increased corporate profits. Nevertheless, real wage growthOpens a new window stagnated and labor share of corporate income declined during that time.

How Does the Future Look?

The situation looks bleak in 2021 also as only 64.2% of organizations said they plan to give a base pay increase. Also, among them, 67.2% said they plan to continue giving an average hike of 3% or less. “The average pay increase in 2021 could be higher than in 2020. However, this depends on organizations who have not yet decided (26.1%),” added the survey.

Similarly, most companies neither have any plans to change the bonus budget in 2021 nor they have a budget for bonuses. The study also observed, “Of those that cited an intent to change the budget allocation for bonuses, a slightly higher percentage (14.4%) planned to shrink the budget for bonuses versus enlarge the budget (11.4%).”

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Fortunately, companies are taking note of how the pandemic impacted the workforce and are considering changing the compensation strategy. A whopping 75.6% of organizations said they either have a compensation strategy/philosophy or were working on one last year — a 6% increase from 2019.

Another 76.7% said that they are keen on ensuring fair pay and consulting either traditional surveys or some form of paid online data sources before setting salaries. The pandemic also highlighted the need for a diverse and inclusive society. This has prompted 46.2% of companies to do pay equity analysis on the gender pay gap, racial pay gap, or both in 2021.