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The pandemic and resulting economic fallout impacted lives and businesses like no other event for a generation. In response, employers adapted with agility and speed. Remote work became the norm. Companies embraced digital technologies to enhance employee safety and collaboration. However, as companies have repositioned in the marketplace, compensation and rewards programs have not kept pace.

There is a profound need for companies to reshape their approach to rewards. A successful rewards scheme will encourage the right behaviors, driving performance and focusing employees on a common purpose to deliver a business’s mission. Here are the trends most likely to impact restructuring of company pay and rewards:

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1) Aligning Purpose with Pay – Based on the idea that business leaders should serve communities along with their other stakeholders, compensation is now more closely tied to achieving a successful strategy founded in purpose. In other words, companies are striving to make a positive societal impact through environmental or social activities ─ both internal and external ─ that build a more equitable and sustainable world.

Company purpose is established by determining the impact that can be made in the markets served, a vision that is aligned with brand, business model, growth strategy, and stakeholder interests. Purpose comes to life as Environmental and Social Governance (ESG) or Corporate Social Responsibility (CSR) programs. Both activities tend to be employed by public companies, however, more private companies are following their lead. When structured well, the return-on-investment includes a better company reputation and more committed and engaged employees.

Investors, employees, and other audiences want accountability and transparency with these programs, so compensation strategy and design should include:

  • Multiple metrics or a scorecard approach to gauge accomplishment of company purpose in performance management and incentives programs.
  • Expanded use of long-term incentives since purpose-based initiatives at organizations emphasize longer-term over short-term goal achievement.
  • Eligibility for incentive participation and opportunity for more employees so they have a stake in the outcome.
  • Performance management systems incorporating more frequent feedback to employees and emphasizing employee development.

2) Skills-Based Training – Skills required for the jobs available now may be different than pre-pandemic opportunities, in part due to the accelerated adoption of digital technology. In addition, worker shortages and the drive to reduce costs have some employers leaning on automated processes and artificial intelligence (AI) to perform work formerly done with human labor. This shifts the focus to more professional, technology and “soft” skills, such as critical thinking and innovation. To retain valued employees and attract new hires from a limited talent pool, more employers are investing in reskilling and upskilling programs. Moreover, investing in people leads to greater job satisfaction and engagement.

Research shows that reskilling including training costs, time off work, and administration costs an average of $24,800 per worker. The costs of not reskilling, however, including recruiting, onboarding and severances costs likely outweigh retraining.

Therefore, rewards must be redesigned to attract future-leading skills, whether those skills are developed by updating current employees or through hiring. Rewards should be designed so that they do not over value old skills but reward future business model needs.

3) Diversity, Equity, and Inclusion (DEI) – Many companies delayed implementation of DEI initiatives during the pandemic as hiring was curtailed, limited money was available, and remote working made addressing inclusion difficult. As a result, employees continue to believe that there is compensation inequity.

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Because pay equity perceptions have such a strong influence on retention, it is imperative that organizations be more transparent with employees about pay gaps and what they are doing to close them. Be sure to include DEI metrics in compensation and incentive plans to help promote progress on these initiatives.

4) Remote Working – Most employers expect to keep some portion of their workforce remote as pandemic restrictions ease. What started as a safety practice has become an important benefit to employees who value the flexibility working from home offers.

In addition, since remote work can be done from anywhere, employers can tap into a wider talent pool. Depending on where employees work, deciding what to pay them is more challenging. If they are in a lower cost-of-living area, should they be paid less? Or should all competitive pay be based on cost of labor? Some companies are using a national median as a starting point, then layering in geographic pay differentials and occupational data. How deep the analysis becomes is based on the level of competitiveness desired.

5) Benefits & Other Rewards – As workers’ needs evolve, the value of benefits to all employees has become increasingly apparent, especially those that center around flexibility, health care and wellness. For example, employers are revising their benefit strategies to better accommodate caregiving needs by letting employees work outside the historic 9 to 5 workday and subsidizing childcare during working hours.

To demonstrate their commitment to employee health and well-being, many companies are offering wellness programs. These include subsidized gym memberships, EAP resources, telehealth options, and meditation apps to help workers manage stress. Wellness is seen to be a significant future component of employee benefits.

Special bonuses are also gaining ground in 2021. These are used to recognize and reward employees for meeting challenges during a difficult business cycle, rewarding them for the completion of an important project, or to retain top talent. And with hiring shortages in some industries, sign-on and referral bonuses are increasing.

Summary

Inflation pressures, supply chain issues, and a virus that is still unpredictable are all weighing on employers, making it difficult to predict what will happen with compensation and rewards through the end of the year. Still, companies can take several actions to keep their compensation strategies on course.

First, stay on top of labor markets and increase hourly wages periodically to meet competitive markets. Next, review pay of first- and second-level supervisors to maintain parity with hourly workers. Finally, track salaries for professional and management positions so they are competitive ─ particularly top performers, high-demand positions, and high-potential employees. Businesses learned to be flexible and resilient during the last 15 months, lessons learned that can be applied to the future of pay.

Contact Us

If you would like to discuss the future of pay and rewards, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. A discussion carries no charges.

Compensation Alert periodically features guest articles from thought leaders in their fields. National speaker and trainer Jeff Kortes, founder of Human Asset Management LLC., shares his views on pay raises and promotions to reduce turnover. Jeff helps organizations recruit, engage, develop, and retain talent.

As an employee retention speaker and trainer, I see a lot. I also see a lot that simply amazes me. One of the things I just saw was an article in the Wall Street Journal that stated that 39% of employers hand out promotions with no pay increase. My question is: Why don’t you just slap the employee in the face and tell them to look for a new job?

In the opinion of this employee retention trainer, it is a huge insult. You want to give the person more responsibility, probably more work and not pay them anything more? Organizations that do this are just begging to have the person quit and go somewhere where they are rewarded for what they do.

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You often hear people say it’s not about the money. I do not buy that; not totally. Few employees are independently wealthy and work just for the fun of it. People work to pay the mortgage, make the car payment, send the kids to college, and have a decent life. So, to an extent, it IS about the money. People are told to work hard and get rewarded. Then, when they clearly work hard, are doing something right, and get promoted and DON’T get rewarded for it, the perception of most people is, “That’s not fair.”

Most people expect to be treated fairly. In a fair system, the top performers get paid more!

The most important thing to this employee retention author is that not giving a raise sends the message you do not think enough of the person to pay them what they are worth. This is about respect (or lack of it). That is how most people would view it. They would feel disrespected. When people feel disrespected they get angry. That anger is one of the things that drives a person to action. The action taken may be to go home (or maybe even fire up their computer during lunch to look on Indeed for a new job).

Even in this economy, you might as well count that employee as a turnover statistic. The best people are always in high demand.

MY TAKEAWAY

Rarely does this employee retention speaker advocate throwing money at an employee retention issue. However, in this case, to quote a local Milwaukee attorney, “It IS about the money!” Money is a factor in employee retention and when an organization does promote someone, a pay raise is warranted. Organizations that do not do this risk losing some of their best people.

ABOUT THE AUTHOR

Jeff Kortes is a recognized speaker and trainer who helps organizations recruit, engage, develop, and retain talent. Founder of Human Asset Management LLC, he has more than 25 years of experience in human resources working with companies including ConAgra Foods, SPX, Midas International and American Crystal Sugar. He is a member of the National Speakers Association (NSA) and the author of several books including: Give Your Employees C.R.A.P., 7 Other Secrets to Employee Retention, and HR Horror Stories…True Tales from the Trenches. For more information visit http://www.jeffkortes.com

ABOUT LAPPLEY & ASSOCIATES

Lappley & Associates is a management consulting firm that specializes in the development and implementation of compensation programs for clients. We primarily consult with manufacturing, service, utilities, and not-for-profit organizations for medium and small-sized businesses.

CONTACT US

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


What factors will your organization look at when determining 2021 salary budget increases and compensation plans? No doubt pay data will be part of your decision tree. But the volatile economy makes salary predictions challenging. To prove that point, forecasts from compensation surveys provided earlier in 2020 have shifted in recent months. That is why we advise companies to consider many more factors – both internal and external – when making their compensation plans.

We provided a roadmap outlining key actions to take in our September Compensation Alert. Since then and resulting from an extended pandemic, flexibility above all other factors has become priority one for employees, many of whom are working remotely and juggling care for children and parents. Health and financial wellness programs, telemedicine, education incentives and more personalized perks, such as a company library or Lifestyle Spending Account, are also growing in popularity.

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So, where do we go from here?

Creativity and purpose will be essential elements to compensation planning in 2021. In addition to studying salary and compensation trends, benchmarking competitors’ total rewards strategies will be perhaps more important.

Here is our take on recent survey data and how employers can navigate the future to overcome financial pressures and motivate a world-class workforce for shared success:

Companies Reducing 2021 Salary Increase Budgets

According to the North American Compensation Planning Pulse Survey of 705 U.S. employers completed the week of September 21 by Willis Towers Watson, 35% have reduced their projected 2021 salary increase budgets from earlier estimates; 50% kept them intact. All non-executive employee groups are projected to receive salary increases averaging 2.6%, with executives getting slightly smaller increases averaging 2.5%. Willis Towers Watson’s prior survey conducted from May to July had salary increases of 2.8%. And while 84% of employers will deliver pay increases, almost one in six employees will not receive any.

A second study fielded Oct. 4-31, the WorldatWork 2020-21 Salary Update Survey, reveals almost 40% of 694 respondents either have made or are considering making changes to their 2021 salary increase budgets. The survey showed a projected average salary increase for all employee groups of 2.8%, down slightly from June’s forecast of 2.9%.

According to their press release, WorldatWork reports the projected 2021 salary increase budgets showed a slight 0.1 percentage-point drop since June, from 2.9% to 2.8%. Contributing to those declines was an increase in the number of organizations reporting zero or no salary budget increase.

Finally, Korn Ferry now reports about a third of companies are planning 2021 salary budget increases to 50% or fewer of their general employee population, three times the number of organizations reporting this finding last year. The projected increase in North America is expected to be 0.3% percentage points lower than 2020 or about 2.7% in 2021. Korn Ferry used survey data from its annual and periodic pulse surveys to provide these updated insights.

Our analysis: Organizations will plan salary increases that align with business conditions. Industries that are hurting will provide zero salary increases or allocate these selectively. Others doing well will be more generous. But all companies should set money aside to recognize top performers, those in critical roles, and high potential employees. After all, these employees are your most valuable assets and are most vulnerable to being lured away.

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Non-Salary Rewards

Though many employees may not be receiving raises, they are increasingly being rewarded in other ways. For instance, WorldatWork reports significant increases in wellness and other employer-sponsored programs designed to promote a positive culture, recruit and develop talent, and retain valued workers. These perks range from telemedicine and counseling programs to tuition discounts, paying off college debt and caregiver leave.

Annual Incentive Programs

Many companies have adopted new business models based on how markets and their supply chain have been altered. Often, product mix, margins, investments, and growth expectations have changed. This requires them to change key performance measures used to determine incentive-based pay.

Setting 2021 performance targets, thresholds and performance ranges will not be easy. There will be questions about setting targets that may be lower than actual performance. Instead of setting specific targets, it may be appropriate for companies to use relative targets based on competitor or industry norms. Uncertainty may also lead to flatter payout curves. Or companies may bet on a rapid recovery and adopt steeper, more aggressive payout rules.

Summary

With more uncertainty ahead, now is the time to consider changes to your compensation strategies. We continue to believe that executives will not follow national market trends, but instead focus on doing what is economically feasible for future growth and sustainability based on local and regional developments. They will decide on what they want to invest in people rather than blindly following the market.

Contact Us

If you would like to discuss 2021 salary increases or other compensation-related topics, please contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com. A discussion carries no charges and perhaps after you get to know me and my capabilities, when an assignment arises you will call me.

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Despite uncertainty about where the U.S. economy is heading, recent salary surveys from compensation consulting firms reveal that salaries are expected to either increase slightly or hold steady versus 2019 salaries. In this issue of Compensation Alert, we look at how companies are planning to deal with 2020 salary budgets to remain competitive and retain top talent.

Survey information was gathered from human resource professionals facing an extremely tight labor market, increased investment in pay equity adjustments and climbing minimum wage rates. What’s more, many economists are predicting slower economic growth and greater risk for a possible recession within the next two years.

Under these conditions, participating organizations in this year’s salary surveys provide crucial insights into how companies are budgeting for salary increases in 2020.

WorldatWork

WorldatWork survey participants report that in 2019 salary budgets grew slightly to 3.2% average (median 3.0%) meeting last year’s projections. They expect salary budgets overall to increase to 3.3% in 2020. Specific pay increases are expected to be:

  • 3.2% for exempt salaried workers,
  • 3.3% for officers and executives,
  • 3.1% for nonexempt employees, and
  • 3.2% for nonexempt hourly.

In addition, pay equity continues to be a significant issue to organizations. The WorldatWork survey finds that 42% of participants plan to budget for pay equity increases in 2020, up from 37% in 2019. When pay equity adjustments are not budgeted, 46% of respondents report that company savings will be used for adjustments in 2020.

Promotional increases in 2020 are projected to average 8.9%, up slightly from 2019. The portion of salary increase budgets attributed to merit are projected at 3.0%. Not surprisingly, the largest increases in salary budgets are from the East Coast (Washington DC and Boston) and the West Coast (Denver, Portland, San Diego and San Jose). In 2019, the reported average salary structure increase was 2.2%.

Willis Towers Watson

According to the 2019 Willis Towers Watson General Industry Salary Budget Survey, salary increases are expected to hold steady in 2020. The survey reveals increases of:

  • 3.1% for exempt and non-management employees,
  • 3.1% for management employees,
  • 3.0% for nonexempt hourly workers,
  • 2.9% for nonexempt salaried employees, and
  • 3.1% for executives.

The survey finds that employers will continue to reward star performers larger increases than average performing employees. According to the survey, the highest performing employees were granted an average increase of 4.6% in 2019, about 70% higher than the 2.7% increase given to those receiving an average increase.

To retain your best workers, as compensation consultants we have long advanced a minimum increase for star performers should be at least two times the increase to average performers. Although the differential has crept up over the past few years, it still has not reached a minimum ideal level.

Mercer

Mercer’s findings are consistent with WorldatWork’s 2019-2020 Salary Budget Survey. While overall salary increases were 3.5% in 2019, they are projected to be 3.6% in 2020. Survey results show that merit increases for 2019 were at 2.9%, while mean and median merit increases are expected to be 3.0% for 2020.

Additionally, the Mercer survey found that there was no change in the number of employees receiving promotional increases in 2019. The average promotional increase was 9.3%, slightly more than the 8.9% increase recorded by WorldatWork.

Further findings reveal organizations continue to use performance ratings to differentiate salary increases, although a small portion do not use performance ratings (14%). Among this small group, the majority distribute merit pay based on manager discretion with oversight by business leader or HR/compensation.

The survey also finds that high performers received 1.6 times the salary increase of average performers.

Payfactors

The Payfactors salary survey provides detailed responses for U.S. and Canadian employers, with data broken out by industry, revenue, organization size, region and state.

According to the Payfactors survey, average salary increases in 2020 are expected to be:

  • 3.2% for exempt employees,
  • 3.2% for exempt (non-management) employees,
  • 3.2% for managers, and
  • 3.1% for officers and executives.

Industries reporting higher expected increases include professional services, pharmaceuticals, software, technology, metals, and oil and gas. Industries expecting lower increases include retail, not-for-profit, hotels and restaurants, banks and aerospace. The survey shows little difference in average increases by region.

Salary.com

According to its annual Salary.com Salary Budget Survey, median annual salary increases are expected to remain flat at 3.0% for 2020. The salary.com survey average salary increase is significantly lower than the salary increases predicted in prior cited surveys. Although different survey methodology may be present, also likely at play are different survey populations.

Variable Pay Programs Becoming More Important

After reviewing the results of these top-rated surveys, it is apparent that many organizations are struggling to remain competitive on salaries to attract and retain top talent. That’s why many are moving towards variable pay programs. Rather than investing in long-term, fixed salary programs, companies are focused on rewarding and retaining top talent via pay-for-performance incentive programs. Along with improving employee engagement and reducing turnover, another benefit to these programs is stronger market competitiveness.

How Do You Determine Your Salary Increase Budget?

Clearly, predicted market increase budgets are only one input to weigh when deciding on your salary increase budget for 2020. To begin with, it is important to distinguish between your competitiveness goal and your overall compensation strategy. Next, examine how far above or below that goal your current salaries are. Finally, evaluate how close your company can come to meeting your 2020 salary goal based on available funding.

One final point to consider: recessions are inevitable. Organizations that take strategic compensation and human resources actions in advance of these downturns will be better positioned when the economy turns around.

In Summary

Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss this topic further. In addition, you can read more on this topic at lappley.com. Please share this article with anyone who think may be interested.