Posts

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.

Photo courtesy of Pixabay

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.

Photo courtesy of Pixabay

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.

What will your HR and compensation priorities be in 2021? Chances are they will look a lot different from where you started in 2020. CEOs have had to make tough choices to survive a recession not of their making. Change has been the norm.

Although flexibility and resilience will still be required heading into next year, CEOs and HR leaders surveyed about the critical issues they face are struggling with how to optimize talent and skills to deliver on their business strategies.

Photo courtesy of Pixabay

In its annual CEO benchmarking report, The Predictive Index surveyed 160 CEOs about their top talent concerns. They wanted to find out: How is your organization’s health? How is senior management holding up? Is the team prepared for the work ahead? What kind of guidance are they looking for?

Surveying more than 800 HR leaders, the Gartner 2021 HR Priorities study sought to identify their key priorities to achieve business goals – namely, growth and cost optimization – in a sea of constant change. While the pandemic disrupted traditional ways of working, it also uncovered widespread skills gaps in the talent areas needed most today.

Here are each survey’s findings and their implications for the world of work in 2021:

THE PREDICTIVE INDEX 2021 CEO BENCHMARKING REPORT

  1. Many executives are leading all-new teams, as 69% of companies restructured during the pandemic. It is not surprising then that finding ways for employees to work well together is a priority. Also, new teams mean new people problems to solve. Sixty-six percent of CEOs say productivity is a major concern; this worry is an increase from 36% in 2019.
  2. Remote work is here to stay as 97% of CEOs will allow some degree of remote work going forward. Still, CEOs cite a large challenge in getting remote teams to work well together. This leads to conflict and leaders spending time mediating people issues. More important, CEOs whose operations are mostly remote believe their teams struggle to deliver on short-term and long-term strategic goals.
  3. CEOs have had to navigate entirely new business circumstances due to the pandemic. As a result, 96% overhauled their business strategy in 2020. Currently 53% of CEOS say strategy development continues as their number one priority. Moreover, 80% believe a lack of strategic clarity runs deep within their organizations. Making sure that employees understand the mission and strategy is essential to ensure teams are equipped for the work ahead.

KEY TAKEAWAYS:

  • Management of remote teams requires a people-first approach and great amounts of time coordinating and communicating to maintain company culture and to ensure teams are engaged and motivated to meet their goals. Communicate new strategic direction throughout the organization, making sure that each level thoroughly understands and can communicate the strategy to the next level.
  • Do not neglect talent strategy. This means taking inventory of current skills, minimizing those that are becoming less important, and focusing on new competencies required. Help employees learn those new skills and rework the performance management system to reflect those changes.
  • Ensure that each employee function in the organization is directly tied to company function which will anchor employees to the company’s strategic direction. Make sure incentive plan participants understand how program measures support company strategies.
Photo courtesy of Pixabay

GARTNER 2021 HR PRIORITIES STUDY

  1. Building critical skills and competencies is the number one HR leader priority, cited by 68% of respondents. Gartner reports that the number of skills per job increases 10% each year and that fully a third of skills present in 2017 will not be needed in 2021. This rapid skills obsolescence cycle makes integrating effective learning into workflows challenging, especially when it may be difficult to determine future skill requirements.
  2. The second highest priority is organizational design and change management, a priority of 46% of HR leaders. Leaders report managers are not equipped to lead change, and employees are fatigued from all the change. A past focus on improving workplace efficiency has left many organizations with rigid structures and current roles that lack flexibility to meet evolving needs.
  3. A priority of 44% of HR leaders is developing current and future leadership bench strength. They comment that current leadership is not diverse, succession processes do not yield the right leaders at the right time, and leaders struggle to effectively develop midlevel leaders. Bottom line: the leadership management pipeline today is not working.
  4. Planning for the future of work is seen as a priority by 32% of HR leaders. Many say their organizations do not have a future of work strategy. They are struggling to adapt to changes in the market, such as how AI and automation will displace workers. The question that HR leaders face most often is where to start.

KEY TAKEAWAYS:

Update performance management programs to emphasize responsiveness to customer needs and build organization resilience. Make sure employees are learning the right skills. This may require more frequent and tailored revisions to learning programs throughout the organization.

  • Invest in technology and AI to improve corporate decision making and efficiencies.
  • Ensure that the diversity, equality and inclusion journey is manifested in the organization’s hiring, development, promotion and compensation programs through inclusive hiring, promotion, and compensation processes.

SUMMARY

We recognize that CEO and HR priorities cited do not apply to all organizations. Rather, you should consider your own priorities, using CEO and HR comments as a starting point, and develop solutions to address your priorities.

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 how these 2021 predictions may impact your compensation strategies, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

The year 2020 has brought many changes to the workplace, not the least of which is a rise in remote work arrangements. According to a survey conducted in October by WorldatWork and Salary.com, prior to the COVID-19 pandemic just 13% of employees worked remotely. By April, as lockdowns became the norm, 67% of employees were working remotely. Even now, with more businesses open than not, 62% continue to work from home. About 9 out of 10 of these are working remotely full time.

As employees and companies adapted to remote working, both began to see the considerable benefits. And today’s technology advances made the adjustment easier. Organizations reconfigured company computer access for off-site staff. Zoom became the most popular platform for team meetings, cross-functional collaboration, and webinars.

The remote work relationship proved to be a win-win for employers and employees alike. Workers recaptured commuting time and costs, enjoyed more flexibility to attend to childcare and other family needs, and this translated into increased productivity. Employers maintained business operations while accommodating remote work.

Once the business disruptions from the pandemic fade, many are predicting remote work will be here to stay.

In fact, a new survey from U.S.-based Enterprise Technology Research (ETR) finds the number of employees permanently working remotely is set to double in 2021 to nearly 35%.

Businesses have many good reasons to support the remote working trend including:

  • Lower costs for commercial office space, utilities, and ancillary expenses
  • Increased diversity in hiring
  • Better employee retention
  • A reduced carbon footprint with fewer people commuting
  • Expansion of the available talent pool

On this last point, remote work allows companies to recruit from a much larger pool of candidates than they currently do, as most medium and small-sized organizations recruit talent locally. Now organizations can expand their recruiting base to the entire U.S.

One impact of the pandemic has been a reported flight from big cities as professionals seek less crowded urban environments and a significantly lower cost of living (COL). According to a new study by freelancing platform Upwork, 14 million to 23 million Americans intend to relocate to a different city or region because of telework.

If these trends do indeed become reality, employers have a strategic opportunity to reframe their basis for compensation decisions.

Even so, the current question that many employers are asking is this: Should I pay someone who is working remotely in a lower COL city the same as an employee working at our more expensive central business location? The traditional thinking goes like this: built into the corporate salary structure is recognition that larger population areas generally pay more. So, will I be overpaying if I do not reduce remote salaries to reflect these COL differences?

We believe that reducing salary simply based on COL is wrong for several reasons. First, employees will not like having their salaries reduced. How they spend their money is their own business. After all, employers do not care if an employee drives a 10-year-old Chevy or a Mercedes. So, why should they care what street the employee lives on? Second, paying less than the broader market rate increases the risk employees will be recruited away. Finally, administering and communicating separate pay programs for remote employees with multiple pay arrangements can be an organizational burden.

Photo courtesy of Pixabay

A better approach is to define a larger geographic area and set compensation competitiveness targets for that area, then administer pay to one set of parameters. So, instead of using competitiveness survey information for the company’s immediate surrounding geography, expand the territory that is used to determine competitiveness.

For example, if you are recruiting from a Midwest talent pool, you may want to examine salary data for Wisconsin, Iowa, Michigan, Minnesota, Illinois, Ohio, and Indiana. Both state-level data and regional data can be used to determine pay ranges for each position or job level. If you are recruiting from coast-to-coast, you can use a national median. This can offer a great advantage to organizations with a highly distributed workforce.

In any case, it is important to weigh the benefits and risks for your remote workforce and to consider how pay may vary depending on the industry, occupation and skillset required. Using a broad geographic approach for your competitive salary information is easy to administer and avoids confronting employees with a pay reduction.

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 pay of remote employees, contact Neil Lappley at (847) 921-2812 or nlappley@lappley.com.

Last June in our Compensation Alert, we discussed how to develop a compensation strategy. As year-end compensation planning approaches for many companies, we think this topic is timely and worth revisiting with updates to address current trends.

Compensation strategy is part of a company’s human resource strategy and should be integrated with all other elements of human resource planning. A compensation strategy—a formal, written statement capturing the organization’s views and approach to compensation—serves as a guide and touchstone when designing new HR programs or evaluating existing ones. In addition, a clear compensation strategy lays a foundation for communication transparency when giving employees the rationale behind pay and benefit decisions.

Compensation Strategy Planning Elements

Like every strategy guiding your business, your compensation strategy should align with your business priorities.

Here are six elements to guide you through the design process:

  1. Gather Information: Obtain information and perspectives from your stakeholders, including directors, executives, managers, employees and customers. Take a close look at external and internal factors having a direct and indirect impact on your pay strategy. External factors include trends in supply and demand for talent, your relationships with your customers and challenges you are having in the current marketplace. Internal factors include your company’s business culture, values and strategic initiatives, as well as the core competencies of your current and future employees.
  2. Business Lifecycle: Consider your organization’s business strategy and human resource strategy, as well as where your business may be in its lifecycle.
    • Inception Phase – At this stage cash is tight and organizational structures and systems are informal.
    • Growth Phase – Here cash is tied up in growth; often developing the HR infrastructure becomes critical during this stage.
    • Maturity Phase – Mature organizations have cash and organizational structures are in place.
  3. Consider Demographics: Early career employees may need different incentives than those further along in their work lives. For instance, entry level employees may be willing to accept lower base wages in exchange for larger cash incentives or professional development opportunities. Employees nearing retirement may be willing to trade some amount of pay for greater medical and retirement benefits.
  4. Benchmarking: Gather information on salaries and wages so you understand how your organization stacks up against competitors and where your pay is relative to market rates. This approach involves understanding an organization’s relative positioning, but not necessarily blindly following. It also considers the economics of the business, so you can decide what’s best for the organization.
  5. Test Initial Strategy: Develop an initial strategy statement, then share it for feedback from stakeholders. When evaluating your compensation strategy, make sure it is equitable, fair, fiscally sound, legally compliant and provides a framework to effectively communicate with employees.
  6. Revise as Needed: Once you have implemented your compensation strategy, monitor and evaluate its internal impact – pros and cons – making changes as warranted. In addition, adapt your strategy to changes in the external business environment while keeping its intrinsic value.

How Competitive Do You Need to Be?

Understanding competitiveness begins by defining the markets where your organization competes for talent and business. Does your company recruit talent on a local, regional, national or global basis? Gather relevant salary data so that you can adjust your compensation strategy based on geographic differences in pay. Some industries, occupations and job levels, too, may be more competitive than others.

Establishing a market competitiveness target is a key element of an organization’s compensation strategy. Does your company plan to pay at, above or below market for the jobs in your portfolio? Based on your analysis, you’ll need to decide if you want to lead, lag or match the market.

For example, if you are currently paying below market median, your reputation is solid, business is good, or talent is plentiful, you may want to continue that approach. But if you currently have great employees and recruit only the best, need skills in short supply, are in a less desirable geography or the cost of living is high, you may want to target above the market median. These and other considerations must be weighed when developing your salary structure.

What Should be Rewarded?

Your compensation strategy should be tailored to meet your organization’s unique needs and circumstances. Most compensation strategies include:

  • Base salary has an important role in compensating employees as it establishes ongoing job worth and reflects employee performance. When deciding how wide to make salary ranges, make sure there is a clear purpose for each segment in the range. Also consider how you expect employees to move through the salary range as they advance in the organization.
  • Annual incentives are meant to reward annual performance. Once you determine who will participate in the incentive program and what the incentive opportunity will be, set performance measures and a feedback schedule so everyone is on track. Include financial and performance measures for both the operating company and supporting business units.
  • Long-term incentives, in contrast, are meant to reward a longer performance cycle and typically are part of an executive compensation program. The timeframe for these incentives is typically two-to-five years. Reward systems establish forward-looking performance conditions and include cash and equity.

What motivates employees can differ greatly, so use a mix of rewards.

In Summary

How your company spends its compensation dollars – often an employer’s largest expense – deserves a strategic plan aligned with business goals. In today’s rapidly changing employment environment, it’s time to leverage the most important asset your organization has: its people.

Contact Us

Please contact me at nlappley@lapppley.com or (847) 864-8979 to discuss any comments or questions you may have about how to develop a compensation strategy. Feel free to forward this email to anyone else who may be interested.