Most U.S. companies are planning to give employees pay raises and annual bonuses next year despite the economic fallout from the pandemic. However, the pandemic and the growing demand for pay equity and transparency and remote work are all changing pay practices for 2021. HR and compensation leaders need to manage five compensation trends for 2021 and beyond.
Trend 1: 2021 Pay Increases.
Raises are projected to rebound from this year’s smaller-than-projected increases, even in industries struggling during the pandemic. According to findings in a survey by Willis Towers Watson, average exempt employee pay increases in 2021 are predicted to be 2.8 percent, compared to an average of 2.5 and 2.7 percent this year, down from the expected increase of 3 percent for 2020 at the start of the year, before the pandemic hit the US.
The Willis Towers Watson survey found three in four companies are planning to award annual performance bonuses next year, roughly the same percentage as this year. Bonuses, which are generally tied to company and employee performance goals, are projected to average 11 percent of salary for exempt employees, while bonuses for non-exempt salaried and hourly employees will average around 6.8 percent and 5.6 percent, respectively.
World at Work predicts an exempt salary increase of 2.9 percent for 2021, which is the same as the exempt salary increase in 2020. They predict a 2.9 percent average increase in wages for non-exempt, hourly, non-union workers in 2021. This is up from the 2.8 percent increase for these workers in 2020.
World at Work observes that many national retail stores such as Target, Walmart, and Amazon have committed to a US-wide $15 per hour minimum wage, matching the federal minimum wage. In many cases, this makes permanent a temporary increase in minimum wage that was awarded during the pandemic.
Trend 2: Pay Equity
Women and people of color still face pay equity hurdles and are demanding change.
Women have made progress in being paid competitively with men, when similarly qualified and performing at the same level as men. At some organizations and levels, such as CEOin large organizations, and in some professions, such as social work, women make more than men. In other professions, such as human resources, teaching, and nursing, they are paid the same as men. According to the US Census Bureau, women overall are still paid 82% of what men make on average. In states like New York, women have lessened the gap, earning 89% on average of what men make.
The disparity in pay equity is more severe in terms of race and ethnicity. According to the 2018 US Census Bureau Data for 2018, Blacks make 61 percent of whites. Hispanics make 74 percent of whites. American Indians make 63 percent of whites.
Companies can easily eliminate pay inequity by gender, race, disability, and veterans’ status (to name a few) by merely conducting an analysis of the planned salary increase for each individual by job category and level (such as senior mechanical engineers or principal accounts). When the analysis shows a pay inequity by gender or race that is not explained by the individual being on a performance improvement plan, having less education, or being less experienced, an adjustment should be made before the final pay plan is completed. I have used this practice for over 20 years and can attest to its effectiveness.
Another recommendation I have from experience is to have a 90 percent to market pay rate by job classification as a minimum. It is simple arithmetic that anyone brought in below 90% of the market will never get to market pay with an average of three percent pay increase per year.
Trend 3: Pay Transparency
Forty-eight percent of female workers/job seekers reported company transparency on pay and benefits as important information for assessing long-term potential at a company, compared to only 40 percent for men, according to a 2018 Harris Poll Survey for Glassdoor. Similarly, 44 percent of women reported that a company’s explanation on how they could grow their careers after joining would make them think the company offered long-term potential, compared to only 34 percent of men who reported the same.
Providing pay transparency on job postings is easy. Some companies do not do it, believing they are giving away competitive pay information. Join the 2020s. Glassdoor and PayScale have already open the door on pay transparency.
Trend 4: Variable Pay
With the rise in minimum wage and trends in pay equity, one way companies can still pay their best performing individuals, teams, and business units higher pay is through variable pay incentives. According to World at Work, 99 percent of private-sector employers use short-term variable pay awards, such as project bonuses and spot awards, and annual pay incentives. Annual incentive plans (AIP) are the most common type of short-term incentive (86 percent), compared with others, such as spot awards, project bonuses. Firms seem to be consolidating thei spending on structured AIPs that incorporate companywide financial metrics and other objectives.
Paying for performance is a great way to motivate teams and business units to achieve important company goals and milestones. Going forward, spot bonuses and team awards will be handed out more frequently.
Trend 5: Work/Life Integration and Remote Work
When the pandemic hit, 80 percent of office workers began to work from home. About 70 percent of them and their supervisors said they are as productive— or more productive — than when they were in the office. About 50 percent of these workers want to work from home two to three days a week when the pandemic finally abates. Working from home as a regular part of life is now a thing. Companies will need to make this a normal part of their working environment for those who are not required to be at work to service customers, interface with technology, or participate in manufacturing.
This will mean changes to pay as workers move from high-cost cities to lower cost suburbs or back home to rural states. Companies will need to transition off of national pay scales to regional pay scales. For example, with a regional pay scales, the pay of a San Francisco based software engineer who moves to Missoula and works remotely would be reduced to the market pay of Missoula Idaho. I recommend this practice. In addition, companies will have to deal with complex and irrational tax issues between the states of where the work is done (or sent digitally) and where the employee lives.
These trends will be with us not just for one year but into the 2020s. The first moving and agile companies will be market leaders.
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting, managing partner of InnovationOne, and Sales Advisor to MeBeBot. He works with companies to transform HR, implement remote work, recruit executives, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: the Best of Empirical Research, Method and Process, and Digitization. Subscribe to his weekly blogs at www.VictorHRConsultant.com.