Employers plan smaller, fewer pay raises in 2021
A recent study suggests the pandemic has employers reconsidering their scheduled pay increases.
As if workers didn’t have enough to worry about, a study from Gallagher found that annual pay raises may go the way of the conference room meeting and office happy hour. Forty-five percent of employers say the pandemic has forced them to reevaluate their plans for offering pay raises in 2021.
Before the pandemic, two-thirds of employers had planned pay raises for their workforces. As the disease spread and companies began to take financial hits, they had to reduce the amount they were offering. The average salary increase fell from a projected 2.8% to 2.5% in fiscal year 2020, Gallagher found.
Looking into 2021, more than half of employers are planning to offer smaller increases, and 45% are suspending them altogether.
Related: Redefining compensation strategies in the remote work era
Gallagher surveyed 1,283 organizations in July and August about salary practices for fiscal years 2020 and 2021.
Salary increase budgets dropped across all employee groups, the study found. The budget for increases for management and exempt positions fell 0.5%, while nonexempt employees will have an increase that’s 0.4% less than 2020. Executives had the smallest drop: 0.3%.
“Revenue streams and budgets will be unpredictable in 2021 and for these reasons, many employers are pausing across-the-board salary increases,” William Ziebell, CEO of Gallagher’s Benefits & HR Consulting Division, said in a statement. “However, the data shows more employers are leaning into variable pay models because this allows them to provide employees with a pay increase based on performance.”
The study found employers who use variable pay structures may be slightly better able to withstand the financial pressures caused by the pandemic. Of the 40% of respondents who use variable pay, 55% said they aren’t planning any budget changes for fiscal years 2020 or 2021.
“Incentive plans often link this compensation to organizational success without accruing the amount to base pay, helping to avoid long-term costs,” the report noted.
Executives are the biggest beneficiaries of variable pay schemes. The report found an average 22% (FY 2020) to 22.7% (FY 2021) of executives’ base pay is variable. However, other employee groups will likely be more affected by changes to variable pay schemes following the pandemic. In fiscal year 2020, 8.6% of base pay for nonmanager exempt employees was used for variable pay, Gallagher found. That’s expected to increase to 13.5% in fiscal year 2021.
Management and nonexempt employees will see smaller increases in the share of base pay that will be used for variable pay: 12.8% to 13.6%, and 5.9% to 6.5%, respectively.
Ziebell noted that employers are recognizing that salary is only one tool in their talent retention box.
“Employers of all sizes are beginning to realize pay increases aren’t the only levers they can pull to attract and retain employees,” he said. “Oftentimes, customized benefits and compensation strategies can reduce operating expenses and, at the same time, better cater to employees’ physical, emotional, career and financial well-being.”
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