Employers may scale back raises in 2021

Gallagher survey shows COVID-19 impacts may cause companies to adopt variable pay models instead.
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Gallagher’s 2020/2021 Salary Planning Survey

A new survey has found the shadow of COVID-19 is causing many U.S. organizations to reevaluate their salary increase plans for 2021.

Gallagher’s 2020/2021 Salary Planning Survey, an annual report, found nearly half of organizations (45%) plan to reevaluate their salary increase plans for next year.

Researchers collected data from company leaders and human resource and financial practitioners representing 1,283 organizations during July and August 2020.

Gallagher said the study paints a picture of the “stark contrast” employers now find themselves in compared to the beginning of 2020. When the year began, organizations said they felt primed for growth, with a robust economy and record-high employment. As a result, two-thirds (66%) of employers implemented pay raises prior to the pandemic. Toward the end of the first quarter, the reality of COVID-19 set in, forcing many organizations to put the brakes on wage hikes. This trend is expected to continue into 2021, according to the employers surveyed.

The 2020/2021 Salary Planning Survey findings align with the Gallagher’s 2020 Benefits Strategy & Benchmarking Survey, which found a significant number of employers planned salary freezes for management and executives (43%) and nonmanagement personnel (42%) to preserve jobs in 2021.

Lenny Brucato Courtesy Gallagher

Some employers surveyed in southeast and West Michigan made what they hope will be temporary employee salary reductions along with layoffs and furloughs, especially in the health care sector, according to Lenny Brucato, Michigan area president for Gallagher’s Benefits and HR Consulting Division.

Of the 34% of surveyed U.S. employers who reported making changes to their salary increase budgets for fiscal year 2020, 12% reported salary reductions occurred. However, Gallagher found for the most part, executives opted to cut their own pay rather than cutting employees’ pay.

Among the segment of employers who indicated COVID-19 is forcing them to reevaluate 2021 salary increase plans, 51% expect to reduce salary increases, and 45% plan to suspend salary increases altogether.

“Revenue streams and budgets will be unpredictable in 2021, and for these reasons, many employers are pausing across-the-board salary increases,” said William Ziebell, CEO of Gallagher’s Benefits & HR Consulting Division. “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.”

Brucato said variable pay models include lump sum bonuses or incentive pay for teams or individuals that meet performance metrics, rather than across-the-board, cost-of-living adjustment (COLA) or merit increases that would raise annual salary levels permanently.

Variable pay models, while saving companies money, could be disappointing to some employees, Brucato conceded.

“Whenever you look at things like compensation, there are always going to be pros and cons,” he said. “Employees like the certainty or predictability of a known merit increase or COLA increase that an organization commits to, but at the same time, I think most employees acknowledge the challenges that this environment is continuing to create (and that most) organizations have been negatively impacted by COVID in terms of loss of revenue. And the reality is, they know these businesses have to be profitable in order to continue to do these things. …

“Conversely, if there is an opportunity to receive increases in pay or bonuses if your organization can achieve certain metrics, then at least there’s that opportunity there, versus just simply nothing available because (of) COVID.”

The report found the projected average pay increase for fiscal year 2021 was 2.1%, down 0.4% from the average so far in 2020 and down 0.7% from the projected average increase for 2020 before COVID hit.

Brucato said he believes one of the best findings from the survey is that 65% of employers said they are not planning to make changes to salary structure increase plans due to COVID-19, which he believes points to a hopefulness that the economy might return to normal next year, as well as an acknowledgment of the struggles employees are facing.

He added this extended to benefit changes, as well.

“We saw a lot of employers who opted not to make major changes to their benefits for the coming year, even if they had financial incentive to do so, because they didn’t want to create any more disruption for their employees,” he said. “… Employers — even though they, as organizations, have faced a lot of economic pressure and had to make some difficult decisions — they’re going to try to do everything they can to limit any further disruption to their employees and understand that as we move forward in this new normal, the need to attract and retain talent is still going to be there.”

Brucato said whether employers continue to tighten their belts when it comes to employee compensation in 2022 will depend on factors such as COVID-19 case spikes and the success and timing of a vaccine, which will impact the economy’s ability to recover.

Gallagher’s Salary Planning Survey report is designed to be a tool for employers to evaluate the array of salary budgeting tactics their peers are utilizing to maintain head counts and balance budgets.

“Employers of all sizes are beginning to realize pay increases aren’t the only levers they can pull to attract and retain employees,” Ziebell 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.”

The full 2020/2021 Salary Planning Survey report is available for purchase at ajg.com/US-SPS-2020.

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