Moving forward with optimism

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November 24, 2020

As companies are finalizing their compensation planning, we’re seeing smaller budgets, but not many other changes

You may recall that when we last conducted the pulse survey, in September, the vast majority of respondents indicated that they were only in preliminary discussions regarding budgets or were unsure of the status of their budgets. We took that as a cue to wait a bit and give you all time to make some decisions. We chose to skip the month of October and instead asked you to provide information on your annual increase budgets along with incentives, both payout and planning, in early November.

Increase budgets being finalized, driven down by salary freezes

As of early November, of the 64% that have projected their salary increases budgets, 65% indicated that they were either already approved by leadership or had been proposed to leaders, which is an increase from September, when 54% indicated they were only in preliminary discussions with compensation/HR. At this point the numbers reported are more likely to reflect what will actually be paid in 2021.

When looking at the reported budget numbers, the organizations that are planning to give merit increases are averaging slightly below last year’s budgets at 2.8%, compared to 2.9% in 2020. However, if you pull in the 9% who have indicated they either will not have a merit increase cycle or will freeze salaries, the average increase budget drops to 2.4% for merit and 2.8% for total increases.

However, as we all know, the pandemic and related economic downturn had a differing impact depending on your industry and ability to adapt and innovate. Forty-four percent of organizations indicated that they have been moderately impacted by the pandemic and the average increase for that group aligns with the overall average (2.4%). However, the one quarter of organizations that were hardest hit are planning increase budgets around 1.8% which includes those that report a 0% budget.

Incentives, payout, and planning

Many of us wondered just how companies would address financial shortfalls that would drive lower short-term incentive (STI) payments for the 2020 performance year. According to our US Compensation Planning Pulse survey for November, most employers don’t really plan to make any changes/adjustments. Instead, it seems they will let the payouts reflect the state of the business without any type of adjustment to benefit the recipient. When asked if they made changes or planned changes for the 2020 STI plan, over 60% selected “no actions taken to the 2020 plan” and they plan to deliver payouts according to their typical payout timing. However, that does not mean that payouts won’t be significantly impacted for some — how the funding and payout formula are constructed will play a role. Of those companies with bonus plans, a little more than a quarter indicate that their bonus pool will be reduced by 10% or more.

But, what about the STI plan design for 2021? Are companies going to make adjustments to possibly insulate themselves and their employees against the continued volatility of the economy? Well, so far it doesn’t look like it. The majority of respondents (73% of those with STI plans) told us that they have “no actions planned” for their 2021 plan. Of those that will make changes, there wasn’t any predominant action or modification that they are considering. They indicated actions such as providing more discretion when determining payouts; modifying the weighting of metrics and/or introducing relative financial metrics; and expanding ranges for threshold, target, and max performance.

Just under 500 companies reported that they currently have long-term incentives (LTI) and 66% of those had no intention of modifying outstanding grants made prior to the advent of COVID-19. As for go-forward plans, organizations seem to be considering changes to LTI a bit more than they are for STI. With 49% indicating they will stay-the-course and not make changes, the 37% sitting in the “Don’t know/Unsure” bucket is where we might still see some movement. Of the small percentage of organizations that have decided to make changes, the options indicated most frequently were to change the mix of vehicles at the executive level.

Surely sales compensation plans were adjusted

With a much greater percentage of total pay at risk, a down economy where many companies implement spending freezes, can be a real financial blow to the typical salesperson. Did companies adjust quotas or sales plans in order to ensure some minimum level of compensation was maintained?

It doesn’t look like it — 70% of the organizations with sales incentives indicated they did not adjust sales quotas/goals for the majority of their populations, nor did they adjust pay mix. And they don’t expect to make changes to the pay mix for 2021 either. Whether or not other mechanics of the sales incentive plan are adjusted remains to be seen, the majority of respondents just don’t know at this point.

Looking forward

As we come to the end of what has definitely been a memorable year, one thing is clear — organizations realize the power and significant impact of the decisions they make impacting their most critical resource — their people. The caution and care that employers have exhibited this time around is in stark contrast to the swift actions we saw impacting employees in 2008/2009. Sure, there were different circumstances, but it seems like a significant lesson was learned around the relationship between a company’s ability to recover and the actions they take around their workforce.

As we move into 2021, with hope and optimism, this is your time to shine. Human resources professional are the key to positioning organizations for success as they are forced to reinvent, innovate, and become more agile. Step into the spotlight … take that seat at the table and lead your organization confidently by providing leaders with sage advice based on sound data.

We’re here for you. Mercer’s got your back.

compensation pulse US November