We’ve got projected salary increase budgets, but they’re likely to change

October 14, 2020

2020 US Compensation Pulse Survey – September Edition

Over the last several weeks, the amount of calls asking us for merit increase budget numbers has increased dramatically. It’s that time of year — everyone is working on budgeting. And you know that we typically publish our annual US Compensation Planning Survey results in August. So, it’s understandable that you’re looking for that guidance! This year is a little different though. With the global pandemic and its impact on the economy and labor market, we quickly realized that asking about compensation planning at one point in the year was probably not going to cut it this year. Instead, we opted to conduct a series of pulse surveys from May through July and then again in September. And, wow, are we glad we did! We’ve learned so much from you.

Compensation’s chicken or the egg story

Though we’ve sort of always known this, you’ve confirmed for us that many of you don’t really have an annual increase budget for the coming year until very late in the current year (e.g., November or December). With the economic impact of COVID-19 still being sorted out, we expect that though you might be putting together your projections now, there will likely be adjustments as the leaders of your organizations determine their reinvention strategy for 2021.

In this latest edition of the pulse survey, of the over 800 companies that participated, 69% indicated that they are just in preliminary talks or are “unsure/don’t know” the status of their salary increase budget. Only 11% indicated their budget has been approved by leadership or the board. And through our questions we confirmed that this is not unusual. When we asked about the budgeting timeline in a typical year, most indicated that they start the process in September/October and do not finalize their budgets until November or December. What that means is that those of you who use compensation planning numbers published earlier in the year are relying on very preliminary numbers given that the majority of companies are on a calendar year financial plan. And those very preliminary numbers are influencing what you propose for your company’s salary increase budgets. (Which came first, the chicken or the egg?)

This year, everyone wants to see what budget numbers we publish, but without your submissions, we can’t publish budget numbers. (Which came first, the compensation planning survey data or the participants’ budget decision?) It’s all interconnected.

What does this mean for you? Well, let me tell you, just like with many other decisions you’re being asked to make now, you can’t just consider one factor (i.e., the salary budget number in published surveys).

Amongst other things, when setting your salary increase budget this year, you need to customize your proposal by taking into account:

  • Your company’s economic situation
  • Competitive pay positioning of the critical jobs needed to reinvent and thrive in the future
  • Any planned hiring or reductions in force
  • If giving merit increases, your differentiation strategy
  • Your employee’s wants and needs — what do they value?

Salary increase budgets – what we do know

Of the 491 organizations that plan to have a merit increase cycle and not freeze salaries, the majority indicated that they will be setting a similar budget to what they did last year. A little more than quarter of companies indicated that they would be setting a smaller budget. Those that will be setting a smaller budget will plan to either be giving increases to fewer employees and/or increasing differentiation by performance, skills, or market competitiveness.

For those that reported a proposed merit increase budget, the average for all employees, including zeros (e.g., freezes) is 2.5%. When excluding zeros, that number increases to 2.8%. Total increase budgets, which include market and other adjustments, were reported to be 3.0%, excluding zeros.

Looking more closely at these numbers, there is some variation in budget projections based on how severely the company feels they were impacted financially by the pandemic. For those that feel they were the most negatively impacted, the average merit budget is 1.7%, including zeros and the total increase is 2.4%.

Be sure to participate in the November US Compensation Planning Pulse survey!

Structure adjustments

With structure adjustments, the responses indicate that companies may hold off on moving their midpoints this year. Companies indicated that in a typical year, 69% adjust salary structures annually. However, when asked if they will adjust structures this year only 40% indicated they will. The average projected structure adjustment reported is 2.2%.

Go forward with confidence

While responses aren’t as “final” as we’d like them to be, keep in mind that this aspect is really no different than prior years. Take what you know from published compensation planning data and then consider what’s right for your company. Confidently develop a proposed annual increase budget and structure adjustment recommendation by considering the market data, but emphasizing your own company’s situation.

Not sure what to do? We’re here to help.

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