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Salary budget planning 2020

Pay freezes, postponed reviews and slashed salary budgets - what will be in store for 2021?

System og strategi for kompensasjon |Executive Compensation|Total Rewards
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By Callum McRae , Douglas Leenen and Max Ashwanden | July 30, 2020

Our latest Salary Budget Planning report observes that although each country felt the impact of COVID-19 at different times, one noticeable consistency is the prudent approach that many organizations have been taking throughout the pandemic.

Barely a month after the COVID-19 pandemic began, the world plunged into recession as the economic implications of the health crisis started to surface. Our latest Salary Budget Planning report observes that although each country felt the impact at different times, one noticeable consistency is the prudent approach that many organizations have been taking throughout the pandemic. Furthermore, major markets reacted much more rapidly this time around compared with the 2008 recession, and this unprecedented level of cooperative response could be key to achieving global recovery within a shorter timeframe.

When COVID-19 was declared a global health emergency, over 60% of organizations in the major markets of the G7 countries, Brazil, China and Russia had already finalized their salary reviews and implemented pay adjustments for 2020. On the other hand, among the companies that had yet to complete their reviews, one-third halted their salary increases through freezing or postponement, while the rest implemented salary adjustments that on average are 0.6% lower than the pre-crisis level.

As the world steadily moves towards restoring stability, many organizations are relying on extreme cautiousness and cost-saving strategies to navigate through the rest of 2020 and to create optimism for 2021. In particular, companies in the U.S. expect pay rises to remain steady at 3.0% in 2020 and to continue at the same level in 2021 (Figure 1). Organizations in Canada, Germany, Italy, Japan and the U.K. are also optimistic about restoring their salary budgets close to pre-pandemic levels in 2021.

Across the G7 countries, Brazil, China and Russia, 19% of organizations adopted a salary freeze for 2020. Projections for 2021 see this going down further to 12%, implying that the majority of organizations are optimistic that their cash preservation decisions in 2020 will yield positive outcomes for their 2021 budgets (Figure 2). During the 2008 global financial crisis, organizations were also looking to recover and rebuild in the following year; however, over 40% saw the need to freeze salary increases in 2009.

It could still be too early to predict the 2021 budgets, as the pandemic is still ongoing and markets remain volatile. Organizations should take a balanced and thoughtful approach, looking at their own company affordability in order to determine the final 2021 budgets.

Comparative insights on cost-containment strategies across different markets

In an immediate effort to curtail costs this year, many companies adopted various cost-containment strategies. Our survey found that the most prevalent strategy across all markets was to implement an immediate hiring freeze. Other measures included reductions on pay and bonuses, workforce reduction and furloughs.

Some observations, based on survey data from organizations in Brazil, China, Germany, the U.K. and the U.S., show that a country’s COVID-19 response and recovery outlook seem to be a major factor influencing the types of cost-saving strategies used most widely in each market.

Executive pay reductions (Figure 3) and broad-based employee pay (Figure 4) reductions are prevalent, particularly in the U.S. Both strategies are less common in China, which may be related to the timing of the outbreak and the speed at which controls were enforced.

Companies that have reduced or may reduce executive pay
Figure 3 – Companies that have reduced or may reduce executive pay
Companies that have reduced or may reduce broad-based pay
Figure 4 – Companies that have reduced or may reduce broad-based pay

Workforce reductions are also most prevalent in the U.S., with almost 40% of organizations having implemented mass lay-offs and an additional 15% considering the same action (Figure 5).

Companies that have reduced or may reduce workforce headcount
Figure 5 – Companies that have reduced or may reduce workforce headcount

In contrast, many companies in the U.K. and China opted to implement voluntary furloughs (57% and 53% respectively) instead of reducing headcount (19% and 7% respectively). Similarly, more companies in Germany and Brazil implemented involuntary furloughs (58% and 56% respectively) instead of lay-offs (8% and 18% respectively) (Figure 6).

Companies that implemented involuntary and voluntary furloughs
Figure 6 – Companies that implemented involuntary and voluntary furloughs

All five countries are seeing the highest proportion of organizations that have reduced or are considering reducing annual bonus payouts (Figure 7) – a strategy that may help to preserve valuable cash in the short term. It is interesting to note that these same markets are not expecting a significant negative impact to their 2021 salary increases.

Companies that will reduce or plan to reduce annual bonus pay
Figure 7 – Companies that will reduce or plan to reduce annual bonus pay

Three points to consider in the next salary budget review

The effects of the ongoing COVID-19 crisis bear similarities to the economic uncertainties during the 2008 global recession. However, a major difference this time around is the use of digitalization and AI technologies to predict the economic impact, which may have helped many organizations to act faster and more prudently throughout the crisis. As the next salary-review cycle approaches, organizations must remain cautious and especially mindful of a key difference between the 2008 and 2020 recessions – the previous one was caused by a banking crisis, while the current recession is caused by a health crisis which is far from over.

Here are three key considerations for organizations as they plan for recovery in 2021. These could also help to weigh the potential long-term impact of decisions post-crisis.

  1. 01

    Company affordability

    In determining the appropriate budget for your organization, the first step should be to look at company affordability. Have the revenue expectations surpassed the cost? For companies experiencing a tougher business environment, there’s a greater need to prioritize and look after critical segments of your employees, such as top performers and essential workers.

    It is crucial that companies put focus on defining appropriate rewards for critical segments. Fifty-five per cent of organizations have employees who are required to work on-site; however, only 28% have identified specific rewards for front-liners. Cash allowance is by far the most common type of reward. As the health crisis wears on, companies must work on addressing pay and reward gaps that will be brought to light as essential workers continue risking their health and safety.

  2. 02

    Rethink and restructure total compensation

    Now is the time to consider restructuring compensation (to avoid further impacting base pay) and to look at implementing bolder and differentiated changes to performance based variable pay. This will ensure that the total compensation remains competitive and performance-based.

    Organizations may benefit from leveraging advanced technologies to simulate pay decisions before implementing any cost-saving approach or pay adjustment. This could provide insight into the potential impact on the business and workforce, thereby helping to manage employee and stakeholder expectations for 2021.

  3. 03

    Timely and transparent communications around the salary review process

    Globally, 61% of employees say they are dealing with new financial concerns brought on by the pandemic. This will surely compel employees to question how they feel about their compensation, and all the more so when they inevitably compare their experience with that of their peers.

    Even in these unusual times, organizations must remain on top of this conversation and continually provide clear, timely information about the salary review process. Ensure that employees understand your organization’s pay philosophy and the factors that affect pay decisions, including the actions that the business is taking to better maximize limited cash flow and to protect human capital throughout the crisis.

    Amidst ongoing uncertainties, employees feel less anxious when leaders are being upfront, even if it's about bad news. Prioritizing this connection point can have a profound impact on employee engagement and trust.

Participate in our Salary Budget Planning Survey which will be open in October to ensure that you have access to the latest market data for making informed decisions.

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