Skip to main content
Article | Beyond Data

Planning 2021 Salary Increases in the wake of COVID-19

N/A
Beyond Data

By Max Ashwanden | September 17, 2020

What should you look at when planning your salary budget allocations in 2021

COVID-19 has had profound impacts on people’s lives from a societal and health standpoint but the looming economic crisis will affect everyone. The pandemic is unlike any crisis we have seen, therefore one cannot expect to follow the historic pattern of just relying on data from peers but we need to consider how various factors such as country economic response, industry and affordability will effect decisions on salary budgets for next year.

Unlock More

Salary Budget Planning Survey 2021

At Willis Towers Watson, we collected our Q3 Global Salary Budget Report at the height of the pandemic including COVID-19 specific actions and considerations taken by employers. To continue to be at the forefront of providing you data you need we are launching the 2020 Q4 edition of the Global Salary Budget Report in early October. Results will be published at the end of this year and continue to help you navigate a way through turbulent markets.

To achieve the best results when planning salary budgets for next year, now more than ever companies must combine relevant external macro considerations with up to date data from peer companies and the financial position of their own company. The unpredictabilty of the macro environment means that companies must be aware that the volatile environment will impact salary budgets more than usual. Therefore, companies must look to stay abreast of changes whilst also having multiple plans to react to alternative scenarios. In this article we outline factors to consider while determining 2021 salary budgets

  1. 01

    Macro Consideration

    In its latest World Economic Outlook, the International Monetary Fund1 has projected a contraction in Global GDP growth of around -4.9% in 2020. This figure of course is a projection and could be incorrect if we see a considerable rebound from economies or if a vaccine is released early. Critically for businesses lower GDP sees a reduction in economic activity within the country, which for an individual company may translate to reduced revenue and profits affecting the allocation of salary budgets.

    Our recently concluded Q3 Salary Budget Planning Report did reflect the negative sentiments towards the economic environment. Results showed that “one-third of the companies halted their salary increases in 2020 through freezing or postponement, while the rest implemented salary adjustments that on average are 0.6% lower than the pre-crisis level”.

    On a more positive note, we can observe the G20 economies have engaged in massive economic stimulus. 2020 has seen these major economies injecting money into the economy not seen since the end of World War II2. In 2020 the first two months of the pandemic, governments around the globe responded by announcing 3 times more stimulus than in the entirety of the 2008/09 financial crisis. 11 of the G20 countries have spent more on fiscal stimulus in 2020 than 2008/093. Organisations in major economies seem to be optimistic that these measures will keep the economy afloat. Our data reflects this confidence in initial salary budget forecasts for 2021. No G20 countries have forecasted a negative 2021 salary increase compared to actual 2020 salary budgets.

    The length and severity of countries' lockdowns have also had a wide ranging and significant impact on economies. Every country has approached lockdowns with different strategies and that in turn will have a different bearing on their economies. Additionally inflation is a necessary consideration as it has a key impact on salary budgets. If inflation rises quickly in 2021, following the COVID-19 crisis then we may see erosion in real salaries for those employees who experience small salary increases or freezes.

  2. 02

    Industry

    One of the other significant factors which will impact salary budgets is the varying impact of COVID-19 on different industries From a “big-picture” standpoint the global health crisis will undoubtedly negatively impact most of the sectors in the economy. However, based on the data the impact on companies is varied and heavily depends upon the sector it operates in. The following analysis is using our Q3 Salary Budget Report Data.

    The most heavily impacted industries are those which are reliant on physical transactions. Specifically, the retail industry has been majorly impacted, due to the reliance on customers buying products in store. The lockdown period saw retail shops being closed, which put a considerable dent in revenues. Furthermore, while many countries have re-opened these retail shops the recovery of sales has not been as substantial as expected. This can be explained a number of ways including: fearful consumers, social distancing measures and restrictions on opening times.

    Economic statistics leave little doubt that COVID-19 will negatively impact the global economy, there is however a handful of industries which are achieving a higher level of growth to pre-crisis levels. The technology industry has been very well positioned in this crisis, further research shows how the sector is “weathering the negative impact of the global COVID-19 pandemic than other industry sectors”. Companies within this industry which generate revenue from connecting people, working remotely and/or providing entertainment remotely have seen massive growth. This industry growth should in theory translate to higher salary budgets in 2021 for technology companies.

  3. 03

    Affordability

    Affordability remains perhaps the most important factor to consider when deciding 2021 salary budgets. The factor traces back to how companies entered the crisis and how they have been able to respond.

    Entering the crisis with positive cash flows and a strong balance sheet would have been the ideal financial scenario for businesses to enter the pandemic. Clearly this is important because if a company has a positive cash flow and strong retained profits then it may be more resilient and able to weather the storm better. On the flipside, if cash flows are weak then companies must protect themselves by using cash containment strategies such as freezing salaries, cutting discretionary spending to a minimum etc.

    While considering the 2021 salary budgets, HR should work closely with finance and business to determine the overall impact of COVID-19 on revenue and profitability. Has the revenue declined more than the cost containment strategies that were put in place or has the company been able to regain profits at pre-COVID levels faster than planned? This would have an overall bearing on how next year’s salary increases budgets are determined. Of course the unknowns remain, overall revenue and profitability for next year, which could yet determine if any further measures are required.

Conclusion

Clearly planning salary budgets will heavily depend on several factors, some of which we have outlined in this article. It is difficult to forecast how those will change and take shape throughout the rest of this year. This crisis is different to any other and presents challenges to salaries in 2021. Making informed decisions in any crisis is important, and when it comes to pay using the latest data and external analysis will certainly help.

Footnotes

1International Money Fund
https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
2Deloitte
https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html
3Atlantic Council
https://www.atlanticcouncil.org/blogs/econographics/how-does-the-g20-covid-19-fiscal-response-compare-to-the-global-financial-crisis/

Author

Max Ashwanden
Analyst - Talent & Rewards

Contact Us
Related content tags, list of links Article Beyond Data Beyond Data