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Spotlight on Compensation Trends – United Kingdom

Organizations made significant changes to compensation in 2020, and it’s not what you might expect. 

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Beyond Data

March 5, 2021

We identified 5 key trends in this years’ analysis of the compensation landscape in the United Kingdom.

2020 was an unprecedented year and we’ve seen the COVID-19 pandemic fundamentally change our ability to work normally, companies to operate effectively, and markets to function efficiently. The pandemic has shown the incredible value of the health and contributions of people to an organizations’ success. All of this has great implications for HR not only today, but also in the future.

To shed some light on the compensation landscape in the United Kingdom, we analysed more than 650,000 data points from over 800 organizations to derive these trends.

Companies took drastic actions in response to COVID-19
Accelerated base salary growth for high performers in key roles
Pay rates in East Anglia are catching up with Central London
Largest gap between target and actual incentive payouts in the last 10 years
Shrinking pay gap between general industry and industry sectors
  1. 01

    Companies took drastic actions in response to COVID-19

    Through our research and working closely with clients, we saw 3 distinct phases of action for organizations to take in response to COVID-19.

    Initially, organizations had to quickly react and adapt in key areas of the business and adopted various cash conservation strategies such as furloughs, headcount reductions and freezes on discretionary spending. As organizations stabilized, many reached a point where they could start to think about resetting and reimagining operations. In this phase, companies were looking to make longer term adjustments to how and where work gets done and by whom. Once the worst had passed, organisations were able to resume and redefine sustainable operations and find their new normal.

    As we think about the implications all this is having on compensation specifically, we’ve learned some important lessons over the past year:

    Specifically, in the United Kingdom, we saw 39% of organizations reduce their workforce, 64% froze or reduced hiring and 22% froze or reduced pay.

    • A fresh look at Total Compensation is needed – it’s time to rethink and restructure the deal to reduce or control fixed expenditures or consider changes to performance-based pay and long-term incentive plans, taking into account things like environmental, social and governance or ‘ESG’ metrics.
    • Digital transformation is accelerating: The pace of technological transformation will continue to grow and the number and types of technology jobs will increase. The increasing demand for digital talent will make setting appropriate compensation levels even more challenging and critical.
    • And perhaps more than ever before, organizations need good data to inform and guide these important decisions.
  2. 02

    Accelerated base salary growth for high performers in key roles

    For the United Kingdom as a whole, median base salary growth was 2.7%. But this doesn’t really tell the full story.

    We can see from the data that at the upper quartile (P75) and particularly the upper decile (P90), some individuals (likely key talent or high performers) are commanding much higher increase percentages than the median. In the table below, you can see the functions where the stretch is highest – Finance, Data Science, Analytics, IT Development, Marketing and Legal. Helping to drive this are the digital disciplines within these functions such as cyber, artificial intelligence and digital marketing.

    Table 1
    Function Median P75 P90
    Sales & MKTG (AMJ) 3.0 6.6 13.1
    Finance – Credit & Collections (AFC) 3.0 6.2 11.2
    Finance (AFA) 2.8 4.2 11.0
    Account Mgmt (CAM) 2.6 4.0 10.5
    Data Science / Analytics (AEM) 3.0 4.2 10.4
    IT Development (AID) 2.9 4.5 10.0
    Account Mgmt (CAM) 2.6 4.0 10.5
    Customer Services (CUS) 2.7 4.5 10.0
    Marketing (AMK) 3.0 4.4 10.0
    Legal ALG 2.8 4.1 10.0

    With limited budget and resources available, organisations are clearly considering and choosing much more carefully where and how to spend their money.

    alt tag for the image
    Figure 1: Salary budget increase by employee group (excluding salary freezes)
    Which is showing that across all employee groups there is a drop in salary rises in the fourth quarter.
  3. 03

    Pay rates in East Anglia are catching up with Central & Outer London

    Geographic differentials are a focus for many clients this year given the move to home working. Central London has always had the highest aggregate level of salaries compared to the other regions and Northern Ireland the lowest.

    However, a particular point of interest this year is the figure for East Anglia – which at 105% is only one percentage point lower than Central & Outer London. This is likely due to the growth of the business parks in and around Cambridge, attracting Tech and Pharma companies to open businesses and operations there. It is no surprise therefore, that having these relatively higher paying sectors playing a bigger part in the local economies, that this would start to increase salaries in the region.

    Figure 2: 2020 General Industry Regional Differentials Across All Employee Categories – National as base (100%)
    Figure 2: 2020 General Industry Regional Differentials Across All Employee Categories – National as base (100%)
    Across the UK there are different salary increases, with the Central and Outer London Zone at 106% down to Northern Ireland at 90%.
  4. 04

    Largest gap between target and actual incentive payouts in the last 10 years

    We saw that generally, 2020 performance levels were not sufficient for organizations to meet their short-term incentive targets. Actual payouts are less than targets across the board at all levels of seniority. In 2020 the average payouts is only 76% of target, which is the lowest noted figure in the last 10 years.

    The last time we saw the aggregate level of performance resulting in above target bonuses was back in 2011 – based on performance years just before the crash. Since then, ratios have typically hovered around the eighties or nineties.

    Figure 3: Average STI Payout ratio in relation to target for Managers and above 2011-2020
    Figure 3: Average STI Payout ratio in relation to target for Managers and above 2011-2020
    The graph displays the average STI pay out and how in 2011 this was 109% and has dropped all the way to 76% in 2020.

    If we then look at the distribution of short-term incentive payouts in relation to target, we see a relatively normally distributed approach to payouts, however there is a notable skew. We see that 20% of individuals did not receive any bonus at all – a figure which is up significantly from only 4% of individuals in 2019.

    Figure 4: 2020 Distribution of STI payments in relation to target
    Figure 4: 2020 Distribution of STI payments in relation to target
    This graph shows that 20% of organisations had no distribution of STI where as the most has 106% to 125%.
  5. 05

    Shrinking pay gap between General Industry and industry sectors

    In the past few years, we’ve seen significant differences in pay practices across industries with a few sectors paying significantly higher or lower than the General Industry. With the mobility of talent rising, we’ve seen this gap shrink with a few notable exceptions:

    • Retail is the noticeable outlier, being lower than others across all reward elements.
    • Media is a relatively high payer across all reward elements.
    • High Tech and Fintech sectors seem to use base pay as their main element for delivering pay.
    • The Financial Services sector is also high, but the comparison is much higher for Total Compensation and Total Direct Compensation – suggesting there is greater focus on the use of annual incentives in this sector than others.
    • In the Energy and Pharmaceutical sectors, base salary and annual incentive levels are relatively on par with General Industry but pull ahead with the use of long-term incentives.

For more information about our data, insights and services, please contact us.

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