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Survey Report | Beyond Data

Salary budget planning 2021

Optimistic business outlook and salary increases

Compensation Strategy & Design|Total Rewards
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By Max Ashwanden | August 18, 2021

Our latest salary budget planning report observes that salary increases in 2021 were not only higher than the pandemic levels of 2020, but have also surpassed the forecasts.

Most companies have been able to give higher than forecasted salary increases in 2021, largely due to their lower operating costs and an economy that has been better insulated than expected. In fact, the economy appears in very good health – welcome news for governments, which have intervened heavily and granted large stimulus packages to keep their economies from stalling. Some sectors have undoubtedly suffered exponentially, but many of those are now showing signs of recovery.

Many businesses awarding unexpectedly high salary increases are wishing to acknowledge and reward the resilience their employees have demonstrated throughout the pandemic. Inflation may also be an influence, however, as it looks set to increase in several geographical areas. GE Renewable Energy’s Global Total Rewards Leader, Vassilis Fragkoulis, listed inflation as a “key driver” in deciding 2022 salary increase budgets which businesses “need to continue monitoring”. Almost all business sectors have been considering the likely impact of anticipated and persistent inflation.

Many sectors are recovering in line with the wider economy, and 51% of companies globally are reporting better than expected performance in 2021.

Higher salaries in 2021 are partially attributable to fewer companies freezing pay increases compared to last year. In 2020, an unprecedented number of companies cancelled salary reviews (15-20%), whereas in 2021 the figure has returned to historic levels (2-5%).

Salary increases in 2022 are projected to be higher than 2021 increases (Figure 1). Companies are going through extensive planning in 2021, and will be experimenting with hybrid work models which better fit employees’ lifestyles and which may also result in long-term business savings.

Every situation is unique

Every country, industry and company has experienced the pandemic differently and will have been impacted in different ways. Furthermore, the various stimulus packages, and the unwinding of these, may yet have unexpected consequences for economies in the ongoing pandemic. There are therefore a lot of variables to consider when making generalizations and forecasts.

The Economist has reported that vaccination rates will directly correlate with projected growth rates in emerging economies. In historically high-income countries the COVID-19 vaccination rate is very high, with an overall average of 95.44 people per 1001, compared to a dramatically lower rate of 23.76 people per 100 for lower- and middle-income countries. In addition, developed countries have been able to provide generous stimulus packages to sustain their economies. These differences will lead to a large disparity between the ‘rich’ and ‘poor’ nations, with a serious risk to the future growth of emerging countries.

Inequality in pay increases across sectors has become quite prominent over the years. Travel, tourism and hospitality, and physical retail sectors have been hard hit by the pandemic, whilst tech-based and financial services sectors have ‘benefited’ and as a result these industries on average have been able to afford increases in the region of half a percentage point more than hospitality and retail organizations globally.

Firstly, what is the overall budget that we need? Secondly, how much can we afford? And thirdly, how can we differentiate?”

Vassilis Fragkoulis, | Global Total Rewards Leader, GE Renewable Energy

The size of salary increase budgets inevitably correlates directly with how your business and sector has endured the pandemic and/or been assisted by government relief measures. In general, businesses able to accelerate their digital presence and delivery now have healthier budgets to attract and retain talent. Whilst every company is unique, the key questions remain the same.

What does the future hold for pay increases?

In the vast majority of countries, 2022 salary increases are forecast to be greater than in 2021 (Figure 2). The buyout economy, long-term savings from hybrid work models and a booming job market have all led to forecasts for higher 2022 salary increase. The buoyant job market and the challenge of engaging employees without the office environment mean that companies will need to pay top dollar to hold on to their top talent.

Figure 2. Forecasted salary change in 2022
  Countries in each region - %
  Salaries expected to grow Salaries expected to be stagnant Salaries expected to decline
North America 100 0 0
Western Europe 86.5 9.0 4.5
Central and Eastern Europe 76 9.5 14.5
South Eastern Europe 91 0 9
Latin America 92 0 8
Middle East and Africa 50 31 19
Asia Pacific 78 18.5 3.5

The booming talent market is impacting salary increases. Recruitment has exploded in recent months. Of companies we surveyed, 47% indicated that their rate of recruitment currently far outpaces their 2020 efforts. Organizations which stalled hiring last year are now starting to actively and aggressively recruit. Rich Luss, a senior economist at Willis Towers Watson said: “If demand for labor remains high and supply growth is sluggish, we would expect organizations to feel the pressure to increase compensation to attract the employees they need.”

Changes in working conditions have caused many workers to reflect on their career and prospects. They have also created an increased fluidity and, in some sectors, limitations in the recruitment pool. For example, hospitality firms in France have reported recruitment problems attributable to previous employees seeking alternative posts which would improve their family and home life. They claim that this has led to shorter menus and longer waiting times. Overall, talent shortages as a result of labor mobility, combined with competitive and aggressive recruitment in some sectors, are having an impact on salary increases. Globally, companies are noticeably putting their efforts into hiring sales and technology functions, both of which are in short supply. As a result, we expect salaries to continue to increase for these functions.

As the talent market experiences both push and pull, business leaders are looking to talent retention as critical for safeguarding business success. Simply put, business competition in attracting and retaining talent is creating real cost increases for businesses. A year on from the pandemic some businesses are awarding salary increases, with “even more differentiation” for high performers, whereas other business leaders emphasise the importance of retaining all talent as opposed to focusing on differentiating a specific talent segment. The logic behind this has two parts: 1) that average performers have played an important part in ensuring that the business continues to operate, and 2) that budgets in general will be larger, meaning there is more money to go around.

These approaches are not as opposed as they may appear: differentiation will still occur between top and average performers, and it is only the extent to which it will occur that will differ (Figure 3).

Highest level of differentiation for top performers

3.2x
Netherlands
2.9x
Brazil
2.8x
Hong Kong

Lowest level of differentiation for top performers

2.1x
Turkey
2.1x
Argentina
1.9x
South Korea
Figure 3. Salary differentiation between top performers and average performers

 
Now, more than ever, a wider consideration of factors and context is essential to arrive at the right salary increase budget for your company. Vassilis Fragkoulis at GE Reward Energy put it like this: that salary budget planning is “more of an art than mathematics”.

The main elements which need to be taken into account when planning budgets can be summarized as follows:

  1. Internal factors: Which agendas in your business context are influencing salary increases?
    • Affordability – what can your business afford?
    • Reward philosophy – to what extent do you want to differentiate for performance?
    • Hybrid work policy – how will you pay for roles which are remote on a full-time basis?
  2. External factors: Which forces in your sector and location impact how you need to increase salaries?
    • Inflation – how much real salary increase will you award?
    • Talent market conditions – in a booming market, how will you ensure that you retain your key talent, especially in a tough-to-engage remote working environment?

Gone are the days where organizations raised salaries by the standard 2-3% in line with company affordability and a consistent rate of inflation. The pandemic has made it absolutely critical to account for external market conditions as well as internal factors. With a large proportion of the workforce now working remotely – which makes engagement more difficult – it is essential for organizations to consider how they will address the retention challenge in a booming talent market. In order to fight this battle for talent, organizations must take stock of how they compare to their peers in regard to both pay and benefits. As such, accurate compensation benchmarking should be a priority.

Every organization needs to look at how they can best deliver salary increases in accordance with their reward philosophy, and how much differentiation they consider appropriate after a difficult year in 2020. Organizations must look both inwards and outwards when deliberating on salary increases through 2021 and beyond.

Footnote

1. Rate of COVID-19 vaccine doses administered worldwide as of August 10, 2021, by country or territory

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