2021 Compensation
Best Practices Report

Navigating Compensation
in a Changing World
Navigating Compensation
in a Changing World

PayScale’s survey shows that the impact of COVID-19, remote work, pay equity and the evolution of technology is driving major changes in compensation and propelling organizations to navigate new waters to remain competitive.

PayScale’s survey shows that the impact of COVID-19, remote work, pay equity and the evolution of technology is driving major changes in compensation and propelling organizations to navigate new waters to remain competitive.

Executive Summary

2020 was an unprecedented year. PayScale’s Compensation Best Practices Report is the largest and most robust resource available to help organizations understand how other employers reacted to 2020 as well as what the trends are for compensation and total rewards going into 2021 and beyond.

The transformative shifts taking place in business are bigger than the COVID-19 pandemic. A changing economy, the rise of remote work, calls for diversity, equity and inclusion, new laws around pay transparency, and the expectations that workers have for employment opportunities are all reshaping people strategy, which includes compensation. The impact of 2020 on the employee experience is creating waves that will result in a sea change over time.

The question is what is important now? According to our data, the biggest themes include reductions in base pay increases and total compensation and their impact on income inequality, a growing focus on compensation strategy, higher investment in pay equity analysis to close pay gaps, and the importance of paid market data and transparency in driving compensation strategy and enabling shifts to accommodate changing conditions and expectations.

In summary, organizations who are serious about being competitive when it comes to talent will need to invest in mature compensation management solutions and pay communication strategies in 2021.

Note: PayScale’s Compensation Best Practices Survey is able to provide cuts of the data for certain questions with segmented data available for the United States vs. Canada, Company Size, Industry, and Top Performing organizations. See Methodology for more information.

HIGHLIGHTS

64.2%

of orgs plan to give base pay increases in 2021, a continuation of 2020 when only 63.7 percent of organizations gave pay raises.

80.4%

of orgs say that engaging and retaining talent – not maximizing payroll – is how they determine pay.

75.6%

of orgs say they either have a compensation philosophy/strategy or are working on one – a 6 percent increase from previous years.

65.3%

of orgs say that given the events of 2020, changing their compensation strategy is important in the next 12-18 months. 

76.7%

of orgs either purchase traditional surveys or use paid online data to set pay, an increase of 7.9 percent since last year that has been growing year over year.

54.6%

of orgs want to be transparent and share pay ranges with employees, but only 33.6 percent share pay ranges currently.

COVID-19 RESPONSE

COVID-19 RESPONSE

The COVID-19 pandemic impacted organizations differently. Although impact on pay has been in the minority, it is more significant than what typically happens in a recession. The most common response was freezing pay or deferring raises for highest earners. However, the fallout of 2020 (e.g. remote work, calls for racial justice, new laws around pay transparency, etc.) is looking to influence further investment in compensation strategy.

FINANCIAL IMPACT

The impact of COVID-19 has been mixed for businesses. Around 45 percent of organizations experienced a negative impact to revenue as a result of COVID-19. However, a quarter of organizations (25.3 percent) said they saw a positive impact to revenue. Around 30 percent say that COVID-19 had no substantial impact to revenue.

Financial Impact of COVID-19 on Organizations

Financial impact chart

COMPENSATION RESPONSE

Although most organizations did not make changes to pay in response to COVID-19 in 2020, a sizable chunk did—one fifth to one third of organizations depending on the type of change. Going into 2021, a smaller percentage of organizations plan to continue these changes, with the most common responses being pay freezes rather than pay cuts.

Actions Taken on Pay in Response to COVID-19

Strategic response chart

STRATEGIC IMPACT

Given the cumulative impacts of 2020 (pandemic, remote work, recession, pay equity, etc.) 65.3 percent of organizations said that changing their approach to compensation is important over the next 12-18 months. However, nearly 30 percent are not ready to make those changes. The drivers most likely to change compensation strategy include the economy (47.1 percent), retention of talent (44.9 percent), recruitment of talent (42.3 percent) and pay equity (34.7 percent).

Is Changing Your Comp Strategy Important Over the Next 12-18 Months?

Strategic impact chart
boat on water

BASE PAY INCREASES IN 2020

BASE PAY INCREASES IN 2020

The economic impact of COVID-19 led to deferment or reduction in annual wage increases for 2020 and possibly for 2021. Contextually, this is troubling, especially for lower wage earners as the impact of the last recession of 2007-2008 was still being felt more than a decade after corporate profits increased, with stagnation in real wage growth and declining labor share of corporate income. Before the Great Recession, 4-5 percent annual wage growth was standard; after it hovered around 3 percent or less. With fewer organizations giving base pay increases at all, income inequality can be predicted to widen even further in coming years.

Only 63.7 percent of organizations said they gave a base pay increase in 2020, which is significantly less than the 85 percent who planned to give a base pay increase in 2020 when asked last year and a steep departure from the 82.3 percent of organizations that gave base pay increases in 2019. A majority of organizations (74.3 percent) said that they gave an average pay increase of 3 percent or less to employees in 2020, which is slightly higher than the 71 percent that predicted they would give 3 percent or less in 2020. An increase of 3 percent or less has been standard for almost a decade, but is less than economists have said workers need for the economy to recover to pre-Great Recession levels.

Did Your Organization Give Base Pay Increases for 2020?

Base pay 2020 chart

What Was the Average Base Pay Increase Given to Employees for 2020?

For 2021, only 64.2 percent of organizations said they plan to give a base pay increase at all. Of the organizations giving pay increases, 67.2 percent said they plan to continue giving an average base pay increase of 3 percent or less. The average pay increase in 2021 could be higher than in 2020. However, this depends on organizations who have not yet decided (26.1 percent).

Do You Plan to Give Base Pay Increases for 2021?

Base pay 2021 chart

What Do You Expect Will Be the Average Base Pay Increase for 2021?

TOTAL COMP

TOTAL COMP

The reduction of base pay increases is not being made up with bonuses. Overall, fewer organizations said they gave (or planned to give) bonuses in 2020 compared to 2019. This was also reflected in the types of bonuses that organizations give, which showed lower participation rates across the board. Organizations also largely don’t plan to change their bonus plan for 2021.

Do You Offer Variable Pay as Part of Total Compensation?

VARIABLE PAY

The majority of organizations (69.6 percent) offer some kind of variable pay as part of a total rewards package (e.g. bonuses). However, this is a reduction from 2019 when over 73 percent of organizations said they offered variable pay, indicating the reduction in base pay has not merely shifted rewards to variable pay in 2020.

What Type of Bonuses or Incentives Did You Offer?

TYPES OF BONUSES

In 2020, aside from the individual performance bonuses, the most popular types of bonuses were employee referral bonuses, company-wide performance bonuses, and spot bonuses. However, participation in all types of bonuses dropped in 2020 compared to 2019, although they were higher for top performing organizations.

How Will Your Bonus Budget Change in 2021 Relative to 2020?

BUDGET CHANGE FOR 2021

Most organizations either don’t plan to change their bonus budget in 2021 (45.5 percent) or do not have a budge for bonuses. Of those that cited an intent to change the budget allocation for bonuses, a slightly higher percentage (14.4 percent) planned to shrink the budget for bonuses versus enlarge the budget (11.4 percent).

COMPENSATION STRATEGY

COMPENSATION STRATEGY

Compensation strategy needs to change to keep up with the times and that has never been clearer than now. Although HR has been slammed with a revolving door of critical needs in 2020 as a result of the pandemic, compensation planning is looking like it will surge in prominence as organizations figure out how the events of 2020 will impact workforce planning and how they will become more agile to compete for talent in both the current and future economy.

COMP PHILOSOPHY/STRATEGY

In 2020, 75.6 percent of organizations said they either have a compensation strategy/philosophy or are working on one. This is an increase of 6 percent over reports from previous years, which is indicative of the growing importance of compensation as a strategic aspect of business planning and operations.

Does Your Organization Have a Formal Compensation Philosophy/Strategy?

PAID MARKET DATA

A majority of organizations (76.7 percent) consult either traditional surveys or some form of paid online data sources when setting salaries in order to ensure fair pay. This increases for larger and more mature organizations. It has also increased from last year, when only 68.8 percent of organizations said they used traditional surveys purchased from providers or paid online sources to set salaries, and an even bigger increase from 2017 when 53.2 percent organizations used these sources.

Which Sources Do You Use to Obtain Market Data?

Paid Market Data Chart

REMOTE WORK

Only 11.3 percent of organizations have a pay strategy specifically for remote work. Another 10.6 percent of organizations say they are working on one for 2021. Organizations can pay remote employees according to the employer’s location, the employee’s location, a national median (or regional pay bands), or by adopting a mixed strategy. In 2020, organizations were primarily utilizing an employer-based strategy or a mixed strategy. After the pandemic, organizations primarily say they haven’t decided what their strategy will be.

What Was Your Strategy for Remote Pay in 2020?

Remote Work Strategy 2020

What is Your Strategy for Remote Pay in 2021?

Remote Work Strategy 2021

PAY EQUITY

PAY EQUITY

The last few years have brought up the importance of pay equity as an aspect of Diversity, Equity and Inclusion. Although the Gender Pay Gap has been prominent in the media in recent years, protests around racial justice in the summer of 2020 drove visibility around the Racial Wage Gap as well. More states are also passing pay transparency laws. It is important to note that pay equity applies to all employees in an organization regardless of demographics and that analysis is needed to ensure there are no systemic gaps for all employees with the same job titles and responsibilities that cannot be explained by compensable factors.

Which Best Describes Your Approach to Compensation?

Reason for fair pay chart

REASON FOR FAIR PAY

Organizations care about their people. It is sometimes believed by workers that companies value their bottom line more than compensating their employees fairly. However, this is not true. Most organizations (80.4 percent) say the way they approach compensation is to keep employees engaged and retain talent. Only a very small percentage of employers (7.6 percent) say they prioritize payroll costs. This is true for organizations of all sizes.

INVESTMENT IN ANALYSIS

In our survey, 46.2 percent of organizations say they plan to do pay equity analysis on the gender pay gap, racial pay gap, or both in in 2021. This is a meaningful increase of 8 percent since last year, showing that pay equity has become of greater importance to most organizations. Pay equity analysis is much more likely the larger the size of the organization. Once an organization reaches a size of 750 employees, pay equity analysis is drastically more likely. However, this does not mean that pay equity analysis is not important for smaller organizations.

In 2021, Do You Plan on Performing a Race or Gender Pay Equity Analysis?

Investment in analysis chart

PAY COMMUNICATIONS

PAY COMMUNICATIONS

What is the purpose of a compensation strategy and commitment to pay equity if employees don’t know about it? Pay communications ensure that employees understand how they are compensated, how their salary, variable pay, and other rewards are determined, and how to grow their career with the organization. Although the degree of pay transparency will vary by company, pay communications are an essential aspect of compensation planning. Unfortunately, it is also something that many organizations overlook, which can be detrimental to employee engagement and retention even when pay strategies are strong.

Does Your Organization Offer Training to Managers on Pay Communications?

Manager training chart

MANAGER TRAINING

A majority of organizations (57.8 percent) do not offer manager training on pay communications. Manager training becomes more likely the larger an organization grows, but never gets much over 50 percent. This is surprising given the importance of compensation in retaining talent. Training managers to talk about compensation with employees is something every organization can do even if they are low on the pay transparency spectrum, although it is vastly more effective when pay structures and processes are more mature.

CAREER GROWTH

Only a little more than half (51.7 percent) of organizations say that employees know how to move up in their pay range or move to the next level in their career. Past analysis by PayScale has shown that an increase in pay is why many employees seek promotion and is a leading contributor to talent looking for opportunities elsewhere. Employees have a better sense of their career opportunities at large organizations; however, SMBs of 1-99 employees do a slightly better job at this than organizations of 100-749 employees.

Do Employees Know How to Move Up in Their Pay Range?

Career growth chart

PAY TRANSPARENCY

PayScale finds that about a third of organizations (33.6 percent) are a three or higher on the pay transparency spectrum, meaning they share at least a pay range with individual employees. About two thirds (66.4 percent) are a one or two on the spectrum, either sharing no information except a paycheck or just a little bit of market data. However, when asked how transparent they would like to be, most organizations (54.6 percent) want to be able to be a three or higher, sharing at least share pay ranges with employees. This allocation has not changed substantially for many years, but with an overall increase in attention to compensation strategy, maybe 2021 will be the year.

Pay transparency chart

DOWNLOAD THE COMPENSATION BEST PRACTICES REPORT FOR 2021

DOWNLOAD THE COMPENSATION BEST PRACTICES REPORT FOR 2021

The full report offers additional insights to what is included in this summary page around how organizations responded to COVID-19 as well as leading trends on base pay increases, total rewards, compensation management strategy, and pay communications.

Additional reports from PayScale will be published throughout 2021 with more in-depth analysis on trends related to pay equity, modernizing compensation, remote work strategy, and employee engagement and retention. By downloading this report, you will be added to our mailing list to receive notification of future thought leadership.

Navigating compensation in a changing world image

Methodology

SURVEY METHODOLOGY

The 2021 Compensation Best Practices Survey gathered responses from November 2020 to January 2021. There were 5,003 respondents.

TOP-PERFORMING ORGANIZATIONS

Top-performing organizations are defined as those who exceeded their revenue goals in 2020. Nineteen percent of respondents fit this criterion.

LOCATION

Respondents spanned the globe, including 3,397 respondents in the United States and 447 respondents in Canada. Organizations with both single and multiple locations were represented.

ORGANIZATIONAL SIZE

We defined four organizational sizes for comparison as follows: Small (1-99 employees), Mid-Size (100-749 employees), Large (750-4,999 employees) and Enterprise (5,000 or more employees). Thirty-three percent of respondents reflect small organizations; 32 percent of respondents come from mid-sized organizations; 18 percent of respondents come from large organizations, and 18 percent come from enterprise organizations.

INDUSTRY AND ORG TYPE

As in prior years, the top industries represented in the survey were Technology (including software), Healthcare and Social Assistance, Manufacturing, Nonprofit, and Finance & Insurance. In terms of organization type, most respondents were either from a public company, a private company or a nonprofit (totals 88 percent), but we also have respondents from government, schools, colleges/universities, hospitals, cooperatives and trade associations.

JOB LEVEL

Most respondents identified as either Individual Contributors (33 percent) or Managers (29 percent). Twenty percent identified as Directors, 6 percent identified as Vice Presidents and 12 percent identified as C-level executives.