PayScale is thrilled to announce the launch of our 2021 Compensation Best Practices Report (CBPR), the largest survey in North America to focus specifically on compensation and total rewards. PayScale has been releasing CBPR every year for 12 years now, but 2020 was unique in many ways, highlighting not only the socio-economic impact of compensation practices, but also a rise in the importance of compensation strategy, data, and software in tackling new and unexpected challenges.
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The Catastrophic Impact of COVID-19 on Pay
According to PayScale’s newly released 2021 Compensation Best Practices Report (CBPR), only 63.7 percent of organizations gave base pay increases in 2020. This is a staggering drop from 2019 when 82 percent of organizations gave base pay increases. If this continues, it would be devastating for employees and for the overall economy. For now, it does look like it will continue, as only 64.2 percent of organizations surveyed by PayScale said they plan to give base pay increases in 2021.
Why is this catastrophic?
2020 was a tough year by any measure. The pandemic caused business to surge for some organizations while social distancing caused others to crash. According to CBPR, 45 percent of organizations saw a negative impact to revenue, 25 percent saw a positive impact to revenue, and around 30 percent experience no significant change.
Financial Impact of COVID-19 on Organizations
Note: For a breakdown by industry, download the full report.
Unemployment spiked higher than it has at any time since the Great Depression and the resulting recession caused the U.S. economy to shrink by 3.5 percent. Although the second half of the year was largely better than the first half, many organizations have had to shore up resources in ways that were hitherto unprecedented. Many organizations even needed to make drastic decisions such as issuing pay cuts (27 percent), pay freezes (32.7 percent), and hazard pay for essential workers (27.1 percent) to keep employees on staff to stay afloat.
Actions Taken on Pay in Response to COVID-19
Wage reduction during the pandemic is only problematic if wages don’t surge post-pandemic. The concern is that they won’t. Following the Great Recession of 2007-2008, real wage growth flattened—and never fully recovered. This is shown starkly by PayScale Index which tracks both nominal and real wage growth quarter over quarter and year over year.
The PayScale Index: National Real Wage Growth (US)
Before the last recession, 4-5 percent was the average annual base pay increase. After the recession, the average base pay increase shrank to 3 percent or less, where it has remained for over a decade, despite economists calling for at least 3.5-4 percent increases for the economy to recover. Wage increases were also split to favor professional white-collar occupations more than lower wage blue collar occupations, a steepening divide between high earners and low earners that has impacted overall income inequality.
Now we are in another recession. In 2020, wage growth appears to bump up, but this is actually indicative of layoffs—largely of lower paid workers—which causes averages to rise temporarily. As people get back to work, and if they are not rehired at the same or better salaries, we will see real wage growth flatten or fall.
The way things look right now, a significant chunk of the population is experiencing wage stagnation if not wage losses. And this also impacts future earning potential. Unemployed workers are prone to accepting salaries at lower levels, and women in particular experience a reduction in wages when returning to the workforce after a break. When some employees will work for less, there is less incentive for employers to pay anyone more.
According to PayScale’s Compensation Best Practices Report, the reduction in base pay increases is shown to impact every industry. Again, in 2019, 82 percent of organizations gave annual base pay increases to workers. In 2021, no industry is giving base pay increases at levels that equal the investment in employees before the pandemic, not even industries that are performing comparatively well. In addition, for organizations that are giving base pay increases, the majority (67.2 percent) still plan to give an average increase of 3 percent or less. This is approximately the same percentage of organizations that gave 3 percent or less in previous years, so the investment in base pay by organizations giving anything is not increasing. The difference is also not being made up by bonus pay.
Granted, a large percentage of organizations are still undecided about 2021. It is possible that these numbers will shift as the economy improves.
But when will the economy improve—and how?
Back when the pandemic first hit, the White House was hopeful that the economy would bounce back in a V shape. However, many economists viewed a V-shaped recovery as overly optimistic. The pandemic was not quickly contained, but has instead ebbed and surged in waves in accordance with social distancing and other methods to control the spread of the virus. Even with a vaccine now in distribution, economists are predicting a K shaped economic recovery, which means that parts of the economy will recover rapidly while other parts may continue to stagnate.
Collectively, this has the potential to severely deepen income inequality as people at the bottom of the pay scale, who are already being crushed, are forced to accept lower wages in industries with stagnated growth for an undetermined period of time. Given the workforce demographics of the industries that might suffer the most, women and people of color are likely to be disproportionately impacted.
The Problem of Growing Pay Inequity
Collectively, this economic situation signals trouble for pay equity. The fastest way to stimulate the economy is to give people more money to spend—especially people at the bottom of the pay scale—but when businesses are hurting and concerned about the future, they may be loath to increase pay. The question is, when the economy does recover, will organizations correct pay or let the situation ride?
Hopefully, employers will correct pay for the staff that suffered with them through a difficult time. There are ample reasons to do this. Employers boosting base pay for employees would not only raise morale and motivate workers to perform at their best but also encourage consumer spending, which in turn strengths the economy and helps the business.
However, there is a danger that organizations will normalize the lack of base pay increases beyond the current crisis and plow forward until the competitiveness of the talent market forces them to increase pay or lose employees to opportunities that pay better.
In addition to unproductive turnover and potentially hobbling economic recovery, this approach risks having pay inequities sprout across the organization.
Pay inequity would be immediate for any new employees hired at the height of the recession who are paid less than current employees. As the economy improves, employers might start slowly raising offers to attract new candidates in a more competitive marketplace, resulting in current employees being paid less—a phenomenon known as pay compression. If employers do this without also raising the pay of current employees, especially those hired in at lower rates or who accepted pay cuts or pay freezes when times were tough, the pay inequities can get extreme. And again, do to inherent biases as well as economic forces, unequal pay will likely be weighted toward women and people of color.
Many organizations are aware of the inherent risk here. In fact, 80.4 percent of organizations that participated in PayScale’s Compensation Best Practices survey say that paying employees equitably to engage and retain them is how they approach pay — not attempting to save on payroll costs. This is roughly the same across industries, with Retail and Food, Beverage & Hospitality being the industries least likely to approach pay equitably. It should be noted that Retail and Food Beverage & Hospitality are also industries that are have been more deeply impacted by the pandemic, meaning these organizations are most at risk for pay inequity if they approach compensation this way.
Enter Compensation Strategy
Due the importance of the risks at hand as well as the unprecedented situation, more organizations than ever are investing in compensation strategy in 2021.
For the past five years, PayScale’s Compensation Best Practices Report has asked the question: Do you have a compensation strategy/philosophy? Although a philosophy and strategy are different things, 70 percent of organizations have answered that they either have one or are working on one—and this has been true since 2017. However, in 2021, the number of organizations with a comp strategy/philosophy or working on one has jumped to 76 percent.
However, although more organizations recognize the importance of compensation strategy, they may not be ready to make changes. A majority of organizations (65.3 percent) say that changing their compensation strategy is important over the next 12-18 months, but nearly 30 percent are not ready to change how they approach comp. This might be due to a lack of executive buy-in, a lack of dedicated resources for the compensation function (team size and composition), or a lack of market data, or a lack of compensation technology and tools that enable innovation and agility.
Fortunately, PayScale’s Compensation Best Practices Report can provide helpful insights into all of these obstacles. For example, we provide data on when organizations are most likely to have a dedicated comp function (which is 80 percent for organizations with more than 750 employees) as well as how team sizes break out by company size. We also have insights on what causes organizations to decide they need a dedicated compensation function.
When it comes to what drives the importance of compensation strategy, 47.1 percent of organizations cite the economy. But it isn’t the only driver. Other concerns for employers when it comes to compensation strategy include (unsurprisingly) retention, recruitment, and pay equity.
It is interesting that remote work ranks lower on the list. When asked specifically, less than 11 percent of organizations have a compensation strategy specific to remote work and 50 percent say that they do not think that remote work will impact talent strategy for their business.
This may be short-sighted. Although some occupations cannot be done from home, most businesses employ at least some people whose occupations can be done from home and after a year of working remotely without impact to performance, both current employees and candidates for these positions are likely to want or expect workplace flexibility in the future—even if it’s not a permanent remote position. In addition, the success of remote work is likely to change the way some businesses recruit talent, which means that there will be more remote opportunities and more options. In turn, this means that there will likely be some impact to the talent market, though it may be more likely to vary across occupations than industries.
Note: See our Remote Work Pay Strategy Report for information about this rising challenge.
It is not surprising that pay equity ranks highly on the list. In a vein similar to more organizations focusing on compensation strategy, more organizations also said they planned to do a pay equity analysis in 2021 versus previous years—46.2 percent to be exact, which is an 8 percent increase over last year. Intent to conduct pay equity analysis also increases substantially by company size and maturity in compensation management.
As previously mentioned, pay inequities are most likely to happen during times of economic strife. That is why it is important for employers to approach pay strategically with consistent pay structures driven by accurate market data. It is also important to continually monitor pay equity both internally (how employees doing the same jobs are paid compared to each other) and external pay equity (how employees are paid compared to the market).
The Value of Compensation Technology
Compensation software makes all aspects of compensation management easier, from accessing validated market data to tools and templates for calculating merit increases and monitoring pay equity. Even organizations without dedicated compensation analysts need market data to price jobs.
The accuracy of market data — which includes transparency in how it is sourced – is important. Our survey found that 76.7 percent of organizations use paid online data or traditional market surveys, which has increased 7.9 percent since last year and 23.5 percent since 2017. PayScale compensation management solutions allow organizations to blend traditional market surveys with other forms of salary survey data while maintaining complete transparency on the source of the data. It is a recommended best practice to use multiple sources when pricing jobs—85.8 percent organizations use at least two sources.
In addition, PayScale offers a suite of compensation management software and services to help organizations solve an array of business challenges, from developing a compensation strategy and setting up pay structures, to customizable analysis and reporting tools, to partnering with experts on pay equity analysis.
In conclusion, organizations that invest in compensation as a strategic practice will be able to meet the challenges of the future and have confidence in the fairness of how they reward employees for their work. In addition, they will have the foundation necessary to be able to build programs around pay communication and pay transparency so that employees understand how they are valued and how to move up in their pay range within their chosen career path. With a strategic, data-driven and modern approach to compensation, organizations will be well positioned to maximize the output of their greatest assets: employees.
Interested in Learning More?
This post just scratches the surface of the data and insights available in PayScale’s most comprehensive report of the year: The Compensation Best Practices Report (CBPR). With over 5,000 participants surveyed between November and January, PayScale is able to analyze compensation practices across location, industry, company size and top performing organizations. The report totals over 50 pages with charts and insights into the following topics:
- COVID-19 Response
- Base Pay Increases
- Total Comp and Benefits
- Compensation Strategy
- Pay Equity
- Pay Communications
- Future of Compensation
Download the 2021 Compensation Best Practices Report now.