Compensation & Benefits Trends for the year 2021
The economic effects of COVID-19 have forced companies to re-evaluate and be cautious of the compensation structure, and salary increment budget for 2021. According to a recent publication by Mercer, 6 out of 10 organization in APAC are uncertain how the COVID-19 induced pandemic will impact the 2021 salary increase budget for the companies surveyed. 7 out of 10 are uncertain if the salary freeze will continue. However, in the same breath, as high as 85% say that the salary “reductions implemented are temporary for all or most employees”.
Traditionally, layoffs have been preferred over pay-cuts as companies would focus on retaining the key people and focus on the achievement of higher productivity. However, in the Covid era employers have preferred furlough over permanent lay-offs, thus allowing cost optimization without “shedding employees”.
In the post-pandemic scenario, emerging trends around compensation and benefits may be bucketed into three distinct categories – (a) Cost, (b) Talent Retention, and (c) Compensation Structure, with cost considerations underlining almost every decision about compensation in 2021.
EMERGING COMPENSATION TRENDS TO RETAIN TALENT
Differentiate for Talent and Critical Skills
Employers may want to consider skill-based pay that focuses on rewarding critical skill levels. 2021 will see higher compensation for higher risk roles. Differential compensation structure will play a significant role in the talent management strategies of the companies. One would want to hold on to the critical talent force which will be instrumental for managing the uncertain times – such as introduction of newer lines of products/services for the emerging consumer needs and optimizing cost lines.
Companies will increasingly differentiate for performance & skill and limit eligibility. According to a McKinsey report, “a small subset of roles (less than 50) is disproportionately important to delivering a business-value agenda.” As more organizations start focusing on upskilling their talent on such skills, they would also need to differentially compensate them.
Substantial focus on Health and Well-Being Benefits
A Mercer survey predicts that employee healthcare costs will rise by 4.4.% per employee in 2021. Health benefits will be hygiene as well as a differentiator for employers and is fast developing as a tool for retention. In order to keep a balance between cost and employees’ health, Companies in 2021 will have to re-look at:
- Leave policies capping ‘carry forward’, limited encashment pool, introduction of mandatory leave days and encouraging employees to consume their annual leave
- Provision and policies for mental health and well-being, digital care by way of EAP, telemedicine, and making it integral to its compensation and benefits structure
- Inclusion of vaccinations and complimentary leave and packages for COVID-19 impacted employees and dependents.
- Building provision for family and childcare benefits, including help for employees in financial crises
- Tech-based healthcare support by way of artificial-intelligence-based symptoms, healthcare apps, and virtual care
- In the next few years, companies will start focusing on benefits for in-home childcare
Also, with an increased focus on cost, we would see more structured reviews and tracking of benefits utilization in order to customize the benefits plan, better communication, and ensuring ROI.
Tailored Compensation Structure for New Ways of Working
In the hybrid work environment, there is no space for one-size-fits-all. While companies such as Facebook are contemplating localized compensation commensurate with a lower cost of living for remote employees, in a round-table discussion, facilitated by AON India, Rewards Leads agreed that the jury is still out on this.
Compensation structure will be redefined on the aspects of the 4 Ws.
WHEN: Flexible scheduling and compressed weeks (Levers New Zealand is the latest to announce a 4-day week)
WHAT: What gets automated (increasing trend in automating transactional processes)
WHO: Increased consideration for engaging with gig workers, project-based work
WHERE: place of work
We would see introduction of more monthly allowances towards WFH expenses.
EMERGING TRENDS ON COMPENSATION STRUCTURE
Leaning Towards a Heavier Variable Pay Structure and Pay for Performance
To mitigate the unpredictability of revenues earned, and to link pay with performance and organization’s success, more companies would shift to a heavier variable pay model instead of “across-the-board salary increases”. It would help companies in managing long-term fixed costs. However, companies would need to also watch out for tilting too heavily on short-term gains leading to unwarranted retention issues.
While the annual process of “set it and forget it” goal-setting was already in a declining phase with companies choosing more frequent performance reviews, the compensation philosophy will also shift. Invariably, companies will need to also create larger compensation distinctions for outstanding performers. An equal impetus needs to be given to distinguish the mid-range performers and ensure multiple compensation modules to keep them engaged and motivated.
Impact on Fixed Pay Structure
Overall industry performance will play a pivotal role in fixed pay increases. While companies will hope for a “turn towards normalcy”, the fixed pay may see one of the lowest percentage increases in 2021. There may be a reduction in the 2021 salary budget in companies that have been majorly impacted due to the pandemic. We might experience a delayed implementation as has been the case in 2020 too.
A Longer Long Term Incentive Structure and Executive Compensation
Conventional LTI models reward for performance over at-least a 3-year horizon. The pandemic may have disrupted that thinking and companies would be pulling out all the thinking hats to have an LTI strategy for a longer period as they rethink how to reshape their business models for longer-term sustainability. A deeper communication is required to shift the executive’s mindset and build flexibility so that the longer-term gains are more lucrative than the immediate gains. Companies will pivot to have a strong balance between long-term transformation, short-term strategic agility, and strengthening stakeholder ecosystems all at the same time i.e., a consistent longer-term focus with 2 or 3 mission-critical measures.
Equal Pay will Gain Credence
More organizations will take time out to reflect on their policies and practices of Equal Pay. “Equal Play, Equal Pay” will gain momentum with people negotiating hard. The HR teams and the hiring managers would need an extra tutorial to keep reviewing the data and demonstrate pay equity on factors such as role, position, experience, education, tenure. A survey by WorldatWork anticipates approximately 65% of organizations making pay equity adjustments in 2021. Companies will spend time on defining the roadmap to support the key initiatives on Gender Balance and Pay Equity. Most companies will have a 3-5 year horizon to reach 0% ambition with yearly intermediate targets.
Compensation to Drive Business Sustainability
More companies than ever are incentivizing executives to have environmental, social, and governance (ESG) goals. This truly is the final link wherein such improvements are being linked to pay. It leads to game-changers such as Apple to focus on ESG with every new product launch.
With the customer becoming more conscious, it opens up a value proposition for companies to build a model that incentivizes the employees to think and innovate in the direction of more responsible products, sustainable sourcing, eliminating toxins, reducing fuel consumption. Rem-Coms are increasingly adding sustainability measures to compliance and risk parameters for long-term incentives. Organizations can pick their goals from the UN’s list of 17 Sustainable Development Goals with 169 targets for 2030.
In a nutshell, it is a wait-and-watch situation. CFO and CHRO would have a tough time taking a win-win decision for the company and for the long-term retention strategy. It reminds me of Game theory – one company deciding what to do in the competitive scene will tilt the game and may impact the others adversely.
There is still significant uncertainty about revenues. While most experts are predicting salary increases in India, there might be sharp curtailments in 2021 too and companies will be restrained while setting salary increase budgets.
Compensation is a highly valuable tool, especially during such disruptive times. Boards and management will strive to be agile and structure compensation components according to the pace and magnitude of the impact. The CHROs and Reward Leads will go back to the drawing board to outline the pay philosophy based on the intended outcome/benefit whether they would want to focus on a now-and-here or longer-term sustainable proposition.
In a short span of 9 months, strategic stability has taken precedence over strategic agility, rather, Boards and management would be rethinking hard over creating the right trade-off between the two, and with the introduction of the new Wage Code, compensation decision will be at the core of the strategy!