Top 5 Employee Compensation Trends for 2021

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Top 5 employee compensation trends for 2021
Remote work also has opened questions about pay for skills/value, aligned incentives, performance measurement, goal setting, and other pay-related factors.

Top 5 Employee Compensation Trends for 2021

Throughout 2020, the COVID-19 pandemic challenged every aspect of life and society as we knew it. In the business world, the HR function became pivotal in helping steer their organization’s response to the pandemic and contribute to a strategy for recovery in 2021 and help strengthen resiliency against similar disruptions in the future.

The early days of the pandemic found compensation managers struggling to determine a measured response for managing costs and protecting employees at the same time. This circumstance highlighted the need for organizations to increase their agility and transparency with future-proofing the compensation strategy.

To help keep organizations on track in their compensation goals throughout 2021, here are five areas of employee compensation for HR to consider carefully this year.

Restructure pay for remote working

Over half of the global workforce will continue remote work into the first quarter of 2021, primarily to ensure employee safety. But in the next three years, 61% of organizations could make remote working a permanent policy as its various advantages begin to be realized, according to our Flexible Work and Rewards Survey: 2021 Design and Budget Priorities. For example, around half of organizations expect significant reductions to real estate and transportation costs in the coming years. Some have diverted budgets for commuter allowances, company cars and business travel to support optimizing pay for essential workers and to restructuring the rewards of a distributed workforce. They also recognize that workforce engagement and wellbeing rise when employees have choices about where (and when) they work.

This has opened questions around geography-related aspects of the compensation program, which traditionally is based on office location. Seventy-seven percent of organizations have decided that pay will be the same for remote and onsite workers in 2021, and only 10% are paying based on a remote worker’s location for all jobs. Whether this will become a permanent practice has yet to be seen – currently, 46% of the global workforce is onsite and this may increase to 53% in three years, according to our Flexible Work and Rewards Survey: 2021 Design and Budget Priorities.

Remote work also has opened questions about pay for skills/value, aligned incentives, performance measurement, goal setting, and other pay-related factors. In the short-term, remote working can help to optimize costs and boost employee engagement and wellbeing, yet organizations need to focus the next few months on understanding the business objectives of offering alternative work arrangements and creating appropriate pay models that are fair and competitive. It is important for organizations to review the extent to which geographic differentials factor into pay, and to reconsider structuring pay around performance, skills demanded and impact of the role to the organization’s post-crisis recovery and long-term goals.

Differentiate rewards for critical digital talent

Not only did the sudden move to telecommuting force many organizations into accelerating their digital transformation plans, it also helped make clear the gaps in digital roles and skills. Remote working and virtual transactions became the norm and helped push an even greater demand for digital talent, especially those skilled in critical roles involving machine learning, user interface design, full stack development and technology product development.

Moreover, remote working opened the talent market, enabling organizations to hire the best talent not just from anywhere in the world, but also from a broader and more diverse talent pool. With 90% of organizations greatly challenged with attracting and retaining critical digital talent according to our latest Artificial Intelligence and Digital Talent Compensation Survey, access to a much larger talent market can help ensure they stay on track on their digital transformation journey.

Additional findings from the survey show that organizations have shifted toward skills-based rewards, resulting in more relevant and differentiated offerings such as enhanced learning and development opportunities to ensure digital talent can remain competitive in a fast-changing world.

All of these developments are steps in the right direction, but organizations should keep in mind that digital professionals are highly aware of their market value and the criticality of their contributions to the business. Today, only 14% of organizations globally have an integrated digital and business strategy. With remote working on the rise and possibly becoming permanent in many organizations, it is crucial for leadership to invest time and effort in having a holistic understanding of the digital strategy and ensuring its successful implementation throughout the value chain.

Companies that do right, do well

Despite the chaos of the pandemic, investors still held leaders in business and government accountable for their environmental, social and governance (ESG) promises. The corporate pressure to drive sustainable performance and disclose progress on the ESG agenda also compelled HR to future-proof their rewards programs and to redesign it for sustainable performance, through fair rewards and talent-nurturing programs that altogether create an exceptional employee experience.

Through this effort, we saw a resurgence of pay transparency, especially during the height of the pandemic, as organizations acted quickly to prioritize safety and wellbeing policies. But with the crisis having led to widespread job loss, employees understandably developed high levels of anxiety and sensitivity about their pay and financial responsibilities. Many organizations acknowledged these challenges and sought to provide timely, transparent communication concerning compensation, including temporary adjustments such as salary freezes and reductions.

In the coming months, employees will increasingly want more transparency around how their pay is determined. Moreover, as many organizations resume salary and performance review this year, multiple stakeholders (investors, consumers, regulators, employees) will continue to emphasize the importance of fair and equitable pay. This is an opportunity to do better at communicating the linkage between business performance and individual output/contribution to the bottom-line. While this is challenging, especially in large organizations, there are key points in the process that need to be leveraged: the middle and junior managers. They are closest to the action and are in the best position to help employees understand exactly what they bring to the table and become invested in the organization’s success.

Protect employee data

During the pandemic, remote working proved to be effective for various jobs and roles. It also proved the importance of cyber security, as many organizations found themselves ill-equipped to protect confidential data from vulnerabilities in the virtual world. Outside of company firewalls, organizations are challenged with applying a consistent level of control in employees’ home offices.

For compensation professionals who may still have outdated technology, they are now dealing with two complex layers of difficulty:

  • The labor-intensive administrative tasks of working with massive amounts of data
  • The potential cyberattacks on confidential information

In this era of rapid digitalization, there is no reason why working with data can’t be simple and secure. There are advanced technologies available today that can easily consolidate large amounts of data from multiple sources and store all of these in secure, encrypted solutions.

But on top of implementing the right technologies and fortifying the wider network of remote working environments, organizations must also double down on continuously improving employees’ cyber hygiene habits. According to our 2020 Cyber Risk Outlook, 86% of organizations believe that cyberattacks will increase as a result of COVID-19, largely due to data breaches and cyberthreats (particularly ransomware and social engineering).

Measure return-on-investment (ROI) on compensation spending

Evaluating compensation actions holistically — rather than by individual programs or policies — can improve an organization’s understanding of their cumulative impact. Also consider that, while there may be pervasive actions within a geography or industry, the extent and impact of compensation decisions will vary widely because of the unique circumstances each organization faces.

Organizations that are more severely impacted by the pandemic will need to revisit their operations, structures, size, levelling and jobs to stabilize and prepare for the future. It is critical to ensure that the recovery plan is founded on reliable data and information. To rebuild effectively, organizations should compare practices against the rest of their industry. Organizations can use benchmark data to make intelligent, future-ready design decisions such as:

  • Rightsizing the overall management and corporate function structures
  • Eliminating redundant, misplaced, duplicated or shadow roles
  • Ensuring that managerial spans of control reflect the changing nature of the work managed
  • Streamlining reporting layers and decision-making processes
  • Clarifying roles and responsibilities of managers and individual contributors

A thoughtful assessment of these areas will help to support new approaches to the compensation structure of an increasingly agile organization. This includes assessing the relevance of emerging practices to the compensation philosophy, including skills-based pay, value-based incentives, ESG-focused metrics, among others.

For instance, organizations could look at internal data on performance and revenue to analyze which employees contributed significantly to the bottom line, thereby helping the business to stay afloat during the crisis. Or perhaps differentiate rewards for high-potential employees that demonstrate great resiliency and change-readiness throughout volatile times. Or look at jobs that cannot be automated and apply a market adjustment to account for competitiveness.

As the world fights to recover from the crisis, a cautious and practical mindset throughout 2021 could help organizations be better able to rethink their salary budget allocations and zero in on what is essential to the business.

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