As uncertainty continues regarding the continued impact of the COVID-19 pandemic on business growth, business leaders struggle to set 2021 pay levels.

At the start of the pandemic, one-fourth of companies reduced pay (most of them temporarily) according to research by Mercer. Sixty-eight percent offered merit pay increases and 79% paid out bonuses as planned, resulting in an overall rise in 2020 compensation of 3%, on par with increases seen in each of the past seven or eight years.

Research conducted by Gallagher, the benefits brokerage and advisory company, indicated a lower average 2020 pay increase of 2.5 percent. They project a 2.1 percent increase for fiscal 2021. This will mark the first-time salary budgets have declined in 12 years.

Nearly half of all organizations surveyed by WorldatWork are re-evaluating their salary increase plans for 2021. Many employers expect to reduce salary increases or suspend them altogether. One in 3 U.S. companies responding to a recent survey by the Society for Human Resources Management (SHRM) are lowering their projected salary increases for 2021 amid concerns over weaker financial results and budgetary restraints.

However, wide variations by industry and region are expected. Companies everywhere are weighing the uncertainties of the economy against the need to keep pay levels up to attract new hires and retain top performers. Many retailers increased their minimum wage and offered front-line workers a “hazard pay” bonus. But the Brookings Institution reports most companies dropped hazard pay by early summer. At the same time, massive layoffs have created a larger supply of lower-level workers, resulting in stagnated wages.

Analysts do not expect significant wage reductions for managers and executives in 2021. Unlike the recessions of 2001 and 2009, the federal government in 2020 temporarily expanded unemployment benefits and protections against evictions and home foreclosures, removing the need for employees to accept jobs at lower levels of responsibility and pay.

Regional differences have also impacted compensation decisions depending on the health of the predominant industries in that region. Many regions still report an inadequate labor supply for certain skill sets. And, effective January 1st, 20 states have raised their minimum wage. Later in the year, another four states and Washington, D.C. will raise their baseline pay, which means that low-wage workers in almost half the nation will receive a higher compensation level in 2021. Further, the move to remote work created a larger talent pool for many positions while intensifying the supply gap for IT workers who can enhance a company’s digital infrastructure. And marketing talent is valuable as companies adapt to new digital platforms. Before the pandemic, just 1 in 30 companies planned to let half or more of their employees work remotely, according to Mercer. Now, one-third of companies plan to allow that.

nextSource shares the opinion of leading industry analysts regarding best practices when determining 2021 compensation strategies.

  • Keep tabs on the talent market. Just because unemployment rates are higher nationally doesn’t mean that companies do not have to compete for top people, especially in hot areas such as healthcare, logistics, and tech fields.
  • Be agile. The unprecedented nature of the pandemic and its impact on the economy means companies may need to make changes as the situation unfolds.
  • Understand the impact of flexibility. Flexibility is highly valued by employees and can be a powerful benefit to counterbalance tight budgets for compensation increases.
  • See the big picture. Compensation decisions in 2021 will be affected not just by the pandemic and the economy but also by societal focus on diversity and equity.
  • Consider whether to apply significant compensation changes to new or existing employees. Balance the need to align with market realities against the need to retain key employees.