How COVID-19 Has Led to Salary Increase Budgets Decline for the First Time in 12 Years

While many employers still anticipate an economic rebound in 2021, the first decline in the salary increase budget in 12 years has become evident, following a 2020 midyear survey of businesses.

Here are some key results related to expected salary projections for the coming year:

Salary Increase Budget Decline Projected for the First Time since 2008

The 2008 recession was the last time businesses projected declining salary increases due to economic uncertainty. As with the 2020 pandemic, the 2008 crash created anxiety in the market, as many businesses shut down and were unable to secure cash flow to reopen.

A survey conducted by WorldatWork from May 27 through June 26 studied salary projections for 2020-2021 for a sample size of 4,750 total rewards professionals. The results indicated an average salary growth projection of 2.9 percent, short of the previous year figure by 0.4 percent. The declined percentage signifies how the compensation planners are factoring in economic uncertainties while projecting salary budget growth.

Average salary increase projections were consistent for nonexempt hourly and salaried employees, although executives are expected to maintain a salary increase rate of 3.3 percent. A more in-depth look into the numbers suggests many companies hope salary budgets will stay flat through 2020. At the same time, 84 percent of businesses expect to pay higher salaries to some extent for the year. The most generous companies are planning to pay increases up to 3 or 4 percent.

Another study of 1,010 organizations by Willis Towers Watson found similar results with average salary increases of 2.8 percent for 2021. Salary increases have generally stayed steady around 3 percent per year in the past decade. Only 7 percent of companies do not plan on raising salaries next year, which is down from 14 percent in the previous year. On the positive side, 76 percent of firms plan to issue performance bonuses in 2021.

• Other Declared Results:

These surveys can be compared with the data for the second quarter of 2020 received from the Bureau of Labor Statistics, which found wages and salaries for civilian workers rose by 0.4 percent, which is way lower than the previous year’s increase of 2.9 percent.

Another economic barometer released by the Commerce Department on July 31, 2020, declared that the overall American incomes fell by 1.1 percent in June. 

Potential Contributors to Salary Increase

Key factors that will favor higher pay in the next year include position, tenure, education, and experience.

• Pay Equity:

Over half of the businesses will make pay changes to facilitate equal pay for women and minorities.

• Merit Budget Planning:

Many companies pay according to performance, which is also known as merit budget planning, where even low performers may see a pay increase of  0.6 percent compared to an increase of 3.6 percent for the high performers.

A merit budget forecast study for 2021 was conducted by Empsight, which polled 248 large companies. While 217 companies offered forecasts the previous year, only 175 contributed to the survey this year. The overall forecast increase was 2.66 percent, with a slight edge toward professionals and managers over executives.

• Exempt v/s Nonexempt:

The Watson survey found exempt employees stand to benefit the most from compensation bonuses in the next year with an average projected increase of 11 percent. Meanwhile, nonexempt employees will get 6.8 percent higher paychecks, and hourly workers will see an uptick of 5.6 percent.

• Corporate Social Responsibility:

The pandemic has struck the world at a time when businesses and stakeholders have grown in their awareness and concern about corporate social responsibility. Businesses moving in this direction have adjusted models to seek a more diversified workforce with equal opportunities and equal pay. Savvy entrepreneurs of startups understand that offering competitive pay and bonuses are keys to attracting the best talent.

Conclusion

Preserving cash will be a top concern among businesses navigating through the pandemic crisis. Even company leaders who are optimistic about an economic rebound will be conscious of risk management, accounting for the first salary increase budget decline in 12 years.

Contact the professionals at McKnight Associates, Inc. to learn more about economic projections through the pandemic. We are ready to offer assistance on human resources consulting for universities, colleges, and companies.