Gartner Research

Compensation Watch November and December 2020: Impact of COVID-19

Published: 02 February 2021

ID: G00742597

Analyst(s): Total Rewards Research Team

Summary

HR leaders can use these poll results — gathered from 24 November 2020 through 11 December 2020 — to learn about the impact of COVID-19 on short- and long-term incentives, merit budgets, base pay, special incentives and performance measurement.

Overview

Key Findings
  • A majority of organizations (57%) have reduced or plan to reduce merit budgets for 2021.Forty percent have reduced or plan to reduce short-term incentive (STI) budgets, and only 8% have reduced or plan to reduce long-term incentive (LTI) grant budgets.

  • Almost half of organizations (47%) expect 2021 merit increases to be less than in 2020. A majority (57%) expect 2021 STI payouts to be less than 2020 STI payouts.

  • One in five organizations (20%) do not intend to pay out 2021 merit increases to any employees. Thirteen percent of organizations anticipate not paying out 2021 STIs to any employees.

  • STI targets remain close to prepandemic levels (e.g., the average target for midlevel employees fell from 13.8% in a typical year to 12.5% in 2021, a 9% difference). Merit targets have fallen more substantially (e.g., the average target for a core contributor fell from 2.7% in a typical year to 2.0% in 2021, a 26% reduction). Both of these calculations include employees with targets of zero (i.e., no STI payout or merit increase).

Recommendations

To manage total rewards during the COVID-19 pandemic, HR leaders should:

  • Reward performance in the context of reduced budgets by preserving merit increases for high-performing employees (e.g., implement scaled target reductions where underperforming employees have the biggest reduction).

  • Ensure consistency by establishing criteria for adjusting STI payouts before performance reviews and compensation decisions are made (e.g., funding targets at 80% if the organization misses key targets).

  • Preserve LTI payouts to reward and retain senior leaders who have been working under extreme pressure to guide the business through disruption, thereby driving business performance in the long run.

  • Set appropriate pay expectations by proactively acknowledging the context in which pay decisions are being made and linking compensation changes to organizational pay philosophy.

  • Evaluate performance targets to ensure they align with current business needs and fairly reflect the new reality of work.

  • Reward the unique efforts of employees performing “above and beyond” during the pandemic by offering them at least one special incentive.

Data Insights

Note: While Gartner research may touch on legal issues, we do not provide legal advice, and our research or guidance should not be construed or used as a specific guide to action. We encourage you to consult with your legal counsel before applying the guidance and recommendations contained in our research.

The COVID-19 pandemic has forced many organizations to streamline budgets. As a result, HR leaders must prepare for how the changes will affect compensation — often an organization’s biggest expense. HR leaders can use this report to benchmark current and planned COVID-19 responses against those of their peers.

The report draws on data gathered during six periods: 12 through 25 May, 23 June through 10 July, 4 August through 12 August, 15 September through 9 October 2020 and 24 November through 11 December 2020. Topics include the impact of COVID-19 on STI budgets, merit budgets and LTI grant budgets; changes to base pay; special incentives; and performance target revisions.

A majority of organizations (57%) have reduced or plan to reduce 2021 merit budgets (see Figure 1). Only 27% of organizations plan to keep 2021 merit budgets the same. Very few organizations (3%) intend to increase 2021 merit budgets.

Figure 1: Impact of COVID-19 on Merit Budgets for 2021

Almost half of organizations (47%) expect 2021 merit increases to be less than 2020 merit increases (see Figure 2). Forty percent expect 2021 merit increases to be the same as in 2020, and 13% anticipate 2021 merit increases to be greater than in 2020.

Figure 2: Expectations for 2021 Merit Increase Amounts Compared to 2020

Average 2021 merit targets are significantly less than in a typical year for all performance categories (see Figure 3). Underperforming employees are experiencing the biggest reductions to merit increases, but core and high-performing employees are receiving comparable reductions. Organizations should seek to reward performance by scaling necessary reductions in merit targets to performance categories (i.e., higher performers take smaller reductions than core contributors).

Currently, high-performing employees have an average target that is 30% lower than in a typical year (3.2% compared to 4.6%), while core contributors have an average target 26% lower than the average prepandemic target (2.0% compared to 2.7%). Underperforming employees, many of whom received little or no merit increase in a typical year, experience the largest reduction (0.3% compared to 0.6%, or 50%).

Figure 3: Average Merit Target for Employees by Performance Category

For organizations anticipating that 2021 merit increases will be less than 2020 payouts, the reduction in merit targets is even greater (see Figure 4). Targets for high-performing employees fell from 4.6% to 2.0% (a 57% reduction); core contributors’ targets fell from 2.8% to 1.3% (a 54% reduction); and underperforming employees’ targets fell from 0.6% to 0.2% (a 67% reduction).

If we only examine organizations that will pay out merit increases in 2021 (i.e., exclude targets of “0”), then targets are closer to the average target in a typical year: 4.0% in 2021 versus 4.7% in a typical year for high performers, 2.5% versus 2.9% for core contributors and 1.2% compared to 1.4% for underperforming employees. However, when considering these figures, note that many employees — in particular, those who are underperforming — do not receive merit increases in a typical year and will not in 2021.

In fact, 21 out of 28 organizations report underperforming employees will not receive merit increases in 2021. Comparatively, six out of 28 organizations report core contributors will not receive merit increases in 2021. Interestingly, the same amount of organizations (six out of 28) report high-performing employees will not receive merit increases in 2021. If possible, organizations should reward performance by preserving merit increases for high-performing employees.

Figure 4: Average Merit Target for Employees at Organizations Anticipating Smaller 2021 Merit Increases by Performance Category

Half of organizations (50%) expect 80% or more of their employees to receive a merit increase in 2021, compared to the 85% of organizations that expected 80% or more of their employees to receive a merit increase in 2020 (see Figure 5). One in five organizations (20%) anticipate no merit increases for any employees (i.e., eliminating merit increases in 2021).

Figure 5: Expectations for Percentage of Employees Receiving Merit Increases in 2020 Versus 2021

Expected average 2021 merit increases have declined for all regions (see Figure 6). The mean expected merit increase in North America for 2021 is 2.2%, down from 3.0% in December 2019. For Western Europe, the expected merit increase fell from 2.8% to 1.9%. In Asia, it fell from 6.1% to 3.6%. In Eastern Europe and Latin America, data gathered in December 2019 did not generate a meaningful sample size. However, targets fell relative to historic averages: from 3.9% in September 2019 to 2.8% in December 2020 for Eastern Europe and from 4.4% in September 2019 to 2.9% in December 2020 for Latin America.

Figure 6: Expectations for Merit Increases by Region

More than one in four organizations (30%) have reduced 2021 STI budgets, and an additional 10% plan to. As of December 2020, 40% of organizations have reduced or plan to reduce their 2021 STI budgets (see Figure 7). A slightly larger group, 47%, intend to leave their budgets unchanged. Few organizations (13%) report “it is too early to know” what impact the COVID-19 pandemic will have on 2021 STI budgets. No organizations are increasing or plan to increase 2021 STI budgets.

Figure 7: COVID-19 Impact on 2021 STI Budgets

Despite the historic impact of the COVID-19 pandemic, little deviation exists between the distribution of employees expected to receive STI payouts in 2021 and the distribution of employees who were eligible to receive STI payouts as of September 2019 (see Figure 8). A majority of organizations (51%) expect 80% or more of their employees to receive an STI payout in 2021. Thirteen percent anticipate no employees will receive STI payouts in 2021.

Figure 8: 2019 STI Eligibility Compared to Expected 2021 STI Payouts

A majority of organizations (57%) anticipate 2021 STIs payouts will be less than in 2020 (see Figure 9). Forty percent expect 2021 STI payouts to be the same as 2020 payouts, and very few organizations (3%) anticipate STI payouts to be greater in 2021 than in 2020.

Figure 9: Expectations for Upcoming STI Payouts Compared to Previous Year

Less than half of organizations (37%) surveyed in November and December 2020 have set STI targets for 2021 (see Figure 10). Despite this, the percentage of organizations that have decided or plan to leave targets unchanged has increased from July to December month over month (from 23% in July to 50% in December; see Figure 11). Sixteen percent of organizations will reduce STI targets in some manner for employees, and very few (3%) will establish brand new targets related to COVID-19 response and recovery performance.

Figure 10: Organizations Setting STI Targets for 2021

Figure 11: Adjustments to 2021 STI Targets

Because the majority of organizations will or plan to leave STI targets unchanged and anticipate STI payments in 2021 to be less than in 2020, it seems likely that many are leaving their incentive plans unchanged and will reduce the amount of STI payouts either during the performance review process (e.g., designating fewer high performers) or when making compensation decisions (funding a percentage of targets based on organizational performance).

This idea is supported by data suggesting that 2021 STI targets will remain largely unchanged relative to a typical year (see Figure 12). Even for the 57% of organizations anticipating 2021 STI payouts will be less than 2020 payouts, 2021 targets remain comparable to prepandemic targets (see Figure 13). In fact, only 25% of organizations anticipating smaller payouts have reduced STI targets as of December 2020. Most (75%) have kept targets the same relative to a typical year despite anticipating smaller payouts in 2021.

Figure 12: Average Bonus Targets for Employees by Level

Figure 13: Average Bonus Targets for Employees at Organizations Anticipating Smaller 2021 Bonus Payouts by Level

Out of merit, STI and LTI budgets, LTI budgets have previously been the least affected by the disruption caused by the COVID-19 pandemic. A majority of organizations (64%) plan to leave 2021 LTI budgets unchanged, and only 8% have reduced or plan to reduce them (see Figure 14). Interestingly, a sizable percentage of organizations (16%) plan to increase their LTI budgets.

Fewer organizations are reducing LTI budgets than those reducing STI or merit budgets during disruption for a number of reasons. At most organizations, LTI eligibility is restricted to 10% or less of the workforce, representing mainly the highest levels in the organization. Given that many senior leaders have been working under extreme pressure to guide the business through disruption, HR leaders may possibly view adjusting LTIs downward as particularly unpopular.

Additionally, LTIs typically involve equity and other noncash rewards, which means adjusting LTI budgets (and subsequently LTI offerings) may be more complicated than adjusting STI or merit budgets (and therefore organizations may be less inclined to do it). Lastly, LTIs are traditionally aimed at rewarding and retaining talent over the long term, something most organizations, even those heavily affected by the pandemic, likely want to do.

Figure 14: COVID-19 Impact on 2021 LTI Budgets

Two-thirds of organizations (67%) report the pandemic has not affected employee base compensation nor do they expect it to (see Figure 15). One in three organizations (33%) report the pandemic has affected or will impact employee base compensation. Of the 20% (or six out of 30 organizations) reporting an impact on base compensation, two-thirds (four organizations) reduced base compensation for some or all employees, and one-third (two organizations) reduced base compensation for some employees and increased it for others.

For organizations anticipating salary reductions, we recommend the research note, .

Figure 15: COVID-19 Impact on Employee Base Compensation

The COVID-19 pandemic has also affected performance measurement and special incentives. As of December 2020, a plurality of organizations (47%) are not adjusting how they set or manage performance against annual targets (see Figure 16). Of those 47%, there is roughly a two-to-one split between those who will adjust incentives if the business misses its year-end targets (64%) and those who will not (36%; see Figure 17).

Still, 40% are adjusting how they set or manage performance against annual targets. Organizations are doing this a number of ways. Organizations may engage in more than one approach. One in five (20%) are adjusting their guidance (e.g., external targets), while 20% are adjusting internal targets (e.g., reducing the degree of stretch in internal targets). Thirteen percent are adjusting how they manage performance against internal targets (e.g., more frequent reviews; see Figure 18).

When it comes to performance, HR leaders must ensure targets are still fair, given how the COVID-19 pandemic has changed the nature and conditions of work. For some employees, such as those taking care of children or a sick relative, prepandemic performance targets may be harder to meet. For other employees, such as those who have put longer-term projects on hold to meet shorter-term pandemic-driven business needs, old performance targets may no longer make sense. In addition to setting relevant and fair targets, organizations must face the challenge of conducting and communicating performance in this new environment as well as making and communicating subsequent pay decisions.

To learn more about conducting and communicating performance, we recommend the research note, . For making pay decisions, we recommend the research note, , and for communicating decisions, we recommend using the .

Figure 16: COVID-19 Impact on Setting and Managing Performance Against Annual Targets

Figure 17: Plans for Adjusting Incentives If Targets Missed

Figure 18: COVID-19 Impact on Setting and Managing Performance Against Annual Targets (Detailed)

Overall, 31% of organizations with on-site employees are offering or plan to offer at least one compensation-based special incentive to on-site employees. Seventeen percent are offering or plan to offer some kind of special bonus, while 10% are offering or plan to offer a form of hazard pay (see Figure 19). Very few are offering or plan to offer an hourly pay multiplier (3%).

Figure 19: Incentives Offered to Employees Working On-Site During the Pandemic

The COVID-19 pandemic is driving many organizations to streamline budgets. Fifty-seven percent have reduced or plan to reduce 2021 merit budgets, and 40% have reduced or plan to reduce 2021 STI budgets. The majority of organizations (57%) anticipate 2021 STI payouts to be less than in 2020, and 47% anticipate 2021 merit increases to be less than 2020 merit increases. Thirteen percent of organizations plan to eliminate 2021 STI payouts for all employees, and 20% plan to do away with 2021 merit increases.

LTI budgets remain largely unchanged, and the percentage of organizations reporting or anticipating an impact (positive or negative) on base pay has remained between 20% and 40% month over month.

Two in five organizations (40%) are changing how they set or manage performance against annual targets, and 31% of organizations with on-site employees have or plan to offer some form of compensation-based incentive to employees working on-site during the pandemic.

Presentation Deck

Evidence

To ensure our findings stay up to date with the rapidly changing situation, we are conducting bimonthly research on how the COVID-19 pandemic affects compensation. The majority of the research in this report is based on a compensation survey of 30 organizations from various industries conducted from 24 November through 11 December 2020 (see Table 1). For figures using cross-sectional data, the reliance on our May, June and July, August, and September and October 2020 Compensation Watch Surveys is noted.

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