Compensation Watch 1Q21: Impact of COVID-19

Overview

Data Insights

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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 their compensation decisions against those of their peers.

The report draws on data gathered during seven periods spanning 12 May 2020 through 9 April 2021. Topics include the impact of COVID-19 on STI payouts, merit increases and changes to base pay.

Despite the historic impact of the COVID-19 pandemic, most organizations have paid out STIs in 2021 (78%) or will later in the year (16%). Very few (6%) report they won’t pay out STIs in 2021 (see Figure 1).

In general, actual 2021 STI payouts exceeded expectations from November and December 2020. In April 2021, over one-third of organizations (34%) reported that 2021 STIs were larger than 2020 payouts, compared to 3% of organizations anticipating that at the end of 2020 (see Figure 2).

Furthermore, a plurality of organizations (42%) reported 2021 STIs payouts were less than in 2020, compared to a majority (57%) that expected them to be less. It is possible that some organizations had better end of year results than expected, and organizations were able to fund STI budgets at higher rates than anticipated.

The average 2021 STI targets for senior, midlevel and entry-level employees remained largely unchanged relative to a typical year (see Figure 3). For senior employees, targets fell from 29.3% in a typical year to 25.3% in 2021; for midlevel employees targets decreased from 13.8% to 12.4%; and for entry level employees targets declined from 7.3% to 5.7%.

For organizations that reported smaller payouts this year, targets decreased more than at the average organization. For senior employees, average targets fell from 29.3% to 19.2%; for midlevel employees targets decreased from 13.8% to 9.5%; and for entry level employees targets declined from 7.3% to 5.2% (see Figure 4).

When it comes to how many employees will receive an STI payout, organizations fall roughly into two groups. A majority of organizations (54%) paid or will pay STIs to most of their employees (80% or more) in 2021. At over one-third of organizations (38%), fewer than half of employees have or will receive an STI this year (see Figure 5).

Almost all organizations have already paid out merit increases in 2021 (66%) or will later in the year (32%). Very few (2%) report they won’t pay out merit increases in 2021.

In general, actual 2021 merit increases exceeded expectations from last year. In December 2020, 13% of organizations anticipated merit increases would be greater in 2021 than in 2020, but in April 2021, nearly twice as many (24%) reported merit increases were larger this year than last (see Figure 7).

Furthermore, in December 2020, a plurality of organizations (47%) predicted merit increases would be less in 2021 than in 2020, but in April 2021, only 32% of organizations reported they were less in 2021 than in 2020. A plurality of organizations (40%) predicted that 2021 merit increases would stay the same relative to 2020, and for a plurality of organizations (44%) they did.

Average 2021 merit increases remained largely unchanged relative to a typical year (see Figure 8). For high performers, targets fell from 4.6% in a typical year to 4.3% in 2021. As we enter the second year of the COVID-19 pandemic, HR leaders must consider how they intend to reward high-performing employees, many of whom have had an outsized and prolonged impact on organizational performance during disruption.

For core contributors, targets rose marginally from 2.7% to 2.8%, and for underperformers targets rose from 0.6% to 0.9%. It is possible some underperformers received larger merit increases in 2021 because their underperformance was the result of forces outside of their control.

For organizations that reported smaller merit increases this year, targets decreased more than at the average organization but not by very much, indicating organizations have tried to preserve merit increases as much as possible despite disruption. For high performers, targets fell from 4.6% in a typical year to 4.1% in 2021, and for core contributors, targets fell from 2.7% to 2.6%. Targets from underperformers rose from 0.6% to 0.8% (see Figure 9).

Most organizations (76%) have paid or will pay out merit increases to most employees (80% or more) in 2021 (see Figure 10). Very few organizations (6%) have paid or intend to pay out merit increases to fewer than 20% of their employees.

In general, actual merit increases exceeded December 2020 expectations for every region. The expected mean merit increase in North America as of December 2020 was 2.2%, whereas the actual increase in April 2021 was 2.9%. For Western Europe, the expectation was 1.9% and the average increase was 2.6%. In Eastern Europe, the prediction was 2.8% and the actual merit increase was 3.3%. In Asia, the prediction was 3.6% and the actual increase was 5.4%. In Latin America, the prediction was 2.9% and the actual increase was 3.6% (see Figure 11).

The impact of COVID-19 has remained relatively stable throughout the pandemic. Eighty percent of organizations report the COVID-19 pandemic has not affected employee base compensation, nor do they expect it to (see Figure 12). One in five organizations (20%) report the pandemic has affected or will affect employee base compensation.

Interestingly, of the 14% (or seven out of fifty organizations) reporting the pandemic has impacted base compensation:

• Five organizations increased base pay for some or all employees.

• One organization reduced base compensation for some or all employees.

• One organization reduced base compensation for some employees and increased it for others.

It is possible that organizations increasing base pay as a result of the COVID-19 pandemic are trying to catch employees up to prepandemic levels.

In general, the disruption caused by the COVID-19 pandemic did not impact 2021 STI payouts and merit increases as severely as organizations anticipated. For some organizations, this is possibly because the business itself is doing well, either because it has adapted to disruption or because the disruption has begun to ebb. In fact, 36% of organizations that took our survey reported the pandemic had moderate to severe positive business impact at their organization, compared to 46% that reported moderate to severe negative business impact and 18% that reported neither positive nor negative impact.

While more organizations than expected paid out larger STIs and merit increases in 2021 than 2020 — and some are even increasing base compensation outside of the merit mechanism — many organizations paid out less this year and some won’t pay out STIs or merit increases at all. As the economy recovers and reopenings take place, effectively rewarding employee performance is imperative to attract and retain talent and drive engagement in 2021. To that end, our previously published research such as Rewards and Recognition That Motivateor Data-Driven Total Rewards Plan Design: Leveraging 2021 Employee Preferences can help.

Presentation Deck

Evidence

The majority of the research in this report is based on a compensation survey of 50 HR leaders worldwide from various industries conducted from 7 March 2021 to 9 April 2021 (see Table 1). For figures using cross-sectional data, the reliance on our May, June and July, August, September and October, and November and December 2020 Compensation Watch Surveys is noted.

Gartner Recommended Reading

Rewards and Recognition That Motivate

Data-Driven Total Rewards Plan Design: Leveraging 2021 Employee Preferences