Looking ahead in 2021, there is certainly a lot of optimism in both employers and employees alike
2020 was a year of uncertainty. What is certain however is COVID-19 has had a significant impact on how organisations finalised their pay budgets. Organisations focused on preserving cash, resulting in nearly half (47%) of all companies globally halting regular salary review cycle in 2020, with the other half implementing regular reviews and reducing their standard salary increases.
Looking ahead in 2021, there is certainly a lot of optimism in both employers and employees alike and our data suggest that 85% of companies globally will increase salaries. Developed and developing nations are forecasting average salary increases of 2.5% and 6.2% respectively. Although with falling inflation levels salary budgets are not likely to be the same as pre-pandemic, they seem to be more aligned to a regular year. With limited salary budget, it is crucial that organisations have a clear strategy to award salary increases as effectively as possible and prioritize increases for critical employees, hot jobs and differentiate for performance.
Smaller salary budgets in 2020
Salary increases in 2020 were notably decreased in comparison to previous years, despite inflation levels remaining similar. In developed countries, companies increased their salary budgets by an average of 2.1%; noteworthy when compared with 2019’s average increases of 3.1%. All developed countries experienced a decrease in 2020 compared to 2019. The biggest declines in developed countries can be seen in South Korea, Malta, Latvia and Belgium. The lesser impacted developed countries were Slovakia, Cyprus and Switzerland. Developing countries shared a similar fate, all experiencing a decrease in 2020 on average compared with 2019 apart from Argentina which experienced rising inflation. Developing nations on average experienced only a 5.1% increase in 2020, which represents a reduction on 2019’s levels which saw an average increase of 6.9%.
High impact and low impact: The gap between industries continues to widen in 2021 due to COVID-19
There are those who experienced a difference in impact due to the pandemic particularly across organisations in different industries.
COVID-19 had a wide range of impact across industries and its impact on salary budgets was no exception.
In 2020 we saw an unprecedented 6.7% percentage difference between the upper and lower quartile globally. To give that figure some context, in 2019 we saw only a 0.4% spread between the quartiles.
| Low Impact | High Impact | ||||||
|---|---|---|---|---|---|---|---|
| 2021 Average Salary Increases (Incl 0's) | |||||||
| General Industry | High Tech | Business and Technical Consulting | Pharmaceutical Health Services | Automotive | Leisure and Hospitality | Manufacturing | |
| Canada | 2.6% | 2.6% | 2.9% | 2.9% | 2.5% | - | 2.6% |
| China | 5.4% | 6.2% | 5.1% | 6.4% | 4.2% | 3.0% | 4.8% |
| France | 2.0% | 2.1% | 1.9% | 2.3% | 1.6% | - | 1.8% |
| Germany | 2.4% | 2.6% | 2.8% | 2.7% | 2.1% | - | 2.3% |
| Italy | 2.1% | 2.2% | - | 2.4% | 1.7% | - | 2.0% |
| Japan | 2.0% | 2.4% | 2.1% | 2.1% | 1.3% | 1.1% | 1.5% |
| Singapore | 3.1% | 3.3% | 3.5% | 3.6% | - | 1.4% | 2.8% |
| United Kingdom | 2.4% | 2.6% | 2.8% | 2.8% | 1.9% | 1.4% | 2.3% |
| United States | 2.7% | 2.8% | 3.0% | 3.0% | 2.6% | 1.0% | 2.6% |
In 2021, winning companies forecasting the highest salary increases tend to be those with business models insulated from consumer spending fluctuations and therefore less affected by economic downturns. These included organisations in the Pharmaceutical, High Tech and Business Consulting industries.
Higher impacted organisations, forecasting lower salary increases, belonged to industries such as: Automotive, Hospitality and Manufacturing. These sectors were particularly affected by COVID-19 as shown in their 2021 salary increase forecasts.
So what can you expect in 2021?
2021 represents optimism amongst employers, with many looking to increase salaries and provide bonuses for their employees
2021 represents optimism amongst employers, with many looking to increase salaries and provide bonuses for their employees. The recovery for many hard-impacted businesses won’t be smooth sailing, but the indication employers have given to returning to a more normal salary review cycle in 2021 is certainly reassuring.
2021 projections show 87.4% of companies globally increasing salaries with far fewer implementing salary freezes. This highlights employer optimism for 2021.
This optimism is evident in both developed and developing countries. Developed countries have forecasted a 2.5% increase on average and developing countries are projecting a 6.2% increase for 2021. The most pessimistic developed countries include Spain, Slovenia and Luxembourg. The average forecast salary increases for these countries are similar to the low levels experienced in 2020. It will be interesting to observe whether these nations are, in fact, being realistic rather than pessimistic. The most positive developed countries are Malta, Belgium, Israel and South Korea with all forecasting over half a percentage point increase to the previous year.
While the optimism shown by different countries gives off hints of cautiousness, 2021 will likely be a better year for salary increases. Targeting and prioritising the increases is vital to ensure that most of this optimism is not misplaced.
Set clear strategies for 2021 salary increases
Perhaps the strategic goal is to retain critical roles and to resolve any possible inequity issues.
We’ve previously outlined various considerations for approaching 2021. In this section, we highlight the importance of setting your salary increase priorities. Simply put, every question about salary increases boils down to the question of “what am I trying to achieve with these salary increases?”
This sounds obvious; however, it’s not always easy to come up with a crystal clear answer. Once you have determined your strategic goal, you can then start narrowing down how you achieve this by setting priorities. Perhaps the strategic goal is to retain critical roles and to resolve any possible inequity issues. Your priorities would then be to adjust any major inequity using salary budgets and even some fair pay analytics, additionally considering in demand and business critical talent. Each business will want to achieve different goals and have different priorities.
One common theme which you should keep in mind is that differentiating with a reduced budget is sometimes more difficult than with no budget at all. Using a return-on-investment approach for business is vital with a diminished budget, however, that could also lead to inequity concerns. These concerns can be avoided by ensuring your salary increase process is transparent and emphasising the connection between business performance and salary increases. It’s easy to forget that salary increase budgets come directly from retained profits; therefore, it’s natural there will be fewer employees receiving a salary increase from a business whose profits have declined in 2020.
Conclusions
2020 has been a tough year for business, resulting in muted salary increases across the globe. 2021 will see salaries and other aspects of life return to some sense of normality with more companies implementing regular salary reviews and higher increases than 2020. Salary increases in 2021 will need to be allocated in line with financials and influenced by clear business priorities. Using data can be a good start on helping you navigate the annual reviews ahead.
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