Insights

Planning for 2021: to freeze or not to freeze?

Analysis
Published on: October 28, 2020
Subjects:  Surveys and forecasts, Total compensation

The seventh edition of our salary forecast report, drawn up in July and August of this year, surveyed over 200 organizations. The numbers show that 17% of the Quebec companies surveyed froze employee salaries in 2020, and 7% expect to do so in 2021. Meanwhile, 25% froze their salary structure in 2020, and 22% expect to freeze their structure in 2021 as well. Despite the current climate of uncertainty, pay increase budgets (excluding freezes) are projected to be 2.5%, on par with the actual increases seen in 2020.

These figures are to be interpreted with caution and agility, however, given that 58% of organizations surveyed have a fair level of confidence that the budget will be approved, but only 14% of them believe that approval is highly probable or certain.

What can this increases and freezes information actually tell you? In this unusual year, what should you recommend to your executive committee?

First, let us remind you that forecasts are just… forecasts. These numbers may change in the months to come, in response to new public health directives and changes in the economic landscape. In years of strong growth, actual increases tend to be higher than forecasted in the months leading up to them, and the exact opposite is true for leaner periods. Considering the impact of COVID-19 on the economy, chances are that actual increases will fall short of forecasts this year.

It is also worth noting that 2.5% is a relatively modest increase budget. A full salary review based on employee contribution for an overall budget of 2% or less might not be warranted, as a full review is an exceedingly demanding exercise for salary increases that may not be differentiated enough to justify it.

Salary freeze vs structure freeze

The organizations that opted to freeze salaries in 2020 and who are considering the possibility of a new freeze for 2021 (3% of the organizations in our survey) should do it with a great deal of caution. A single salary freeze might be enough to hurt an employee’s purchasing power; after the second salary freeze in a row, employee engagement can really take a hit, except in cases where the company is in survival mode and positions are at risk. Such a decision could drive more mobile employees to change industries, especially those in fields where labour shortage is an issue (such as operations, production and IT).

One approach to consider is offering all employees increases at or just above inflation, except those who already have higher pay or who do not meet the minimum expectations for their position. It might be a good idea in this case to earmark some of the budget to reward positions in higher-risk sectors, employees who are currently paid below market, exceptional performers, etc.

As a matter of fact, when salary freezes last over a year, management tends to buckle under pressure to offer increases outside of the planned cycle more often. Even if no increases were planned, whatever little is available in the budget ends up going to the employees who complain the loudest. Not only is this a counter-productive approach, but it also requires an enormous amount of time from managers and human resources teams.

On a different note, setting a salary structure is a way for the organization to manage salaries in light of internal and external pay equity. Indexing your structure is not a very investment-heavy process. Your pay scales could be raised, to at least match or trail inflation slightly, in order to keep your structure competitive, even if you do opt for a salary freeze.

In conclusion, salary forecasts are very useful, but they are mere pointers and should not be the only factor to consider in your compensation strategy. The economic landscape, the labour market, your company’s financial health, the prospects for 2021 and your organization’s demographics are essential to factor in as well.

If you are in charge of making compensation decisions for your company, ask yourself the three following questions to guide your choices:

  1. What is my organization’s situation?
  2. What is the anticipated risk for 2021?
  3. Are we having retention and/or compensation issues?

As 58% of the organizations surveyed have trouble recruiting new talent, a well-rounded understanding of the challenges you’re up against is a key element to consider in planning and reviewing your compensation programs for 2021. You will want to leverage and optimize every aspect of your broad-based compensation if you want to stay competitive in these unusual times.

One last option worth mentioning: if you can’t afford to increase your employees’ salaries, you could shift the focus away from direct compensation and onto other items with a lower direct cost, such as skills development or better working conditions.

Is your organization undergoing a transformation?

Don’t wait to update your compensation programs. Contact our experts to discuss any issues or challenges you might face including. They can help you develop creative communication and compensation management strategies for navigating through exceptional circumstances.

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