Strategy for salary reviews

Four Strategies for Salary Reviews in 2020

As we near the end of 2020, and enter the performance and compensation review period for many businesses, we’re still in uncharted territory. When will the economy start to recover? How will it affect our business? Our employees have worked so hard this year — how do we reward them? How do we approach bonuses when the targets have all changed so drastically? What are some strategies for salary reviews in the current climate?

This year it’s been challenging to plan, well, anything — including compensation reviews, bonuses, and raises. However, unlike the Great Recession and other, more recent economic swings, companies and industries have been affected very differently depending on the nature of their business. For example, hospitality as an industry has experienced a catastrophic decline, while many financial services firms and online retailers have actually seen growth. 

Because of the differences in how companies have been impacted by COVID-19, it’s reasonable to have different strategies for salary reviews this year. After all, budgets have changed, targets have been adjusted, and we’ve all had to get creative with where, when, and how we work. 

Here are four strategies we’ve discussed with clients on how to approach the annual raise and bonus conversation this year. Remember, there is no “right” answer. Each company will need to find what works for them. The key is open communication and transparency. 

1. Pay-for-Performance (and Retention)

Just because there is high unemployment and high levels of uncertainty generally, companies in industries that are “pandemic-proof” or with indispensable talent, should still consider maintaining the raises and bonuses they anticipated back in February. Especially for positions that remain in high demand (we’re looking at you, accounting professionals) or for really exceptional employees, rewarding and retaining talent remains critical. 

If an employee isn’t feeling valued or connected when vaccines are fully rolled out, they’re not going to stay with a company long-term. We’ve heard from many candidates that they’d be open to a new position as soon as things begin to return to normal. 

This depends on the industry and business forecasts, but companies should consider merit-based increases for their best performers to try to ensure they remain with the company. Other companies are absolutely continuing to use bonuses and other rewards to focus on retention. 

2. Smaller Profits; Smaller Targets

Depending on how a company’s year went, some organizations are trying to split the difference and offer their best employees a one-time bonus versus a raise. Payroll only takes a hit for one month, which allows the company to be more nimble moving forward, while still rewarding employees for their dedication and adaptability during this challenging time. 

Or, if the size of bonus has been affected by the pandemic, which is out of the employee’s control, some companies want to meet in the middle and provide a higher bonus, although smaller than what the employee might have anticipated in a year without COVID-19. 

We’ve also talked to clients that are giving smaller, cost-of-living raises, to let employees know that they are still valued, and that the size of the increase will look different post-COVID. 

Communicating that, because of the employee’s strong performance, the bonus will be higher than it might have been, or acknowledging that the raise is due to the employee’s hard work during a time when every dollar is critical, is a necessary part of this strategy. 

3. Delay Payday

Companies that are starting to see some recovery, but want to maintain resources for a few more months or quarters, are pushing out their bonus and raise cycle into 2021. This lets employees know that they are still valued and can expect a defined raise at a defined date. It also takes some of the pressure off payroll for the immediate future while actually helping with retention, because employees want to receive their bonus before considering a new role. 

This is definitely not a strategy to use every year, but we’re in unprecedented times. Communication around this choice might sound like giving employees a clear-eyed view of a company’s prospects and their own raise and bonus potential (e.g., “We want to reward you for your hard work. We’re in a tight position right now, and to avoid future layoffs we can’t provide a raise at this time. However, we will be evaluating bonuses at XX date based on XX criteria.”).

With this strategy, it’s crucial to give employees a firm timeline for a potential raise or bonus, and to honor that timeline to the day. Consistent communication, if the raise or bonus has the potential to change based on company performance, remains critical. 

4. Focus On 2021

While many companies managed to avoid cutting salaries during the pandemic thanks to a combination of belt-tightening and PPP loans, many of the clients we’ve talked to are not increasing salaries or providing bonuses this year. They want to see how 2021 goes before committing to increased overhead. These companies plan to reward employees after they have more certainty around their economic recovery. 

Companies thinking of taking this approach should have a frank conversation with employees about predictions for the next couple months or year (e.g. “We see Commercial Real Estate taking a hit as more people stay remote, move to smaller offices, and businesses close, and we anticipate 1-2 years of slow growth and profits. We know how hard you’ve worked this year and want to be transparent about how we’re doing as a company.”)

The worst thing to do with this approach would be to point out other businesses as the reason for not providing any increases or bonuses. Being transparent about finances and giving employees forward-thinking expectations helps them buy into the larger company vision even when compensation is often the main way a company shows an employee they are appreciated. 

According to a recent Willis Towers Watson survey, the largest trend for 2021 is a “return to normalcy.” Although this return will be industry-specific and continue to look different for every company, this is a heartening prospect. It’s important for companies to balance employee appreciation and expectations, retention, budget limitations, and future predictions when choosing how to handle raises and bonuses this year. 

The key to a successful compensation review with any of these strategies is in how the decision is communicated to employees.