2021 Compensation Budgeting Forecast Part 2: Incentives, Bonuses, and Variable Compensation

2021 has been a year of uncertainty, especially in terms of compensation increase budgeting. As a result, organizations around the country are reexamining their variable compensation strategies and the impact on employee engagement & recognition. Many of Astron Solutions’ clients have requested a variable pay program review, examining effectiveness in retaining key talent necessary to meet 2021’s strategic objectives.

The following are a series of perspectives and predictions from those tracking variable compensation trends going into 2021.

First, let’s consider Willis Towers Watson’s views.

Employers told Willis Towers Watson that they were embracing variable pay structures to compensate and reward top performers, and to make sure they were able to retain talent. “Star performers” are likely to see raises 68% higher than average employees.

On the bonus front, 76% of companies planned on awarding a bonus in 2021. This is flat compared to this year. Bonuses, which are generally tied to organizational and employee performance goals, are projected to average 11% of salary for exempt employees. Bonuses for nonexempt salaried and hourly employees will average around 6.8% and 5.6%, respectively.

Most employers will continue to be in cash preservation and cost optimization modes regarding their budgets. Although many employers are looking toward stabilizing their business next year, the full extent of the economic impact of the pandemic is yet to play out. As such, employers will remain cautious and continue to adopt strategies that attempt to balance employee engagement while protecting their core businesses. This could call for further segmented allocation of base salary increases and use of discretion to preserve incentive payouts by organizations that don’t reach performance targets.

Next, let’s turn to findings from WorldatWork.

As organizations begin to evaluate their annual and long-term incentive plans for 2021, there are several initiatives employers should consider:

De-risk the incentives. In a higher risk business environment with greater uncertainty, it usually makes sense to reduce incentive risk and leverage. This means less upside & downside, and less incremental payout per unit of incremental performance. This can be accomplished with the following approaches:
- Flatter payout curves. Lower the maximum and minimum payouts, say to 25% to 150% of target, rather than 50% to 200%.
- Flatter targets. Instead of making target performance one number or point on the payout curve, make it a range, say between 97% and 103% of the business plan.
- Set lower goals. Given the likely economy in 2021, most employers will be looking at lower goals for 2021 than they had for 2019 or 2020. If employers reduce goals, they should consider the total cost of the incentive plan relative to the lower profit or other performance goal, to make sure appropriate sharing ratios, such as total incentive plan cost as a percentage of net income, EBITDA, or other measure, are maintained within a reasonable range.
- Change performance measure mix. In a more uncertain, lower growth environment, it may make sense to place a higher weight on EBITDA and a lower weight on revenue, for example.
- Consider strategic measures / objectives. Introducing a “milestone” component to the incentive plan based on achievement of one or more key strategic objectives may be worth considering.
- Consider relative performance measures. In uncertain times, performance relative to peers is a good way to gauge how well a company is performing, while avoiding the difficult challenge of setting goals. Relative performance is best kept to relatively simple GAAP metrics such as revenue growth or unadjusted GAAP EPS growth.
- Adjust long-term incentive mix. 2021 may be an appropriate time for companies to increase the percentage of time-based restricted stock in the mix. The lower risk of the pay mix could be offset with longer vesting periods — say four or five years — backloaded vesting (50% after year two and 50% after year three, for example), or adding holding requirements.
- Consider annual goals for long-term performance plans. Since setting three-year goals may be nearly impossible, companies should consider a plan with three one-year goals.

Consider as a third perspective Salary.com’s recently shared findings from their Salary Budget Survey:

Astron Solutions’ Perspective

More than any year in the past, 2021 will be highly difficult to predict with respect to the most effective tools to incorporate in any organization’s total rewards strategy. It is clear from the research that organizations have been taking a serious look at all elements of their total rewards strategy, especially the need to enhance current variable pay programs. With this backdrop Astron Solutions offers the following insights:

Consider mission-critical based incentive and pay differentials, to be sure such employees are retained and do not leave for competing organizations.
Consider more frequent employee feedback opportunities coupled with spot awards for those who excel throughout the year. These approaches will mesh well with our current and near short-term business environments. Frequently recognize contributors in a timely way. Don’t wait for the annual review or bonus to recognize and thank team members for their exceptional efforts.
Give the reward of choice to cater to the desires of every generation and every culture. Ensure rewards offered are culturally relevant and personally meaningful.
Consider a scorecard approach to rewards in which key organizational strategic outcomes are linked to employee performance and employees are rewarded based on both competency and results. For example: