There is no doubt that 2020 has been a year for the record books. When it comes to forecasting compensation trends for 2020 and 2021, there have been challenges. But the data are starting to come in – hooray! In this Astronology®, part one of a three-part review of 2021 compensation planning projections, we will share what we have learned to date.
The Foundation: The U.S. Economy in 2021
2021 economic projections, especially with the confusion created by the COVID-19 pandemic, have been revised on a monthly basis. The following is the most up-to-date outlook that ultimately will have an influence on compensation budgeting for 2021.
Goldman Sachs analysts think things will look a lot better in 2021. Their forecast for the markets and the economy hinge on a critical variable: the timing of the vaccine. “We now expect that at least one vaccine will be approved by the end of 2020 and will be widely distributed by the end of 2021 Q2,” explains Goldman Sachs economist Joseph Briggs. “We have incorporated this timeline as our baseline forecast, and now assume consumer services spending accelerates in the first half of 2021 as consumers resume activities that would previously have exposed them to COVID-19 risk.”
Personal consumption expenditures account for around 70% of U.S. economic activity. The availability of a vaccine is key to giving consumers the confidence to go back out there and spend. That spending is key to getting businesses growing again, which in turn leads to more employment.
This forecast points to increased productivity during the first two quarters of 2021. Increased productivity often translates into expanding workforces and, ultimately, the return of labor shortages. As we have seen in the last quarter of 2019 and the first quarter of 2020, such shortages will tighten the labor supply & demand, thus resulting in the need to set competive compensation budgets to attract and retain the employees necessary to meet these product / service demands.
Alternative Economic Indicators
While there are many “experts” that voice their opinions regarding how the economy will play out in 2021, there is one, often overlooked economic indicator that has been very consistent in predicting how strong the economy will be year after year. This is the “Cardboard Box Economic Indicator.” Most, if not all, durable goods manufactured in the United States are shipped in cardboard containers. This industry must be ahead of the curve to be sure that the cardboard containers are available to meet the projected manufacturer demand. According to www.anythingresearch.com:
As can be seen there was a drop in cardboard box container production in 2020 but the projections for 2021 are positive. This upward trend indicates that these producers are anticipating a strong return to durable goods manufacturing, which in turn feeds a strong economy.
The Impact of the “Unofficial” Minimum Wage
In recent months we have heard news stories of large retailers moving to a nationwide $15.00 minimum wage. For example, the Wall Street Journal recently noted that Target plan to raise its minimum wage to $15 an hour as the coronavirus accelerates the retailer’s plans. This pay increase makes permanent a temporary raise awarded during the pandemic.
No longer do we need to worry about state legislatures making moves on the minimum wage when we have Target, Walmart, Amazon, and others committing to a corporate minimum wage of $15.00. This move to $15 has dramatically changed compensation program design parameters. Many Astron clients across the country are following this practice and proactively establishing $15.00 per hour minimum wages going into 2021. But with this there is a greater need to analyze the financial impact of the compression that is created – particularly in lead and supervisory jobs which often are paid only a few percentage points different from the minimum wage staff.
An alternative strategy Astron recommends is developing broad pay bands at lower grade levels and incorporating pay range zones linked to job complexity. For example:
In essence this approach creates an informal career path for the entry level employees. This helps the employer to remain competitive at the informal minimum wage while providing room for the employee to advance to the Lead and or Supervisory level.
Summary of 2021 Projections
The following is a summary of compensation budgeting projections from WorldatWork:
The following comments were noted by the Society for Human Resource Management (SHRM):
“Respondents said that they anticipated employee compensation at their organizations would grow by an average of 2.9 percent in 2020, down from the projected average increase of 3.3 percent expected at the start of the year and the first time in 12 years that the rate of increase has fallen from the prior year. The last time the survey saw a decline in salary budget increases was during the Great Recession of 2008-09, WorldatWork reported.”
Astron Solutions’ General Conclusions
1. As we move towards 2021, the impact of COVID-19, combined with a Presidential election, civil unrest across America, and the general uncertainty of 2020, have created confusion in terms of 2021 economic and compensation projections. Astron Solutions looks to 2021 with an optimistic lens. We have seen signs that the economy will return to pre-COVID-19 levels.
2. The pause we have experienced during 2020 has allowed many organizations to take a long hard look at how they have delivered compensation in the past, and to consider more creative models, such as the entry level career progression approach reviewed earlier.
3. While WorldatWork reports a decrease in 2021 salary budgeting, the projected 2.9% is only one-tenth of a percentage point below the 3.0% trend we have experienced over the past five years. Astron Solutions recommends continuing with 3.0% compensation budgeting for 2021, of course dependent on your organization’s projected finances.
Please stay tuned for more! Our next issue of Astronology® explores trends in incentive compensation in 2021.