Pay Freezes Were Common in 2020; Employers Stay Cautious with 2021 Budgets

Employees re-entering the workforce may restrain wage growth

Stephen Miller, CEBS By Stephen Miller, CEBS February 23, 2021
Pay Freezes Were Common in 2020; Employers Stay Cautious with 2021 Budgets

Only 64 percent of U.S. organizations gave base pay increases in 2020, down from 82 percent that raised salaries in 2019, new research shows.

The results were reported in February by compensation data and software firm PayScale in its 2021 Compensation Best Practices Report, and are based on more than 5,000 responses from compensation managers at U.S. and Canadian companies surveyed from November 2020 to January 2021.

For organizations still giving base pay raises, the average percentage increase in salary budgets has not changed much, with a majority of employers citing increases of 3 percent or less for 2021, although pay raises will be greater at top-performing organizations—those that exceeded revenue goals.

Bonuses were less common, as well. Organizations that offer performance-based variable pay dropped from 73 percent to just under 70 percent between 2019 and 2020, PayScale found.

"Companies should always stay agile to respond to changing dynamics," said Shelly Holt, PayScale's chief people officer. "During times of economic uncertainty, retaining your top talent is key—especially with limited resources. Even if the median pay raise remains at 3 percent, having performance-based and differentiated rewards, such as variable-pay bonuses and larger pay increases for top performers, coupled with a clearly communicated and transparent compensation structure and strategy, is critical."

The firm released findings regarding:

  • Pay freezes. Although a majority of organizations did not issue pay freezes in 2020, pay freezes were the most popular response for employers that took any action on pay in response to the pandemic. Pay freezes were most likely to be applied companywide if they were an option at all, followed by freezing pay for executives and the highest earners.
  • Pay equity. In 2021, 46 percent organizations are pledging to conduct a pay-equity analysis to ensure employees are paid fairly regardless of race and gender, compared to 38 percent last year. In addition, 80 percent of employers said paying employees fairly is important to foster engagement and retention.
  • Sources for salary market data. Most employers (77 percent) are using either traditional surveys or paid online market data sources to set salaries. A majority of respondents (60 percent) said they also use free online salary data. Organizations frequently use multiple surveys to make sure they have enough sources to validate the accuracy of salaries for their employees.
  • Pay transparency. Most organizations (55 percent) said letting employees know their pay range can help them understand how to grow into their position; however, only one-third currently share pay ranges for other positions with their employees.

Greater pay transparency "can help uncover bias and lead to a more inclusive workplace," Holt said. 

[Need real-time, HR-reported compensation reports? Check out the SHRM Compensation Data Center]

Wage Spike Not Expected

In other research reports, economists and pay analysts are confirming that 2021 wage increases will stay limited, despite an expected pickup in economic growth as COVID-19 vaccinations become widespread and the pandemic recedes.

In line with other wage projections, for example, compensation survey and consulting firm Empsight's 2021 Salary Budget & Incentive Forecasts report, released in December with responses from 161 U.S. companies, also foresees median merit increases of 3 percent in 2021.

The table below from the report summarizes 2021 forecasted merit pay increases excluding organizations not planning pay raises this year. In contrast to the mathematical average, the median is the middle value after listing expected merit increases in successive order. Outliers, or extreme values on either the high or low end, have a bigger effect on the average and less on the median.

Base Pay Merit Increase Forecast for 2021
(excludes companies not planning pay raises this year)

 
Average 25th
 Percentile
Median 75th
Percentile
Overall 2021 Forecast2.68%2.48%
3.00%
3.00%
Executive
2.69%2.50%
3.00%3.00%
Management
2.70%
2.50%
3.00%3.00%
Professionals2.72%
2.50%3.00%3.00%
Support / nonexempt
2.72%
2.50%3.00%3.00%

Source: Empsight, Spot Survey of 2021 Salary Budget & Incentive Forecasts -- Participant Report (December 2020).


Empsight's survey also shows that employers were expecting 2021 salary structure increases—adjustments to pay-range minimums, midpoints and maximums for job positions—to rise at a median rate of 2 percent, and at 3 percent for companies in the 75th percentile, meaning those that are bigger than 75 percent of all companies surveyed.

Labor Force Issues

The Conference Board's Salary Increase Budgets for 2021 report, released at the end of 2020 by the independent business membership and research association, forecasts that "in the next year or two, we expect wage growth in the U.S. to be historically low."

As long-term unemployment neared historical highs one year into the pandemic, many workers had left the workforce "to receive expanded unemployment benefits, and given the risks of getting infected at work or lack of childcare solutions, [preferred] to remain unemployed for the time being," reported The Conference Board. Many of those workers, however, will start to re-enter the post-pandemic workforce this year.

Based on survey responses from 183 U.S. organizations, economists and labor market analysts project that, at the median, 2021 salary budgets will increase by 3 percent across all job levels, in line with earlier forecasts for this year. In addition, they expect that for 2021:

  • Much will depend on how quickly the COVID-19 crisis is resolved. If the virus is neutralized due to widespread vaccination, leading to an economic recovery, "wage growth would still slow substantially given the persistent high unemployment rate," according to the report.
  • Downward wage adjustments will become more visible and will be larger for new hires than for existing workers.
  • The magnitude of the slowdown in wage growth will vary across job types. For instance, the labor market will soon become tight again for technology-related jobs.
  • The rise in remote-work rates will become permanent even after the pandemic is over and will contribute to lower labor costs. Companies in high-cost areas may shift some onsite positions to remote work or move those positions to other parts of the U.S. with a lower cost of living or even outside the country.
  • The drop in wage growth is happening despite minimum-wage rates going up in many states and cities, which will significantly raise wages at the lower end in these locations. At the same time, higher minimum wage levels may lead companies, more so than in recent years, to automate low-paying jobs or shift them to areas with lower minimum wages.


Related SHRM Articles:

Long-Term Unemployment Rises Toward Historic Peak, SHRM Online, February 2021

Fewer Workers Will Get Pay Raises in 2021; Bonuses Gain Ground, SHRM Online, November 2020

One-Third of U.S. Employers Trim Projected Pay Raises for 2021, SHRM Online, October 2020

Salary Increase Budgets Decline for First Time in 12 Years, SHRM Online, August 2020

Developing a Post-Pandemic Pay Strategy, SHRM Online, June 2020

Related SHRM Resources:

Salary Increase Projections 2021, SHRM Express Request

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