2020 has sure been a challenge. Employers have struggled to keep businesses open and have been challenged to develop new markets, products and services in record time.

Especially for those businesses in food service, hospitality, or leasing office space, 2020 has likely been a dismal year. At the other end of the spectrum, grocery stores, specialty manufacturers (think PPE equipment) and home improvement stores have enjoyed hugely successful years. And, of course, the number of tech jobs continues to increase.

Most economists predict that the economy will continue to rebound throughout 2021, but at an uneven pace. 

The varying impacts of 2020 and all the unknowns of 2021 make compensation planning more important than ever — for every business. Here are some things you need to do now to effectively plan for 2021 and beyond.

1. Get (and Stay) Up to Date on Legislative Changes

States and municipalities in the U.S. have enacted legislation that impacts compensation at breakneck speed. This represents a unique challenge for employers doing business in multiple locations. The changes are too numerous to list, but some of the most significant include:

• 23 states have minimum wage increases scheduled for 2021
• 10 states have approved a $15.00 minimum wage
• 9 states now offer paid family and medical leave

At the federal level, Biden has vowed to take several actions to support workers. When and how these might be implemented by the new administration has yet to be determined, but these include:

• End the tax cuts enacted in the 2017 Tax Cuts and Jobs Act
• Increase income taxes for high-income earners (>$400,000)
• Restore federal workers' rights to unionize
• Remove the Social Security Payroll Tax Deferral option

2. Review Paid Salaries

If you hired new employees during 2019 and early 2020, chances are you had to hire them at higher salaries — maybe higher than the salaries of current employees doing the same work. This issue, known as salary compression, can occur throughout an organization but is most common when entry-level employees, hired at $14.00–$15.00 an hour because of competition for candidates, make the same or more than lead or first-level supervisors.

If you typically give year-end salary increases, now is the time to make the determination of whether you’ll award them and the amounts necessary to maintain both external competitiveness and internal equity.

3. Review Compensation and Related Policies and Procedures

The legislative changes described above require that you review and update your minimum wage and paid family and medical leave policies to comply with state and local requirements. Not all of these changes occur on January 1. 

And some of your other policies and procedures may be outdated. For example:

• 15 states have now legalized recreational marijuana. Your drug testing policies may require review/revision as a result.
• If you have written policies regarding work at home or flexible schedules, COVID-19 may have made them irrelevant or, worse, inaccurate. Now is the time to review those as well.

4. Plan Year-end Bonuses and Incentives

Because of COVID-19, many organizations and individuals will not achieve their 2020 business objectives. You may have done all the necessary work to establish goals and a budget early in the year only to find they are no longer relevant.

If your organization often awards discretionary year-end bonuses, you may find that option unaffordable this year.

Now is the time to determine if, when, and how you will pay 2020 bonuses and incentives. Managing employee expectations is key, and that requires thoughtful communication planning and implementation.

5. Plan 2021 Salary Increases

Early projections for 2021 forecast base salary increases from 2.3% (Economic Research Institute) to 2.9% (World at Work).These forecasts were made in the fall of 2020 and consider the volatility of 2020 and the uncertainty of 2021.

These forecasts, combined with your organization’s unique issues related to affordability, external competitiveness and internal equity should be considered as you plan 2021 salary increases.

6. Plan 2021 Bonuses and Incentives

The high-risk business environment and uncertainty expected in 2021 may require changes to 2021 incentive planning. Setting lower goals and/or changing the mix of performance measures are probably the first steps to consider. Doing this, however, requires consideration of the total cost of the incentive plans relative to adjusted goals and metrics.

Similarly, organizations with longer-term incentive plans and goals (e.g., 3-year plans) should consider changing to shorter-term plans since long-term goal setting in times of serious economic uncertainty becomes virtually impossible.

7. Understand Your Competitive Markets and How They Have Changed or Remained the Same

If you’ve historically hired a lot of entry-level employees, you may think that hiring them in 2021 will be easier because so many are unemployed. But, think again. You may have different competitors. Grocery chains are recruiting record numbers of employees, as are other large retailers like Amazon, Target and Walmart. And, they’re pretty much all paying $15.00 an hour, whether it’s legally required or not.

Further, if you hire specialized tech employees, expect the market for skilled personnel to remain as tight as ever. And, expect a lot of these new hires to request flexible schedules and/or the ability to work from home.

8. Develop a Comprehensive Employee Communication Strategy

Employee communications have been particularly challenging this year, often including discussions about furloughs, layoffs, termination, and deferred or canceled salary increases. Add in the difficulties of communicating with employees working at home, and the challenges become overwhelming.

It’s critical to develop your year-end employee communications now. The three key components of your communication strategy should be:

• Legislative changes and how they will impact policies, procedures and employee paychecks
• Plans for year-end base salary increases, incentive plan payouts and discretionary bonuses
• 2021 planned changes to base salaries, incentive plans, and related compensation policies and procedures

Last but not least, don’t forget to recognize your employees and thank them for their contributions and sacrifices. It has been a tough year for all of us!