Question: We are preparing our salary adjustment estimates for this budget year, and we are unsure of how to include the market data we have collected from purchased surveys and our peer organizations. How should we forecast the impact of COVID-19 on the salary movements?
After authorities issued “stay-at-home” orders around the country, our first thoughts flashed back to 2008 and the impact of the subprime mortgage financial crisis on salary budgets. We all learned significant lessons during that time, and heard the phrase “new normal” used all over the country. We experienced successes and failures in how we adapted.
Now during this “new” new normal of the COVID-19 pandemic, we must learn from the past but also remember that each situation is unique. We must develop the best possible solutions based on what we know in order to maximize overall organizational wellbeing.
From past experience we know:
- In 2008 - 2009, salary structure increases dropped from 2.5% to 1.5% in response to the subprime mortgage financial crisis.
- Approximately half of 2009 survey participants considered freezing pay structures.
- Ninety percent of organizations that froze pay in the year immediately after the 2008 financial crisis were considering normal salary administration practices in 2010.
- Salary budget movements for the public sector industry continued at lower levels than general industry into 2010, with approximately half reporting zero-percent salary structure increases.
- It was not until 2013 when the actual salary increase budgets returned to the pre-2008 average of 3%.
In the current situation we know:
- Public sector organizations are dealing with the need to adjust budgets in response to shifting priorities.
- Public sector organizations are challenged in today’s environment to deal with diminishing revenue related to COVID-19, based on reduced funding streams from sales or property taxes.
- Civil unrest has exponentially increased the need for public sector organizations to consider refocusing valuable monetary resources.
Realistically, we really do not know much about the effects of the current situation because it remains fluid and unpredictable. We may even ask why interpreting market trend information is relevant at this time. However, you have a role as public servants to provide the best stewardship of public funds. Compensation and benefits expenditures make up a significant percentage of public sector operating budgets. Making the right decisions in this area will enable your organization to focus resources in strategic and targeted areas.
The salary budget for each organization is unique
As you assess the market data you have collected, consider the following as you formulate a salary budget recommendation. Keep in mind that each situation is unique—and so it will be for your organization. Please consider your funding streams, local industries, your workforce composition, collective bargaining agreements and your constituents, among other factors.
Meanwhile, develop a plan for an immediate response. We have learned from experience that organizations that made small adjustments such as freezing pay or salary structures, implementing temporary salary reductions, or reducing work hours, were able to return to normal salary administration faster than those organizations that failed to respond quickly. Such strategies may offer possibilities for certain job families or titles.
The economic impact will vary in timing and severity across industries. Without question, COVID-19 has dramatically impacted property and sales taxes. These effects impact public organizations, which in turn initiate mitigation plans and seek relief and support at the national level. You are most likely planning for the January or July 2021 salary budget; you need to work closely with your key stakeholders to understand and forecast the financial capability of your organization in view of competing priorities.
Study the market and develop your plan
Just because there may not be any salary structure adjustment or pay increases currently projected for your organization, it is still important to study the market. Key to compensation planning is a clear understanding of the long-term trends for talent management purposes. For example, when we worked with a municipality to adjust their comparable organizations due to significant growth, it was important to understand the resulting salary comparison changes. Similarly, research what your peers are doing, but also look at your broader market. The industries in your area may be hit more or less by COVID-19 and thus change your competitive environment for talent.
In addition, some of the organizations with which you have compared yourself in the past may have changed due to the economic environment, either because they have shifted their focus or reduced their scope. In these situations, timing is critical and organizations may choose not to participate in salary surveys at this time. Examine the participants and the number of jobs you survey year over year to help guide your understanding of the market data. Not only does the number and make-up of the surveys impact the results, but the individual responses of organizations will impact the market data next year.
The staffing and workforce decisions that organizations make this year, such as hiring rates, promotions, layoffs and furloughs, will impact market salary rates and become evident in the surveys next year. These changes will impact market trends. Organizations need to understand the compensation data from this year in order to understand the 2021, 2022, and 2023 recommendations and accept them as valid and defensible.
Consider multiple approaches
In these uncertain times, it is important to consider multiple approaches to assess the market and go beyond the same peer group or surveys you have used to examine different comparison metrics. Sticking your head in the sand and doing nothing is not an option we recommend. Inaction will only make it more difficult to make informed compensation decisions once we emerge from this crisis.
In conclusion, remember that the data is important, but tells only part of the story. Organizational leadership needs to know the context surrounding the analysis for these important compensation decisions. The Public Sector HR and Compensation Consulting team at Gallagher can help you analyze the data, and understand and communicate the context.
For more Public Sector content like this, visit www.GallagherHRCC.com. Please contact us to discuss your questions or concerns: Ronnie Charles, Managing Director and Practice Leader, Public Sector and Higher Education consulting, Gallagher: Ronnie_Charles@ajg.com, 1.651.234.0848.
© 2020 Arthur J. Gallagher & Co.
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