Compensation Strategies & Emerging Trends for 2022
Companies preparing compensation strategies for 2022 can expect similar conditions to what we have seen in 2021. The ever-changing environment along with sporadic regulatory requirements from COVID protocols are forcing companies to be more adaptable. Believing the US economy and workforce will retreat to their pre-pandemic form is unreasonable. Therefore, companies must continue to adapt, taking lessons learned from 2021. Specifically, as it relates to recruiting and retention efforts, a revamping of compensation and benefits strategies has become a necessity. This trend will continue to gain force in 2022 as organizations face never-before-seen challenges in the war for talent.
Executive Compensation Considerations
ESG. Lately, the conversation surrounding executive compensation is the increase in ESG (Environmental, Social, and Governance) metrics in incentive plan design. The driving force behind the advancement of ESG derives from multiple variables. As public pressure and changing cultural norms continue to evolve, ESG looks to stay as a new benchmark criteria for today’s business leaders. Specifically, institutional investors are holding company operations accountable for their effects on the environment and their surrounding communities. Surveys show that already, 45% of FTSE 100 companies incorporate ESG metrics in their executive pay programs. This movement towards ESG metrics is directly supported by the SEC’s decision to create the Climate and ESG Task Force in March of 2021. The Task Force’s primary responsibility is to identify any material gaps or misstatement in issuers’ disclosure of climate risks under existing rules, as well as, analyzing investment advisors and ESG strategies. Tying ESG to incentive plan design, along with proper disclosure explaining how metrics were selected, weighted, and evaluated will continue to see prevalence in 2022 and beyond.
Compensation Clawbacks. As the SEC continues to focus on executive compensation, another important matter for public companies to consider are clawbacks. Since the SEC has recently reopened the comment period for its clawback policy, prudent organizations are already taking steps to get ahead and avoid potential pitfalls. Companies should monitor proposed rules and evaluate potential impacts to their current incentive plan policies and determine if any changes need to be made.
Proxy Disclosures. The SEC’s heightened scrutiny and continued regulation of executive compensation call for full and accurate disclosures. In addition to Human Capital Management, CEO Pay Ratio and other disclosures, Perquisite disclosures continue to be an enforcement priority for the SEC.
Employee Compensation Trends & Strategies
Flexibility & Remote Work. Remote work has been an overwhelming success for both employees and employers, over the prior 18 months. The inclusion of hybrid work schedules, and remote work has transformed the workplace in ways we have not seen since the implementation of computers in the office in the early 2000s. Originally employers believed productivity would decrease with employees working from home. However, workers have even seen an increase in productivity due to the lack of in-person meetings, travel/commute time, and the availability to work anytime, anywhere. Having a choice of work environment is a luxury many American workers have never seen before and offers a level of flexibility that is improving performance. Recent surveys have shown that 70% of companies were planning on adopting a hybrid work schedule, while many have already made the switch permanent. It is important to consider the potential for remote work is determined by tasks and activities, and not specific occupations. While remote work is not an option for all positions, there are still ways management teams can offer flexibility and reap the rewards of improved employee performance. As we explained in last month’s article “Strategies to Combat the Great Resignation,” offering workers more control over their job duties, less micro-managing, flexible work schedules, more autonomy in leveraging strengths for career growth, and more guidance from leaders to develop long-term career success are all great ways to support flexibility in the workplace. Additionally, these types of strategies have a significant contribution to a healthy work/life balance that in turn is shown to enhance mental health – another top concern for employees. Remote work options and flexibility are emerging trends that will continue to gain momentum in 2022 as employees place high value on these benefits.
Variable Compensation to Reward Top Performers. The viewpoint for employers in 2022 is somewhat complex but the challenges have also brought benefits for some. Lower or zero cost of office space, increased productivity, and lower overhead costs are several advantages some companies will benefit from. However, issues dealing with labor shortages continue to be a major problem. Talent retention has been the number one issue for most major corporations. Holding on to employees is harder than ever with so much competition across all industries. Due to this, there has been an increase in variable compensation strategies to reward top performers. Incorporating variable pay programs such as annual and long-term incentives, bonuses, and spot awards are proven methods to improve retention at both the employee and executive levels. It is likely there will continue to be an upward trend in variable pay strategies, especially at the employee level going into 2022.
Mitigating Pressure on Compensation Budgets & Rising Wages. In 2022, employers will have to continue to find solutions in response to the tight labor market while simultaneously combatting the rise in employee wages. As wages try and keep up with inflation, more strain is being placed on compensation budgets. Employers are struggling to fill open positions and face increased pressure to raise salaries. While this is certainly a cause for concern, there are strategies to mitigate these issues: retain current employees, offer learning and development programs to fill positions from within, take a holistic approach to total rewards and look beyond compensation. These are great starting points for HR and management teams to consider and will likely gain importance as this problem persists.
The business world is constantly changing, however, the major shift over the past 2 years has forced companies to be more adaptable and more flexible. Companies will need to continue adopting new strategies in order to hire and retain employees over the coming year. A new spin on total rewards that includes improved compensation and benefits, company perks, and remote work options along with flexibility are some solutions to keep ahead of the competition. Companies will need to remain vigilant thru 2022 to keep up and maintain overall employee satisfaction; however, the strategies mentioned above will likely continue to see an upward trend in the next few years.