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Transcript: Korn Ferry’s Global Reward trends & outlook for June 2022 with Ben Frost

Hello everybody, my name is Ben Frost. I'm a client partner with Korn Ferry based in firm’s London office. My specialism is reward and specifically reward benchmarking. I look after our product area that delivers our pay benchmark data in over 150 countries and over the last few weeks I've had quite a few clients ask me kind of, “So what is the outlook full reward at the moment?”

Particularly as we come out of COVID, deal with the Great Resignation, have this kind of historically high inflation at the moment, but also with fears that a recession might be coming. So, I put a few thoughts together and I thought I would pull this short video to kind of give you a bit of an overview of where I see the world of reward at the moment.

So, I'm just going to share my screen and go on to full screen. What I'll do just to recap very quickly.

So, as I said I lead the part of our business that delivers paid benchmark data. We have that data in over 150 countries, we have data on more than 25 million employees and that's refreshed at least once a year. And so, we have quite a lot of up-to-date information on what companies are doing and what their future plans are. And so, I'll share some of that with you as we as we go through the presentation.

And so I'll do a couple of things: I'll share a couple of the big trends that I think are being brought to bear on reward generally, so some of the longer-term cyclical trends, we’ll look at some of the data and then I'll get the crystal ball out, which is maybe a bit broken at the moment – the unprecedented situation that we're in, but to try and sort of level set to what might be happening in the rest of the year to come.

So, let's start at the beginning.

Almost a decade ago, Josh Bersin said this [“The War for Talent is over. The talent won”]. We were talking about the war for talent, but sort of said the war for talent is over, the talent has won. That seems like not long ago, but it's as long as eight years ago there that he said that, and that's the and that's really the first sort of big trend that that is important.

Employees have the upper hand there's an acute shortage of skilled workers out there. In 2018, Korn Ferry did a piece of research on projecting long-term supply of workers in various countries around the world and mapping that to long the erm demand and our research said that by 2030 there will be a shortage of over 6 million skilled workers in the US. Over 2,000,000 in the UK – you can see the numbers there. Millions in each country, and in each sort of mature market. By the way, if you want to see that research, there's a QR code there which if you point your phone at that, it will take you to the page where you can go and download the data and download the white paper that sits behind that.

But what does that mean?

Well, it means that skilled employees have choices about where they go and work and if you want them to come and work for you, you need a proposition that's giving them what they're looking for. And of course, the hard numbers that reward part of that, that proposition, or you know that the pay part of that proposition is an important part of that.

That's obviously particularly acute in areas of really high demand and so you know areas like financial compliance like cyber security, digital marketing, and actually, what's at the top of the pyramid at the moment – everyone is trying to hire and what do you need in order to hire? You need recruiters and so recruiters actually yeah, one of the most in-demand roles at the moment. So, all of those issues that people have choices about where to work and we need to give them what they are looking for are particularly acute for some of those very in-demand roles.

So, that's the first sort of megatrend. That's been going on for a while. It's been going on through good economic times and bad, but it's I mean it never seems to never seem to get any better and that shortage is getting worse, if anything.

So that was going on anyway. Then the COVID pandemic came along and what I think COVID did was really upended the deal between employers and employee. I’ll explain what I mean by that. So, if we think back two years, people were given sort of varying levels of support from their employers, as we all sort of went home and lockdowns hit. And for some people that cemented the relationship between themselves and their employers, they felt very supported. For others, it broke that relationship or at least started to fracture it. That, you know, that initial support landed differently with some people than with others. Then, of course, we have those initial actions around things like headcount reductions, furloughs, salary freezes, cancellation of bonus rounds, and people saw this happening to themselves and their colleagues. And like with everything that you know, sort of traumatic, that happens that no one likes to do this, but it has to be done. A lot is about the communication that will affect how that lands, and so a lot of that was communicated in a hurry, and so those impressions have lasted. And as I say, for some people it cemented their relationship with the employer, for others it broke, or at least started to fracture it.

Then in the meantime, we've all, I think we evaluated what we want from our lives, right? We've all spent probably a lot of – quite a lot of – time working at home. You know, our view on what we want our life to be. What we want our career to be, what we want our work-life balance to be has changed. And of course, the proposition what's on offer elsewhere has changed as well, and what I really mean by that is this: the approach to work and what does work post-COVID look like. Again, the bottom of this slide is a really good article in the Financial Times late last year, which summarized what leaders, companies and their leaders were saying on this issue.

So clearly at one end of the spectrum, investment banks, as an example, want everyone back in the office. At the other end of the spectrum, you've got consulting firms, tech firms, and a number of other firms that are saying you can be totally flexible, but you know you can work from wherever. You need never go to an office again and actually, for many organizations, you know you work from wherever and it doesn't even need to be in the same country as you were employed in.

And in the middle, you've got the hybrid approach and that can encompass anything from you know, “Please come back for two days a week, “to companies making statements, saying that they're going to reduce their office footprint by 30, 40, 50%. So that is obviously light on detail, but it will mean that fewer people are in offices and they'll be much more of a hybrid working approach.

So, what does that mean?

Well, I've spent two years and locked down and re-evaluated what I want from my life, my career, and my work life balance and I can see what's on the menu everywhere else. So, if I really miss the culture of collaboration and I want to get back to an office, I can, I can see which organizations are offering that kind of culture. And if I never want to go into an office again, I can see who might be offering that as part of their employment proposition.

So, everything has been thrown up in the air. People have re-evaluated what they want and it's very clear what is on offer in many other organizations. And quite often, that's obviously being quite proactively pushed at your employees. So, I think probably the one takeaway from this I would say is if you thought you knew how your reward is always landing and how that was being received by employees, whether they liked it when they didn't before COVID, you probably don't understand the new reality of that because almost all of the ingredients there have changed. So, employees have the upper hand. COVID has thrown all this up in the air.

Probably the third, big trend to call out is well both ESG and DE&I are becoming ever more important considerations for rewards. So, let's say the first of those, let's take ESG – environmental social governance considerations first.

So, I mean, up until recently, the main effect of that has been on executives really, how do we get some of those measures into executive scorecards and have them come through into executive pay, particularly incentives? Now there's much more expectation that ESG measures will be baked into everybody’s reward and everybody’s incentive. All the way down an organization. Obviously, it's quite hard to change someone's base salaries, and it's probably well, you know, this will be more about their incentive programs and their targets and their scorecards. But this is moving fast, and it's being driven mostly by investors. Most of the big fund managers have got sort of ESG-friendly funds. Now you can only get into those funds if you have your act together on ESG issues and that includes, you know, starting to bake that into the reward of a broader group of your employees. And of course, even if you don't have investors, you're not a public company, your competitors are starting to put things in place. So even if it doesn't affect you directly, it affects the people that you're competing with for talent.

Then if you think about DE&I, particularly pay equity and particularly gender pay equity, that's also picking up pace. There's a lot of legislative activity really in three areas. Firstly, pay gap disclosure. So, laws that say that you have to calculate your pay gap and you have to you have to publish that either publicly or to your employees. So, UK's had a law like that for the last four or five years now. And those are cropping up in more and more places – specifically, in Europe, actually not so much in the US, for example. But secondly, we have salary history balance, so you can't ask someone’s current or previous salary when you're hiring, so there's an opportunity there for any previous bias to go away when someone shifts job because they don't take their previous disadvantage with them. And so those laws, there are few US jurisdictions, New York, NY being a big one that has salary history bans. And then mandatory pay ranges so you have to publish a pay range for a job when you advertise that job. Again, more in the US than elsewhere. Colorado already has that law and New York, in New York, it will be coming later this year. So, all of that means that we need to have a way of valuing work and deciding what we're going to pay for it. Because we have to show our homework on that, increasingly. We have to publish those pay ranges, and of course when you publish them on a job ad, all of your employees can see that, as well, and they can see how they stack up against it.

But at the moment there's a big focus on some of the outcome measures, so, “what's your pay gap?” Is it getting bigger or is it getting smaller? But increasingly also on the sort of what we call ‘procedural fairness’. So does the structure – is the structure set up to be equitable and then the outcome measures will follow up from that. And then finally, I'd say our employee expectations are increasing fast on that, as well. In places where there are published pay gaps, UK is a good example. You can go to the government website. You can look up any organization’s pay gap and that is increasingly becoming part of the research that prospective employees will do on a prospective employer. Go and look up their pay gap, go and look on Glassdoor to see what people are saying, but that kind of research is a core part of what employees are looking at.

So those are the three biggest: employees have the upper hand, COVID has changed the world and ESG and DE&I are becoming more and more important.

So just a very quick sort of view of “where does Korn Ferry think of sort of here we're moving then?” So, I think we've been in a world where reward is a bit of a cost to the company. It's administered in a very ivory tower, in a very centralized HR function, and then pushed out to employees. I think as an employee, you've been thinking that reward is something that's kind of done to you and by HR. And not much of a look up on some of those issues like pay equity, but also not much feedback on how that's landing and whether it's effective or not. Whether it's giving people what they want. In a world where we need to give employees what they're looking for because they can go elsewhere or not – we're going to need to get better at getting feedback on how that reward lands. And not just, “of course everyone wants to be paid more,” so actually getting an understanding – that feedback of, “where do we really have issues and can make improvements beyond just the general noise?”

So, I think we're moving from there to a situation where people see reward much more as an investment. It's much more of a two-way street and conversation. We're going out to employees and saying, “well what you actually want and how do we build a proposition that gets as close as we can to giving you that,” with those issues around pay equity, for example, baked in from the very beginning.

So those are some of the big trends as I see them. Love your feedback on that, on whether you see the world differently. Let's look at some data now and the first obvious piece of data to look at as inflation, which it is hard to escape. It’s historically high. This [data] is from last week’s Economist. So, the Economist dated the 11th of June. The dark green bar, are the current inflation numbers for the last year, so those are mostly what countries reported up to the end of April, and in a couple of cases in May. And then the lighter green bars are the Economist’s forecast of where inflation will be at the end of 2022. But you can see in a number of countries, it's predicted to fall back a little bit, but it's still way way higher than we've been used to for, you know, at least the last 20 years.

So, high inflation, but not really feeding through into people’s salary forecasts. Earlier this year, in the spring we went out to thousands of clients and asked them what their salary plans were and again, you see, if you want to get that data, there's a QR code down on that slide or a link at the bottom to go and download that data.

And at that point inflation was well, not quite where it is now, but it wasn't far off and you can see in most of those mature markets, the higher inflation was just not coming through into salary forecasts. So, we’ll have a look at why that might be in just a second. The [exception to] that obviously China where the government has managed to bring inflation down to about 2%, but salary forecasts and salary increases are still at sort of the historic high levels that they've been for most of the last decade or more. And I think what that tells us is there's a lag here. Inflation can move around and it takes time for that to actually come up in salary forecasts and employees’ expectations. But once it is reflected, it also takes time to for that to unwind when things move in the other direction. So, I think what we can expect is a lag. The salary forecast will start taking take account of inflation, but even when inflation falls back, it will be hard to shift that employee expectation that inflation is high and I need a salary increase? Also, probably that people like people don't react to forecasts, they react to the actual natural things that have impacts on them today, and so we obviously haven't seen the full effect of that.

So why is that? Why is there that sort of lag?

And I think there are a few things going on here. Firstly, it's definitely true. I mean, reward professionals in most mature markets are not used to an inflationary environment. When I joined the Hay Group business in 1999, we used to publish our UK data four times a year and I said, “why do we do that?” You know, if inflation’s about 2% and it wasn't that long ago, the inflation had been 10 or 15%. I mean that is very ancient history now, and so most people have not been used to that, and in fact anyone under the age of about 50 is not just not used to it, they’ve never worked in that kind of environment before. So there is an element a lot of reward people – initially, as inflation started to go up – a lot of reward people literally didn't know what to do. Don't know how to react to that and so there was a delay in doing anything while we figured that out. Certainly, at the beginning, people weren't paying attention to inflation. It's harder to believe now because it's on the news every day. But actually, for the first few months of this year, yeah, people perhaps weren't paying that much attention to the wave that was about to come, and there's definitely that time lag between inflation, spiking, and that then feeding through to what employees are demanding. But also our salary budget cycles – we probably do that once a year, and so if you kick that off in August, inflation hasn't been part of the picture yet because you did it last August, you're about to kick off this August and so that has not fed through to those budget and salary budget cycles yet.

There are some people planning below-inflation pay increases or that are already locked into below-inflation increases, so the government public sector is a good example here. Normally they obviously start to forecast what their pay increases will be several years out, so the government can budget. And so, in the UK, for example, private sector might have been averaging something around 3-3.5 %, the public sector is locked into something like one or 2%. So, there's a lot going on beyond the average. And because many people are doing less and quite a lot less, but that means that some are doing more and,  in some cases, quite a bit more.

And then those headline pay increase numbers: they're below inflation, but there are a lot of other things going on in companies that will not appear in that number, and I'll go into more detail on that on the next slide. But then just very quickly to say, of course, there's caution that, “is this all about to turn around, and there's a recession around the corner?” The answer? Probably yes.  And so a lot of companies that are adopting a sort of ‘wait and see’ approach to see if the tide turns.

But back to that penultimate issue: there are lots of things going on in organizations that are not appearing in the headline pay increase number. Let's have a look at a couple of those.

So, firstly, there are lots of one-off retention bonuses going on to stop key talent leaving. Some of those are proactive to try and you know, lock people in and get ahead of a situation where they might resign. But then, a lot of reactive as well, as counter offers once people are already either talking about or threatening to or have actually resigned. So, lots of one-off retention bonuses. Some of those are short- term. Equally, we're seeing quite a lot of longer-term retention bonuses, so if you're still here at the end of 2023, you get a more significant or retention bonus. So obviously that will, you know, that will change the game. That will put more money in people's pockets – especially the short-term bonuses, but it will not appear in a headline salary increase percentage.

Equally a lot of off-cycle pay increases though. So, base salary increases for certain employees to say, “yeah, we're not going to wait for the annual review cycle. We're going to throw more money into certain people or certain parts of the business outside the annual cycle.” Again, proactively to try and sort of correct for anomalies or address any issues if we think people are going to get offered more elsewhere. So again, that may well not come up in your sort of annual headline salary increase number, but it's quite targeted. Not everybody is going to be getting that. It will be targeted at certain high-value employees or certain parts of the business where we know that the pay market is hot.

And if we think down at that bottom point there, that's also a bit of a worry if we're thinking that we need to be baking more diversity and equity and inclusion into our pay systems to try to get more pay equity, those one-off and off-cycle pay actions on individual people risk being subjective and risk worsening some of those pay gaps if we're not doing that very carefully. So, there's lots going on outside the cycle, yeah, and a risk when we're not doing that carefully that could make our pay gaps worse, not better at a time where we're trying to make them better.

And then the final sort of the final bullet: lots of people are reporting significant pay increases, but there's an element of “don't believe the hype”. Many of those people are actually taking a step up. They're taking expanded responsibilities. They may be stepping up into a vacant role. And so of course, if you take a vacant job, you get a good pay increase, but that doesn't increase the overall pay bill. Because assuming that someone had stepped out that role, you're stepping in, someone will step into your old role. So it's a bit of musical chairs, which doesn't necessarily increase the overall pay bill, but it is a big merry-go-round of individuals. And to try and quantify that a little bit: if you took on some extra responsibility and you took an incremental step up, what Korn Ferry Hay Group call “a one level step up” is about the average sort of pay increase that you might expect – here's how the market is different from one level to the next.

So, a professional then would expect an increase of about 15% if you move from one job level to just the incremental step up. Management and executive jobs could be more like 20% or even 25%. So, there are lots of people reporting increases in their own pay, but that's also because they've taken a step up and therefore, you know that's what sort of funding the increase is, not necessarily a change to the headline pay bill.

So, let's get the crystal ball out and as I say, the crystal ball is a little bit broken at the moment, so this is all very difficult because we're in quite an unprecedented situation. We've got The Great Resignation, we're coming out of COVID, which has thrown everything up in the air, and we've got this historically quite high inflation, so this is difficult. That will make no bones about it.

But I think let's stick to some of the core things that we always know. We know the labor market is very tight, so skilled people have choices about who they're going to work for, and if you want them to work for you, you need an attractive proposition. Generally, employers will look to make sure that their employees get better off, not worse off each year after you've taken inflation into account. So, a very typical starting point would be, “let's look at what we expect inflation to be, and let's try and make our pay budget 1%, maybe 2% above that, if we can.”

Inflation is significantly higher than we've been used to, but that has been slowed to translate into pay increases. We assume that that eventually will come through into pay rises, but as I say, beware the average. There are many employers that are doing less or a locked-in already to less, and instead, in countries where that's the case in the public sector, we may well start to see strikes and similar where you know where people pay increases are not keeping pace with inflation.

So, beware the average public sector and others are generally doing less than inflation or are slower to react, is probably a better way to put it – private sector generally doing more, so there's devil in the detail there. But almost no one is doing across-the-board increases. People have been much more precise and much more targeted about where their increased budgets are going. They're going to the key employees that it's important not to lose and the parts of the organization that are under more pay pressure. But we need to do that carefully to make sure that that is not worsening our pay gaps. If we're targeting that pay, we need to make sure that we're doing it in an objective and procedurally-fair way.

The other thing to say, the final thing to say again [is] that the recession is most likely coming and so the ‘wait and see’ approach is what a lot of a lot of organizations are still doing and that is that's a pretty. valid approach. This is a difficult one, and there's a bit of a tightrope to walk here. I would not be going out and taking peak inflation numbers, adding a healthy percentage to that and then going applying it across the board. I think people are people are waiting. I'll say 1% to 2% of inflation is probably quite a good guide, but then that's being targeted quite surgically at the parts of the organization that need it.

So, there are some there are some thoughts on some of the some of the issues. What the data is saying and what might be happening, what might happen as the rest of the year plays out.

Hope that was useful. Where you've watched this, where you picked up this video, hopefully there's probably a way to get in contact with me if you've got questions. If you think differently or you wanna discuss, then we’d really pleased to hear from some of you and so please feel free to get in contact if you want to. Hope that's been useful.

Thanks for listening and have a good rest of the year.

 

Unique times call for unique measures.

If you thought you knew what your employees wanted two years ago, or even two months ago, it’s time to think again. As we move into the second half of the year, we’re seeing almost every element of how to approach rewards change.

So, what’s the cause?

Well, there’s the Great Resignation, our emergence from COVID-19, spiking inflation, ESG and DE&I demands, plus a possible recession on the horizon – just to name a few.

If you’re accountable for your organization’s rewards strategy, watch our June 2022 trends forecast presented by Korn Ferry Client Partner, Ben Frost, to discover the key insights you need to best navigate the year to come.

Watch our forecast to learn:

  • How to adjust your rewards propositions to navigate the shortage of skilled workers
  • How the COVID-19 pandemic has flipped the ‘deal’ between employees and their organizations on its head
  • How the influence of ESG and DE&I are taking the front seat in rewards considerations
  • Why inflation forecasts are not feeding into salary forecasts

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