Planning for 2023: Incentives, Bonuses, and Variable Compensation

As with our review of 2023 compensation budgeting in the last Astronology®, predictions on how variable compensation will unfold next year are challenging. The challenge comes from the on-going talent shortages, as well as the continuation of remote work options. In this Astronology®, we explore the impact of these challenges on the use of variable compensation in the 2023 total rewards mix.

In the following sections, we’ll share extracts from key surveys just coming in, as well as our own insights on variable compensation use in 2023.

Issues that are Impacting 2023 Compensation Planning (From the Willis Watson Towers 2023 Compensation Planning Survey: https://www.wtwco.com)

“According to the survey, attraction and retention challenges continue to plague organizations, although fewer respondents expect those difficulties to be at the same level next year. Over nine in 10 respondents (94%) are experiencing difficulties attracting talent this year, but only 40% expect difficulty in 2023. Similarly, 89% of companies reported difficulty retaining workers this year, but that number is expected to drop to just under 60% next year. In fact, many companies have taken or plan to take non-monetary actions to attract talent. For example, 69% of respondents have increased workplace flexibility, and 19% are planning or considering doing so in the next couple of years. Six in 10 respondents (59%) have placed a broader emphasis on diversity, equity, and inclusion (DEI), and 24% are planning or considering doing so in the next few years. Additionally, 49% of companies continue to enhance recruitment offers with sign-on bonuses and equity/long-term incentive awards, while over 21% are planning or considering doing so in the next few years. Efforts to retain talent are also under way. Almost three-fifths (58%) of companies have broadened their emphasis on DEI to retain more talent, and over 26% are planning or considering doing so. In addition, half (50%) have increased the flexibility for remote work, and 25% are planning or considering doing so in the future. Almost 40% have changed their compensation programs (e.g., base salary and short- and long-term incentive plans), and another 35% are planning or considering. Over 36% have made changes to improve their employees’ experience, and 45% are planning or considering doing so.”

Variable Pay Projections

A Look at What Has Happened in 2022 (Empsight 2022 Policies, Practices Survey https://www.empsight.com/)

“In 2022, we are observing significant changes relative to last year’s budget, policy and practices and findings. In 2022, key areas of change included larger structure movement percentages, richer budgets, and richer short-term incentives. Last year, Empsight’ s participants indicated their organizations were coping and responding to workplace and market changes, largely due to COVID -19 related uncertainty. As compared to last year, there a notable increase in the number of specialized salary structures designated for geography, or distinctions for Classification or Job Function categories. In qualitative comments, many mentioned shifts in budget control to achieve better flexibility in response to a fast-moving competitive hiring market. Some organizations noted some budgets have been consolidated or have shifted from Centralized to Decentralized management control, or the reverse. There was a significant rise in Promotion and Adjustment Budgets, whether they are carved out separately, or combined. Organizations have made changes to 2022 Policies and Practices to be nimbler, more strategic, focused, and responsive to business needs in this highly competitive employment marketplace. 2022 Empsight findings reflect not only the richer budget forecasts organizations are planning to deploy to become or stay competitive, but findings also reflect the various policy and practice methods, tools and strategies being employed to achieve their business objectives, along with key Compensation actions and decisions.”

Short-Term Incentives

Comments about STI Payouts that were higher in 2022 than in 2021:

• Higher in 2022 because 2021 payouts were much lower than normal
• Used operational vs. profit measures because some industries haven’t fully recovered from the pandemic
• Improved business performance led to higher payouts
• Higher funding pool for payouts
• Payouts resulted from pre-determined business goals
• Actual performance outperformed target performance

Comments about STI Payouts that were lower in 2022 than in 2021:

• Performance was good, but not as good as during the pandemic year (2020)
• Impacted by increased cost of materials
• Negative impact of winter storms
• Poor operational results
• Not meeting target criteria
• Comments about STI Payouts that were about the same in 2022 as in 2021
• Some companies who had poor performance in both 2021 and 2020 had STI payouts that were about the same in both years
• Business Unit Performance was consistent

Long-Term Incentives

Comments and Summary findings on Long Term Incentive Awards for 2022:

• A few participants commented that new and more discretionary approaches are being employed.
• Only a few participants noted their companies had revised performance measures or redesigned targets and vehicles.
• 2022 findings suggest there has been an increase in eligibility for LTI Plans, particularly for Professional Individual Contributors, Support, and

Other Comments:

• Increasing LTI target % for all levels
• LTI Targets are based on dollar amounts, not percentages
• Using more RSU’s to substitute for performance unit awards that will not be paid out
• Discretionary eligibility for those not normally eligible
• Expanded use of one-time equity grants and ad-hoc RSU awards
• Increasing use of RSU’s and PSU’s and movement away from stock option awards
• Increased LTI eligibility down to lower levels in the organization, specifically directors
• Eligibility requirements changed to provide greater equity amounts

WorldatWork 2022 – 2023 Compensation Budgeting (https://worldatwork.org/)

The recently published 2022 – 2023 Compensation Budgeting Survey from WorldatWork shows the following in variable compensation 2023 budgeting and, 2022 actual paid:

2022	Hourly	Non – Exempt Salaried	Exempt Professional	Officers / Executives
% of Base Budgeted	5.0%	5.0%	13.0%	40.0%
% of Base Paid	5.0%	5.9%	14.9%	41.0%
2023
% of Base Budgeted	5.0%	5.0%	14.0%	40.0%

WorldatWork is showing little difference between 2022 and 2023 variable pay budgeting.

Astron Solutions’ Perspective

The following are four key trends Astron Solutions has been tracking in 2022 that provide insight into planning for 2023:

1.  First, we have seen a marked increase in the use of variable pay for non-profit executives and department level managers. The trend has been to set targets between 15% and 30% of base pay, with actual payouts varying based on performance.
2. Organizations’ increased use of discretionary bonuses is helping to offset current inflation levels. For example, some of our clients are providing a one time 3% bonus in lieu of a second base pay adjustment in the course of a 12-month period.
3. Rather than focusing on performance, some clients are linking the level of incentives to employee competency. For example, learning level employees do not receive any incentives, fully competent employees receive a target level incentive, and advanced level employees are eligible for two to three times the budgeted target amount.
4. There is an increased use of the “scorecard” approach in determining “goal-sharing” incentive awards. This approach provides transparency in how incentives are determined and paid out, beneficial in our world demanding increased transparency in pay.

Of course, there are many factors outside our control that can impact actual incentive payouts within an organization. The continued COVID-19 pandemic, inflation, supply chain disruptions, and the war in Ukraine are but four that come to mind immediately. While we cannot be certain of any incentive plan’s payout amounts in 2023, we can be mindful of internal and external considerations, and weave them into the plan’s design.

What plan design approach is your organization using for 2023? Please share some high-level thoughts with us in the comment box below!