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Handling Fair Pay Adjustments When You Need to Conserve Cash

Jen Dewar
May 6, 2020 8:30:00 AM

Competition for talent was high throughout 2019, market rates shifted upward, and your new employees may be earning more than their tenured counterparts. This can happen with even the best-intentioned HR departments.

Unconscious bias could also be rearing its ugly head. Women and men both negotiate their initial salary offer, but men are 7 percent more successful. Women of color are 19 percent less likely than a white man to receive a raise when they ask for one, and men of color are 25 percent less likely. Every individual pay decision can add up to large pay discrepancies across your team, warranting a fair pay adjustment.

But in our current economic climate, many companies are low on cash, or conserving cash to extend their runway in case things get worse. So, what are some ways we can address fair pay adjustments given these constraints?

Option 1: Prioritize fair pay adjustments over merit-based increases

Twelve percent of employers have reduced or delayed salary increases, and others are planning or considering it. If your company is reducing pay increases, divert your budget to cover fair pay adjustments first. It’s ok if you don’t have enough to cover all discrepancies right away. Sync with your Finance team so you can plan to prioritize remaining fair pay adjustments as you’re able.

Make sure to communicate this with employees so they understand your commitment to fair pay, and why some employees received increases while others didn’t. A little pay transparency goes a long way, but you may also choose to compensate employees with a stock option grant, deferred raise, or deferred bonus.

Option 2: Run an equity-only cycle

If you’ve delayed or cancelled increases and your company uses stock grants as part of their compensation package, consider running an equity-only cycle. These should be smaller than a refresher grant for most employees, but may vary depending on the scale of your fair pay adjustments and the stock option budget available to work with. Companies that have implemented hiring freezes, or had unvested shares or unexercised options put back into the pool, may have some extra flexibility in this area.

A stock option grant can demonstrate your commitment to fair pay in the same way a cash increase can, but it’s important to communicate the value of your Total Compensation package.

Option 3: Adjust pay cuts

Pay cuts are becoming more common as the pandemic continues to impact our economy. Eleven percent of all companies in the Russell 3000 Index announced base pay cuts between March 1 and April 24, and a second wave is expected soon.

While it may seem fair to apply the same pay cuts across the board, that would allow existing pay discrepancies to persist. Instead, consider calculating pay cuts to adjust for fair pay.

Again, communicating with your employees will be key. Employees talk about compensation, and they should have some context if two people in similar roles received different pay cuts. For instance, 16 percent of women have found that they’re paid at least $20,000 below what men are paid for the same role in their company. A fair pay adjustment could equate to significant pay cuts for some, and small (or no) pay cuts for others. Make sure employees understand why.

Option 4: Wait it out

Nineteen percent of companies are on hold and waiting to decide to pay out salary increases, and another 17 percent have cancelled all salary increases for 2020. You could certainly just wait out your fair pay adjustments until business is back to normal (or our new-normal). Fewer than a third of companies run pay equity analyses anyway, so even a delayed adjustment is more than many companies are doing.

However, this option comes with some risk. First, that your employees question your commitment to fair pay. Without this trust, your employer brand and employee retention could suffer. If you go this route, consider making adjustments retroactive to the date your increases would normally take effect, if you can. Second, this option can open you up to costly legal trouble, damaging your company’s reputation. The Lilly Ledbetter Fair Pay Act allows your employees to file wage discrimination lawsuits within 180 days of their last discriminatory paycheck. Waiting on your fair pay adjustments extends your potential liability.

Final thoughts on fair pay adjustments

A commitment to fair pay is something to be very proud of. Every company’s situation and available options may be different, and communication will be key to maintaining employee trust. When you make an announcement about any pay cuts or freezes, reiterate how important fair pay is to your company and that you will address it as soon as you’re able. If you’ve already missed this opportunity, add this topic to the agenda for your next all-hands. The economy is projected to rebound later this year, and you will need your employees loyalty and trust to help your company get back on track.

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