Pay Transparency During an Economic Downturn

4 min read
Apr 15, 2020 2:32:43 PM

The economic impact of the COVID-19 pandemic has forced many companies to make difficult decisions around compensation. Nearly one in five companies (17 percent) said they were cancelling salary increases in 2020, and 8 percent are cancelling bonuses. More than a quarter of people (27 percent) say a member of their household has experienced a pay cut or a reduction in work hours. As this crisis continues, these numbers will likely continue to rise.

These cost-cutting measures have the potential to add stress to what is already a very stressful time for many. This can impact morale and productivity, as well as retention and your employer brand. But approaching these difficult conversations with a level of pay transparency can soften the blow for your employees. That is, help employees understand why they earn what they do. This is important during your raise cycles, and it’s arguably more important when employees receive pay reductions when they might normally be receiving a raise.

3 best practices for pay transparency during COVID-19:

We are finding ourselves in uncharted territory, as widespread pay reductions are not common outside of economic downturns. Here are three best practices to guide you toward better pay transparency during this time:

1. Make strategic compensation decisions

It may seem fair to reduce everyone’s salary by the same percentage, but that may not actually be fair in practice. Consider approaching compensation reductions in a more strategic manner. Reducing salaries for low-wage workers could have a much more devastating impact than it would for your top earners, without making a significant impact on your compensation budget. Company leaders, on the other hand, are typically high earners and may be in a better position to take pay cuts. Discuss this option with your executive team as a first round of pay reductions.

If you need to make further pay cuts, begin by taking a look at your pay equity data and salary band adherence to see if some employees are already over- or underpaid in relation to their peers and location. Then make adjustments to even them out before making any further adjustments across the board. This can create a more fair process.

Document your interim compensation strategy to ensure consistency in your decision making. For instance, how you’re targeting the market for salary, and how bonuses and employee stock options will be used.

2. Prepare your managers for hard conversations

Discussing pay is already very difficult for many managers. Discussing pay reductions will be even more so. Give managers a heads up before you make any company-wide announcements. Their reports will inevitably have many questions, and they need to be prepared to answer them. For instance, why is the company doing this, what will happen with raises and bonuses that have already been discussed, and when will compensation be revisited? Allow your managers to ask questions that they have, or anticipate their reports having.

Your managers will need a cheat-sheet, so consider providing them with a script containing common questions and answers. You can provide some guidance on what to say to ensure they show compassion and gratitude toward employees during this time. You may also provide guidance on what not to say to avoid messes that will need to be cleaned up remotely. Encourage managers to be authentic and honest with employees about their experience with the pay reduction, rather than simply repeating what they’ve already heard.

As we continue to navigate the transition to remote work, clear communication is more important than ever. Video conferencing should be preferred over voice-only calls, and certainly over written messages, as facial expressions, body language, and tone of voice can impact the way communication is received.

3. Be transparent throughout company communications

Most of us never expected a virus to shut down countries around the world, ravage economies, and impact so many people’s lives. It would have been impossible to plan for this ahead of time, but we should certainly be looking ahead now and planning for various scenarios—including pay reductions.

Pay transparency works best when applied consistently, so you want to avoid a scenario in which you tell employees everything is fine one week, then reduce pay the following week. This can break your employees’ trust. It’s ok to say you don’t know if cost-cutting strategies will need to be implemented—that is preferable to backtracking later.

When it’s time to communicate cost-reduction strategies with your team, build a communication plan around how to deliver it. Share some information around why you’re doing it so employees can understand the big picture. Let them know what you’ve already done, including executive pay cuts, to reduce impact to the rest of the team. Ask your employees to stick with you through these trying times. And encourage them to reach out to their managers, company leaders, and HR with any questions.

Final thoughts on pay transparency in an economic downturn

Compensation cycles tend to be a stressful time for many in the HR field, but those that come with pay reductions are on a whole other level. These are difficult conversations to have, but they are crucial. Your employees depend on their compensation to pay their bills, take care of their children, and access healthcare services. Any decisions that potentially jeopardize their ability to do those things warrants open communication and some level of transparency.

As it stands, only 9 percent of companies are sharing information with their employees around the financial impact of COVID-19 on the business. While you don’t necessarily need to lay it all out, you can certainly say, “Our business is being impacted by COVID-19, but we don’t yet know how that will impact each of you.” Pay transparency, even at the most basic level, can matter more than the pay itself.

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