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Making Strategic Compensation Decisions in Times of Economic Uncertainty

Jen Dewar
Apr 8, 2020 7:05:00 AM

COVID-19 has really thrown us all for a loop. Businesses and schools have closed. Ninety five percent of the United States population has been asked to stay home. The number of unemployment claims filed has hit record-highs for two weeks straight. Your employees and your customers are feeling the impact in many different ways. 

Our economic future is uncertain, and many businesses are thinking about cost-containment strategies to help weather the storm. When compensation is likely your organization’s biggest operating expense, this means some hard decisions may need to be made. It can help to consider your options ahead of time so you can make more strategic compensation decisions when or if the time comes.

Here are some questions you may want to ask yourself in order to make more strategic compensation decisions:

1. Can we freeze or reduce hiring in order to prioritize current employees?

Forty two percent of companies have frozen or reduced hiring, with another 28 percent considering it. If you anticipate needing to reduce your compensation budget, and are unsure of how the pandemic will affect company growth, this can be a good place to start. A Willis Towers Watson survey found this is the most prevalent cost-containment strategy as employers attempt to use layoffs and workforce reductions as a last resort.

Take a look at your open roles, and move forward with only the most mission-critical so you have a longer runway for your existing employees. Just make sure to communicate this with your job candidates if you hope they will still consider joining your company when the economy picks back up.

2. Should we move forward with planned raises and bonuses?

Many companies have already run their first compensation cycle for the year, but may not have implemented salary increases yet. A Willis Towers Watson survey found that 12 percent of employers have reduced or delayed salary increases, and eight percent have frozen salaries. Another 22 percent are planning or considering either or both initiatives for the future. 

Meanwhile, a WorldatWork survey found that 19 percent of employers are waiting to decide whether they will pay out salary increases, and 17 percent said they were cancelling salary increases in 2020. Fifty seven percent have already paid, or still plan to pay out, salary increases. When it comes to 2020 bonuses, 67 percent have paid or still plan to pay them out, 16 percent are waiting to decide whether they will pay them out, and 8 percent are cancelling them.

One consideration is whether moving forward with planned raises and bonuses is even feasible for your company. At a time when many businesses are not generating much, if any, revenue, raises may be completely out of the question. You may have no other choice than to cancel or delay salary increases and bonuses.

Another consideration is whether reducing, delaying, or cancelling planned raises could save jobs, at least for some time if the economic situation doesn’t improve soon. Then, when things do get better, you can re-evaluate.

3. Could we offer voluntary leave or reduced workweeks?

Many employees may be feeling the strain of full-time caregiving and full-time work. Many schools and daycare centers are closed, and elderly or immunocompromised relatives may need additional help.

Nine percent of employers are offering voluntary unpaid leaves of absences, and six percent are offering reduced workweeks. More than three-fourths of employers either will or may do so in the future. 

Consider whether these alternative arrangements could work at your company, and any guidelines you may want to follow. For instance, who is or isn’t eligible, how healthcare insurance will be handled, and when the arrangement should be revisited. Then ask employees to volunteer to see how that can impact compensation spending.

4. How would we structure pay cuts?

A Willis Towers Watson survey found that very few employers have cut salaries. However, it’s best to prepare for this scenario so you’re not left panicking if that needs to happen.

The simplest way to structure pay cuts is to reduce everyone’s salary by the same amount, but is that the best way to do it? Is that fair to people who are currently underpaid, to low-wage workers, or to your top performers? Again, the answers will depend on your company’s specific situation. 

A strategic approach to pay cuts may require more legwork in order to make fair decisions. Take a look at pay by sex, race, and tenure to make fair pay adjustments.

Then look at each employee’s pay band penetration and how that compares to performance. Make adjustments to people who are over- or underpaid. 

Once that’s hammered out, and if you still need to make deeper cuts, consider reducing pay by salary band or seniority. Executives may take the deepest pay cuts, while low-wage workers are affected less—or not at all. 

Finally, consider if you will make any further performance-based adjustments to reward your top performers. This can be structured in many different ways as well, including deferred bonuses when the economy picks back up.

5. Should we increase pay for employees required to work on-site, or for mission-critical roles?

Twenty six percent of employers are planning to provide hazard pay for employees who are required to work on-site during the pandemic. This includes cash incentives as a flat dollar amount, based on hours and shifts worked, or as a percentage of salary. Sixty five percent are planning to provide perks such as meals and daycare options, rather than extra pay.

Eight percent of employers are providing pay premiums (typically 10 percent above baseline compensation) for mission-critical employees and those employees who must be present at work and have increased risk. Another third either will or might do the same. 

You may have employees who you rely on to keep your business running, whether or not that includes them going into a physical business location. Consider whether you need to increase their pay not only to retain them, but also to properly reward them for their contributions.

Final thoughts on making strategic compensation decisions over the coming months

Nineteen percent of employers think they will resume normal operations this month, 33 percent expect that to happen in May, and another 25 percent are targeting June. The hard truth is that we don’t know how when this pandemic will end, nor how long it will take the economy to recover afterward. All we can do is plan for as many different scenarios as possible, and hope for the best.

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