Regardless of how large the financial impact was on a company during the first few months of the pandemic, every business had one immediate goal in mind: cut costs by cutting cash flow. The quickest and easiest way to accomplish this goal is through cutbacks to payroll — more specifically, cutbacks to salary, the fixed cost in payroll. We have seen many companies head straight to the payroll line item with a red pen for 2020 and beyond, but a variety of strategies have been undertaken to achieve cost savings.
One of the first sweeping movements we saw as the economy turned sharply downward was mass employee furloughs within companies of all sizes. Some companies, such as Comcast Universal, chose to pay out partial salaries through their furlough, resulting in conservative savings. However, the majority of furloughs were unpaid and provided companies with swift financial relief by eliminating a large percentage of overall salary costs across the board.
Another strategy that received a lot of attention in the media was the implementation of salary reductions at the executive level. The Walt Disney Company was quick to come forward with this approach, which lasted until August 1. The company applied reductions as seen in the table below:
Source: Littleton, Cynthia. (March 30, 2020) “Bob Iger to Give Up Salary, Other
Senior Disney Executives to Take Pay Cuts,” Variety, https://variety.com/2020/
tv/news/bob-iger-disney-bob- chapek-salary-cuts-coronavirus-1203548824/
By reducing salaries at the top of the organization, companies were able to send two clear messages: they needed to save cash, and the leaders of the organization were willing to step up and sacrifice. At a time of such uncertainty for so many, this communicated to employees at the lower levels that they were both valued and protected by the organization, which was vital to keeping morale and productivity up.
But as with the Disney example above, most of the executive salary reductions have already been reversed. Reducing executive salaries may have had an impact on short-term fixed costs, but this choice comes with its fair share of unanswered questions and unknowns regarding variable compensation costs. We will be addressing the impacts to variable costs later on in our article series.
2021 Salary Strategies
A more long-term take on saving fixed costs through salary is reducing merit increase budgets until the organization feels it has regained its financial footing. Alternatively, some companies may choose to forgo salary increases altogether. A late September survey of 705 U.S. companies by Willis Towers Watson shows the following results:
35% of participants are reducing projected salary budgets for 2021
50% of participants are keeping salary budgets intact
The projected salary increase for non-executive employees is 2.6% in 2021, showing a decrease from the projected 2.8% increase reported in a May–July survey
The projected salary increase for executive employees is 2.5%
One in six employees will not receive a pay increase at all in 2021
According to this same survey, 84% of companies plan to provide merit increases on schedule; however, companies may also choose to delay salary increases until the overall impact to the business is better understood. Pushing back the salary increase schedule also buys companies more time to discuss their enterprise-wide salary strategy before making a final decision for 2021.
Companies may also consider reducing or delaying merit increases for some employee groups but not others, only providing pay changes to high performers, employees paid below market, or positions in high demand. However, this type of pay change differentiation would need to be considered carefully, as it could impact morale and pay equity.
Another alternative is to provide lump-sum bonuses to employees in lieu of salary increases. Although this does not help with the immediate cash flow issue, it means that if and when normal merit increases return in 2022, the company will have a cash savings due to the increases being based on 2020 salaries. However, companies looking to use this compensation strategy should first check in on their overall competitive positioning against the market; if they are lagging behind, providing lump sums rather than merit increases will just make it more difficult and more expensive to catch up later.
Other Factors to Consider
In deciding what strategy to use, companies have more to consider than just how much cash they can save and how quickly they can save it. Another factor they need to consider is COVID’s impact on the business—both how large the financial impact has been and how long the effects are expected to last. If the effects are short-term and the company expects to recover quickly, it may do more harm than good to make changes to the current salary strategy. However, if the impact is projected to be long-term, acting now may be vital to keeping the business going beyond 2021.
Also, as mentioned above, companies should consider the competitiveness of pay in the employee population and decide whether keeping salaries below the original merit increase plan is appropriate. This is particularly impactful if the company is in an industry where retention is an issue. More stable companies may take this unsteady business environment as an opportunity to poach talent from businesses that have been hit harder by the COVID pandemic, so the more impacted business may risk losing talent if it doesn’t maintain competitive pay.
A strong communication strategy is vital, as an already uncertain employee population would likely not take well to the news that they will receive no raises. This strategy would need to help employees understand the impact on the business, what the company is doing to mitigate the effect, and what the plan is going forward.
When a company is forced to cut costs by impacting employee salaries, regardless of whether it is due to the pandemic or any other hardship taken on by an organization, it is important to take a holistic look at the company’s total rewards strategy and hone in on the purpose of the salary changes.
Generally, salary changes are a means to ensure competitive pay and to provide feedback and recognition to the employee population, particularly in a way that helps to retain high performers. If it is not possible to send this message through a fixed cash increase, the company needs to look for low-cost/no-cost alternatives; these alternatives could include increased vacation days, a small one-time performance bonus, or other forms of recognition.
The actions companies take with regard to employee base salaries will speak to the overall financial health of the organization, as well as how the company intends to position base pay within its total rewards strategy. It is important to consider this message carefully, as it could impact employee morale, retention, and hiring capability far beyond the end of the pandemic.
- Joe Kager, Managing Consultant at The POE Group. Joe is a Certified Compensation Professional with over twenty-five years of experience in compensation and human resources. Call him at 813-546-8628, or email him directly at joe.kager@poegroup.com