Rethinking and Rebalancing Staffing, Compensation and Benefits in the COVID-19 Crisis

The following has been adapted from a Gallagher article by Kent Lonsdale, Divisional Executive Vice President, Acquisition Due Diligence & Integration. The original article can be requested by Ms. Rosa.

 

COVID-19 has every company rethinking and rebalancing their staffing, compensation and benefits programs as they fight to survive. In a recent U.S. Chamber of Commerce Report, only 28% of small businesses can continue without shutting down indefinitely. Forty-three percent (43%) believe they have less than six months until a permanent shutdown is unavoidable.¹  

 

My firm, Gallagher, has been reporting for some time about how companies, including our clients, have been wrestling with their ability to sustain their compensation and benefit programs. Today’s high performing organizations typically have well-defined ratios of compensation and benefits cost to revenue. This ratio is important because it often affects base salary levels, incentive compensation arrangements, staffing levels, salary increase pools, and available funds for retirement contributions and the employer’s share for healthcare.

 

Our 2016 Human Capital Insights & Strategies Report notes:

“Most employers don’t spend enough time evaluating the risk of maintaining the status quo of current compensation and benefit programs. To ensure these programs are sustainable, they need to understand why they have them and how they support their organization’s business objectives. It should also be evident to employers that the current cost trajectory can be supported within their revenue and other expense forecasts. Data suggests that having a strategic plan that includes cost projections is an attribute of best-in-class employers. Business today is very dynamic, and maintaining existing programs may not be the best ‘chess move’ to ensure industry relevance.” ²

 

Besides not having a solid strategy, we observed most companies had very rigid compensation and benefit plans that could not easily self-adjust in a downturn or crisis, resulting in most companies having to rely on reduction in force as the only means to adjust compensation and benefits.

 

In response to COVID-19, most organizations are rapidly being forced to adjust their staffing and compensation models due to new business and regulatory realties and fighting for their short- and long-term survival. Adding complexity to these difficult decisions, how organizations handle layoffs, furloughs, compensation reductions, and any reductions in force will have a long-term impact on their ability to manage their employee value proposition and future efforts to retain, recruit, and possibly rehire former employees.

 

To counteract the economic disruption caused by COVID-19, governments and central banks have enacted a variety of fiscal and monetary stimulus measures. In recent weeks, we have seen the Federal Reserve lower interest rates, the Department of Treasury delay tax filings, and Congress pass two economic packages to help businesses survive, preserve jobs and get much needed money to individuals. Even after the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act, there is still a wide range of ideas and actions that organizations are deploying to bridge the revenue/expense gap. These ideas include:

• Hiring/promotion/replacement freezes
• Wage freezes
• Eliminating summer internships and delaying college recruiting offers
• Adjusting executive compensation
  • Bonus/perks being eliminated or not being distributed in 2020
  • Compensation being reduced at the board/executive/leadership levels

• Scaling back payroll
  • Some workers going to reduced schedules and wage reductions

• Four-day work week = 20% reduction in pay
  • Furloughing percentages of the workforce for specific period of time but preserving benefits and unemployment benefits (where eligible) in hope to have employees return
  • On-off furlough plan leaving employees without pay for a recurring period instead of a continuous one
    • E.g., one-week unpaid per month during April, May and June
• Traditional layoff or reduction in force (RIF)

 

Reset, Rethink Your Compensation and Benefits Plan

Companies continue exploring their options, most often deploying multiple approaches. Businesses are working hard to preserve jobs and do the right thing for employees while looking at ways to sustain their organization through the short-term crisis. However, small changes can have long-term cultural and people implications. A crisis can stress the weak links in every organization, including how the company makes money, what is relevant to customers and how products/services are delivered. This crisis is forcing many organizations to creatively confront long-held beliefs, policies and models and re-think their approach to compensation and benefits, as well as many other HR practices. Compounding these challenges is the need to create a sustainable strategy that also promotes a positive employee relations environment that, post-pandemic, supports organizational wellbeing efforts to attract, retain and engage talent.

 

In the midst of decisions based on short-term survival, companies need to also address strategic organizational wellbeing issues. Whether the expected economic recovery graph looks like a “V”, a “U” or an “L”, the idea of retaining core talent to service current revenue is important, as is the result of the downsizing decisions on a company’s ability to restore service to future business. Having to compete for competent, engaged, high performing former talent on the open market during a recovery is difficult to think about. It likely can come at a higher cost as other firms also try and source talent for newly vacant roles. In short, a strategic and forward-thinking focus on compensation and staffing will go a long way toward better organizational wellbeing and future success.

 

COVID-19 is an evolving risk that Gallagher continues to monitor through the Centers for Disease Control and Prevention and the World Health Organization. Please visit our pandemic preparedness page for the latest information: ajg.com/pandemic.

 

 

1. MetLife & US Chamber of Commerce Special Report on Coronavirus and Small Business April 3, 2020.

https://www.uschamber.com/report/special-report-coronavirus-and-small-business

2. Arthur J. Gallagher & Co., 2016 Human Capital Insights & Strategies Report

 

As Area Vice President at Gallagher, Tatiana Rosa serves as a benefits consultant, providing client benefits strategy, health and welfare plan consultation, rate negotiation, RFP development, and high-level vendor management. Tatiana also collaborates with Gallagher’s specialty practice consultants to provide in-depth expertise on retirement, employee communications, human resource and compensation consulting, executive benefits, healthcare analytics, wellbeing and engagement, and voluntary benefits. Additionally, Tatiana has access to regional and national Gallagher thought leaders like the one featured in this article. Please contact Tatiana with any questions: Tatiana_Rosa@ajg.com.