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5 employee compensation items that should be on your review list

Dec 03, 2020

Earlier this year, we addressed the consequences of PPP vs. unemployment and looked at employee compensation options during COVID-19. As 2020 draws to a close and we prepare for 2021, we wanted to share five continuing compensation issues driven by the pandemic:

1. FLSA compliance

Revisit the exemption status under the Fair Labor Standard Act for all positions. For those financial institutions that have pivoted to a remote work environment, roles and responsibilities may have shifted, which might impact exemption status. You may find that a previously exempt position should now be classified as non-exempt and entitled to overtime compensation.

The U.S. Department of Labor has fact sheets that you can use to evaluate the exemption status of your positions. The most common exemption tests are for: executive (Fact Sheet 17B), administrative (Fact Sheet 17C), professional (Fact Sheet 17D) and computer-related (Fact Sheet 17E).

2. Expense reimbursement (Section 139)

The pandemic has been recognized as a disaster. Explore Section 139 of the IRS tax code to assess how you might be able to provide disaster relief to your employees and what tax advantages may be available. You may be able to support your employees with payments to cover healthcare costs and reimbursement for home office furniture, computer equipment, peripherals and related.

3. Continuity of pay and paid time off balance considerations

Assess your paid time off balances. When the COVID-19 pandemic first began, many financial institutions responded with a great deal of generosity and implemented policies like these:

  • Providing employees with additional sick leave
  • Keeping paychecks whole even when working a reduced schedule
  • Not requiring employees to use all of their paid time-off balances

Shortly thereafter, FFCRA was introduced, requiring the payment of emergency paid sick leave. Under this new legislation, any additional sick leave employers had already provided was not considered. Employers were required to cover an additional two weeks of pay.

Employees also didn’t use paid time off benefits as they had in prior years. Shelter-in-place restrictions enacted by many states and the demand created by PPP and low mortgage rates precluded an employee’s ability to take time away. The result is an unusually high paid time off balance for many employees.

If you haven’t already done so, now is the time to evaluate and communicate how the institution will proceed. If you have a “use or lose it” policy, will you be enforcing it, will you be paying it out, or will you allow carryover into 2021?

When making your decision, consider which path will best support your employment philosophy. This decision is particularly important during this unprecedented year when there is high stress, anxiety and feelings of vulnerability. Like compensation, paid time off is an emotional benefit, and employees will be extremely sensitive to any real or perceived losses. Be mindful of your communication and positioning statements and how that decision might impact you in the future.

4. Compression

Compression occurs when there is little difference in pay between more experienced/skilled employees and lesser experienced/skilled employees. For example, you may have a five-year employee making $14 per hour, and you need to pay new employees (without the same skill level) $15 per hour in order to attract them.

Many of the compression issues started a few years back when financial institutions found themselves competing against larger regional and national banks and other industries that were committing to pay $15 per hour. This caused a tremendous amount of discussion with executive leaders on the strategy for increasing base wages and/or communicating with employees why the financial institution should be their employer of choice (e.g., professional work environment, clean, competitive benefits).

COVID-19 introduced additional wage challenges when employees could collect not only state unemployment but also federal unemployment. Many employees were able to earn more on unemployment than when they were employed. Financial institutions were no longer only in a talent war with other employers, but also with the federal government. As a result, wage increases were occurring to entice people back to work.

When wage disparities between new and experienced employees exist, you have a decision point. Will you address it? And if so, how? Before you can address compression, you must first determine if it exists and to what extent. Analyze your current pay practices by position, length of service, performance and related factors. This will help you determine the financial impact of addressing compression.

Employees will invariably discuss compensation. Understand your pay practices and where disparity may exist so that you are effectively and appropriately positioned to respond to employee questions.

5. Merit increases

It was anticipated at the start of 2020, that salary structure and merit increase trends were going to be a bit higher than past years. However, as the year continued to unfold, those higher increases did not materialize. Rather, projected merit increase trends will hold steady at 3.0% for 2021. This is consistent with 2019 and 2020.

Given the significant increase in business due to PPP and mortgage rates, many financial institutions have had a very good year and are discussing the best approach to share in that success — particularly given the tremendous efforts of employees in 2020. Strategies include increased annual cash incentive/bonus, payout of paid time-off balances, larger-than-normal profit-sharing contribution to the 401(k) and/or some combination thereof. However, that success and how you reward it may need to be tempered by the uncertainty of 2021.

Compensation is an emotional topic for employees. Give thoughtful consideration to your compensation decisions today, as they may impact your ability to retain employees once business returns to “normal.” Following the Great Recession, many employees who felt they were treated unfairly, through reduction in benefits for example, elected to seek new employment. I called that the great “job shuffle,” as there was a significant amount of movement. The competitive landscape for talent does not look to be shifting in the near future. Recognize that actions taken today may impact your ability to retain employees in the future.

How Wipfli can help

COVID-19 has created a new set of challenges for employers. Financial institutions have to carefully manage all aspects of the employee experience. Wipfli specialists in talent management are here to help you navigate this dynamic situation. Contact us today.

 

Related content:

Compensation planning for financial institutions in 2021

4 ways behavioral data helps you improve employee engagement

Change is the constant, but culture is the key

Author(s)

Julia A. Johnson
Director, Organizational Performance
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