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Compensation planning during a pandemic

May 13, 2020

Business owners and executives are having to react and plan for so many unexpected issues since COVID-19 became a household term only two short months ago.  

For many, just keeping employees on the payroll has been a struggle, while others have experienced a significant increase in business. Both issues impact compensation planning for 2020 and beyond. Surveys are now coming out showing how employers are reacting: 

  • Cuts or increases to compensation budgets
  • Changes in work hours and/or rates of pay 
  • Indefinite layoffs for many, and conversely, big increases in hiring for some
  • Changes to incentive and sales compensation plans (both plus and minus) with an eye to retaining valuable talent and customer relationships

What is your organization planning to do? Your employees are wondering and watching, so the sooner you can address these issues, the better. Compensation is all about communication — especially in times of trial.  

Now that we are past the initial shock of the speed and depth of this unprecedented event, it’s time to take action.  

1. Assess the situation financially

What has been the impact on your business financially? Managing big increases in business can be as challenging as big declines. Understanding your forecasts and ability to pay people is critical. The PPP loans are operational imperatives but have a limited time frame. The COVID-19 situation will go far beyond the eight weeks this congressional relief will cover.  

2. Review your employees and the value they bring to your “new” organization

The shortage of good employees did not just disappear, though you may have more options now to hire even better people. Which employees have been resilient in this turbulent time? Who stood by your organization even when it would have been easier to jump on the $600 UC bandwagon? Who didn’t? Consider conducting a talent assessment exercise (such as a 9-box) to determine who your performers are and what potential they have as you define your “new normal.”  

3. Review your current base pay plans

Determine when your compensation structure system was last updated. What data was used to develop the underlying infrastructure of your base pay program? How was that data aged and to what point in time?  

It’s critical to understand the current state of your compensation system and related pay practices. As business returns to work, it is in an unprecedented position. Some employees will be returning to work at a pay rate that is less than what they were making on expanded unemployment compensation. Also, some employers have offered premium pay (e.g., hazard or appreciation pay differentials) to employees who are working on the front lines during the COVID-19 crisis. How long will you do this, and how will you communicate with employees if or when you pull back the premium pay? It’s important to note that it does not take long for employees to become dependent on the additional income.

There are many mixed messages in the market today about pay structures. One such message is that there is a strong likelihood you will not need to adjust pay ranges this year, maybe not even next year — and in fact you may need to reduce pay ranges temporarily. An opposing message is that in order to remain competitive and attract top talent, you may need to increase your wages and salaries. If an organization needs to reduce staff in order to continue to operate, then it may need to enhance the compensation of those who remain, as they will likely be required to take on additional roles and responsibilities.  

Salary survey data lags market. We will not see the full impact on reported wages until new survey data is published in 2021 or later. With limited availability of reliable data until then, you’ll need to rely on understanding your markets for people, and your business to make the best decisions for base compensation

Review comparison-ratio data on each of your employees (current rate of pay divided by target/market rates) once the revised base compensation structure is established. It may be necessary to increase starting pay rates for positions and employees in the first few job groups in your pay structures. Be mindful of compression issues — how increases to starting pay impact employees who have been doing the same job for two or three years. It’s interesting that the $600 a week in expanded unemployment equates to $15.00 an hour.  

4. Review your incentive compensation plans

Incentive compensation plans should be tied directly to the strategic plan. A good practice is to review all your incentive compensation plans on an annual basis to ensure continued alignment.  

Take an inventory of the plans you have in place and review them carefully to ensure understanding of all plan provisions. Stress test plans each month to evaluate the impact of the current business considerations on the business and on individual employees. Changing business environments require a critical eye to be cast to ensure the plan is still representative of the intent and aligned with business strategy. 

For those employees who have a significant part of their compensation paid in the form of annual incentive, employers may need to revisit and recalibrate the incentive compensation plan and lean more heavily to base compensation if retention is an issue. If it is anticipated that incentive will be significantly less than normal, the sooner you review, make necessary adjustments and communicate with employees, the better. Managing employee expectations during challenging times is critical. 

For those organizations that are experiencing a significant increase in business, incentive compensation is an excellent way to reward performance. It’s a best practice to establish maximum award payout levels as well as performance thresholds to mitigate potential windfalls that are due to unexpected economic forces that are not reliant upon the efforts of employees. 

In the event of unexpected windfalls that are not a result of employee effort, be prepared to make adjustments and communicate the reason for those adjustments to employees. With the uncertainty of the economy at this time, you should also revisit your payout schedule to ensure it continues to make sense in today’s environment. 

Incentive compensation can pose risk to an organization if not properly monitored. Tap into experts and trusted business advisors such as consultants and accountants to help guide on plan design and decision-making. 

5. Communicate, communicate, communicate

Compensation is emotional, and it impacts the daily lives of your employees. Communication is essential — it truly is all about communication.  

Even when you are saying nothing, your employees are watching and listening, and may assume the worst-possible scenario. If the news is not very good, they still want to know what their leaders are thinking and doing, as well as the reasoning involved when making compensation decisions. They may not agree, but they will appreciate honesty and transparency. Train your managers and supervisors on having adult conversations with each employee on what to expect, what you know right now, and what you don’t know yet.   

Adjusting your compensation plan

Wipfli consultants are available to assist you with your organizational performance needs, including compensation system design, management training, strategic planning and change management strategies.

We’re also here to help you navigate the uncertainty of the COVID-19 pandemic and its impact on your people, finances and business. We have developed a library of resources in our COVID-19 resource center to help you stabilize today and prepare for tomorrow. We’re here to help. Contact us today.

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