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COVID-19’s impact on human capital costs and premium pay

Compensation Strategy & Design|Talent
COVID 19 Coronavirus

By Darcy Clark | March 31, 2020

As a result of COVID-19, companies are developing human capital strategies to control costs while supporting business continuity.

As the COVID-19 crisis continues to grow, the business impact continues to have significant and likely prolonged implications across all industries. In response, companies are formulating short- and long-term human capital strategies to contain costs and ensure business continuity.

On March 23, 2020, Willis Towers Watson conducted its fourth survey, focusing on how companies are managing human capital costs amid the COVID-19 crisis. Additionally, the survey examined how organizations are managing pay premiums for employees who support business continuity and for those whose work may put them at higher risk of contracting COVID-19. We are pleased to present the results of this survey and share our insights and considerations on how companies can best manage compensation through the COVID-19 crisis.

Increasingly pessimistic business outlook

As part of an ongoing series of North American pulse surveys Willis Towers Watson is conducting on COVID-19, we observe a shift in attitudes toward the potential impact on business outlook. Over the last week, companies anticipating a moderate or significant negative impact on business results have increased by six and nine percentage points for the next six- and 12-month periods, respectively.

Employers are trying to protect talent

While not optimistic, companies are attempting to make workforce reductions a last resort, and have implemented, or are planning to implement, the following actions to contain human capital costs:

Other cost containment measures Implemented Planning action Implemented or planned action
Freezing or reducing hiring 42% 10% 52%
Eliminating or reducing seasonal workers 18% 10% 28%
Reducing the use of contract workers or other non-employee populations 16% 7% 23%

Human capital strategies companies are using to control costs

Workforce reductions

To date, only 9% of companies have made plans to reduce their workforce, with 7% reporting that reductions have occurred. However, in an effort to control costs, the most considered course of action from survey respondents — at 28% — is to lay off or reduce workforce.

For companies that have already made changes to their workforce, the reductions are, by and large, affecting hourly and salaried employees, with 90% reporting reductions for hourly employees, and 77% reporting reductions for their salaried workforce. So far, only 34% of these companies have made reductions at the executive level.

While layoffs and workforce reductions may become an unavoidable reality, organizations are making efforts to protect human capital during this period of uncertainty. In any exercise where the contraction of an organization’s workforce is contemplated, it is important to consider:

  1. 01

    Regulatory, legal, operational and financial implications

    • Legislative and regulatory requirements in jurisdictions where employees are affected
    • Contractual obligations, including employment or collective bargaining agreements
    • Financial and operational impacts to the business, including benefits vs. costs analysis and replacement planning to ensure there are people or systems in place in advance of a workforce reduction
  2. 02

    Human capital implications

    • Identification and management of critical and high-potential talent
    • Understanding and delivery on the needs of all employees — including those who are laid off and those who remain — through an integrated wellbeing framework
    • Availability of financial support from government and employer, where applicable
    • Management of accrued Paid Time Off (PTO) and availability of health benefits

As regrettable as workforce reductions are, delivering positive business outcomes through employee readiness and engagement can be achieved through planned communications and change management.

Salary reductions

Consistent with perceptions on workforce reductions, employers are, by and large, reluctant to reduce the cash compensation of employees. Only 5% of employers have or are planning to reduce salaries. Employers, however, are taking a prudent approach to cash compensation overall, with 15% of organizations reporting a reduction or delay in merit increases, and 11% implementing salary freezes — 20% of organizations are considering similar actions.

Salary reductions have been adopted or are being considered by 5% of organizations. Most encouraging is that two-thirds of organizations are neither planning, nor considering salary reductions at this time. When imposed, salary reductions have been focused largely on salaried and executive talent, with typical salary reductions reported as falling between 10% and 20% and the upper limit generally being applied to executives.

Should organizations contemplate any effort to contain cost through the modification of salaries or compensation policies, it is vital to recognize any legal, operational, reputational and engagement risks against the financial benefit before executing on a salary reduction program.

Developing a salary reduction program should be carefully considered and grounded in the following principles:

  • Justifiable and fiscally prudent: Action is needed, and the fiscal benefits exceed cost
  • Reflective of market practice: The magnitude of action is consistent with market norms
  • Consistent and equitable: Action is fair and impartially applied
  • Time-bound: At expiry, ensure provisions are in place to renegotiate compensation arrangement

As with any change, organizations should consider change management and communication strategies in parallel with the decision-making process.

Pay premium considerations remain industry-driven

The impact of COVID-19 has affected employees in distinct ways. As the incidence of working from home has increased exponentially, one-fifth of companies reported that they are either providing, or have plans to provide, employee support in the form of subsidies to help manage the costs associated with transitioning to a remote-based work environment.

For those working in operations deemed an essential service, physically going to work poses health risks to both employees and their families. Companies mitigating the risks of employee exposure to COVID-19 must balance business demand with social distancing expectations in an environment that is anything but business as usual.

From our sample, 8% of companies are currently providing pay premiums for employees who are required to physically be present at a job site. Eight percent of companies are providing additional compensation in the form of retention awards for employees deemed mission-critical or essential. Another 30% to 35% of companies are planning or considering similar actions.

A list of what broader workforce actions companies have already completed in response to COVID-19, and what they may be planning or considering going forward for the balance of fiscal 2020.
Pay premium considerations

Nearly one in six companies are providing subsidies to manage costs associated with working remotely

Our basic needs for food, prescription drugs, healthcare and telecommunication services remain as strong as ever, and, as expected, approximately 15% of companies in the wholesale/retail, healthcare and IT/telecommunications sectors have reported implementing pay premiums. Pay premium programs are more likely to be extended to hourly employees, with actual premiums currently ranging from 10% to 20% of base compensation.

Providing mission-critical or essential employees with additional, upfront compensation is more prevalent than implementing a retention program. While more likely to be extended to hourly employees, the value of additional compensation are consistent across salaried and hourly employee groups, with additional compensation ranging from 5% to 20% of base compensation and retention awards typically at 10% of pay.

When considering the adoption of either a pay premium or retention program, it is important to contemplate:

  • Risk: The risk profile—namely, criticality and risk to heath — of each job should be qualified and articulated
  • Eligibility: Determining eligibility should be based on concrete criteria, determined by the risk profile
  • Magnitude: Award value or pay premium should be commensurate to the risk and should be meaningful to the participant
  • Duration: Program parameters should be clearly articulated and time-bound, with flexibility to adapt
  • Cost: Cost implications need to be fully understood, both from a budgetary and cash flow perspective
  • Communications: A clearly defined communications strategy that describes program intent, mechanics and the full range of implications for stakeholders, participants and non-participants alike

Rapid changes require continuous study of practices

We expect many companies will continue to re-evaluate policies on an ongoing basis and we anticipate organizations to continue to adapt their compensation programs to the conditions as the COVID-19 crisis unfolds. We recommend that companies evaluate compensation strategies using market norms to help formulate solutions, though the business context and financial condition of the organization is paramount to decision making. We plan to continue to survey companies and monitor the emergence of any compensation trends as the situation progresses.

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