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Article | Executive Pay Matters

How COVID-19 is accelerating human capital governance 

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Andrea Walsh , Ryan Resch , Justin Luce , Ruby Tewani and Jacob Custer | May 20, 2020

Organizations that take strategic action related to human capital will be able to mitigate risk and maximize profitability, demonstrating sustainability to key stakeholders.

In light of COVID-19, and its impact on human health and the economy, boards are increasingly considering employees as key stakeholders critical to the recovery. This shift brings human capital governance to the forefront as boards are being asked by investors and regulators to oversee human capital issues. Investors are assessing an organization’s effectiveness in mitigating COVID-19 human capital risks and are turning to those with well-established human capital governance frameworks with confidence that they are better positioned to create long-term value. Regulators such as the Securities and Exchange Commission have urged companies to disclose the actions they’ve taken to protect the value of their human capital in upcoming earnings releases.

As stakeholders continue to align on the importance of human capital, we developed a multi-part series to share our latest research and thinking on this rapidly emerging issue. Here, we describe the human capital considerations boards will likely confront in the areas of total rewards, inclusion and diversity (I&D), talent and culture. In later articles, we will dive deeper into these focus areas.

Total rewards (pay and wellbeing)

Pay fairness

It is important for boards to understand the effectiveness of the organization’s fair pay strategy. This is amplified by the speed at which organizations are changing their pay programs through pay reductions, incentive resets and pay premiums. Additionally, the crisis has reframed the way organizations segment their workforce to include essential and frontline workers. As the crisis continues, organizations that have implemented these changes may need to consider a long-term strategy to determine which changes will be temporary versus permanent. Those decisions could significantly impact whether an organization is truly delivering “fair pay” that is unbiased and aligned with the organization’s I&D strategies. Assessing the fairness of how pay practices and programs are designed and administered will be a top priority, as pay issues can be symptomatic of broader talent issues.

Wellbeing

Change and uncertainty have strained workforces in extraordinary ways, both emotionally and financially. Even before COVID-19, emotional and financial wellbeing were top concerns for businesses. Now, as companies adjust to functioning under pandemic conditions, workforce health, resilience and wellbeing are even more vital to sustaining operations.

With widespread stay-at-home orders, employers have adjusted, reduced or suspended operations and shifted workforces online, all of which have affected overall employee wellbeing. As companies begin to transition back to normal operations — which could take months for some and years for others — employee health and safety will continue to be critical. Boards will need to ensure that the right frameworks are in place and that management’s wellbeing strategies sufficiently address top employee concerns, minimizing company risk.

Inclusion and diversity

This is an important time for boards and executives to revisit their I&D strategies. Starting from the top, the composition of some boards might be less diverse which can create risks through increased susceptibility to the pandemic and the need for greater diversity of thought to navigate in an agile way through this uncertain time. In other parts of the organization, frontline worker furloughs have changed diversity statistics, particularly when those furloughs reduce diversity across the remaining workforce. This may indicate ineffective diversity strategies in talent management and recruitment programs.

Not only will a robust I&D strategy decrease operational risk, but it will enhance levels of innovation: In an inclusive environment, diverse thoughts and perspectives increase as more people from different backgrounds share their unique insights. Boards may need to work with management to consider how this pandemic has impacted the organization’s demographics to address gaps and to strengthen their I&D strategy and programming.

Talent

While the “future of work” was well under way before the pandemic, COVID-19 has certainly accelerated it. Boards now have an opportunity to recalibrate their organizations’ talent strategies (mid- and post-pandemic) to adapt to our evolving reality.

Future of work, fast-tracked

In the era of social distancing and increased remote working, companies are taking steps to realign talent strategies and reskill their organizations’ workforces. The Harvard Business Review — in collaboration with Willis Towers Watson’s Ravin Jesuthasan, Tracey Malcolm and Susan Cantrell — found that, in the pandemic environment, organizations should consider three future-of-work concepts:

  • The ability to work portably across the organization
  • Accelerated automation
  • Sharing employees in cross-industry talent exchanges

The COVID-19 pandemic necessitates actions to realign, repurpose and (re)skill talent. Companies that accelerate into the future of work by evolving human capital into a more efficient, agile and purposeful resource mitigate risk while sustainably increasing competitiveness and profitability both during and after the pandemic. Boards can take a long-term view to the future of work and ensure that their organizations have the right strategies and programs in place to proactively address the rapidly changing work environment.

Leadership

Boards are beginning to concern themselves with leadership issues beyond pay and diversity. For many, the physical workplace has become a health hazard, and companies have been quick to transform the workplace by making physical modifications or by taking the workplace entirely online. With this transformation, boards are heavily relying on leaders to espouse a culture that promotes physical and psychological safety, all while delivering business results.

Boards should expect management to revisit the leadership capabilities that best support long-term value creation with deliberate consideration of the business’s purpose, values and culture. Management should clearly articulate the new attributes of a good leader and put steps in place to develop the right leaders based on these requirements.

Succession planning

Most board-reviewed succession plans have focused on executive talent and a limited number of incumbents whose roles are critical to strategic or operational success. In the current environment, boards, with management support, might wish to reconsider their succession planning activities to include a broader definition of “critical talent,” one that might include future leaders lower in the organization as well as essential and frontline workers.

Expanding the definition of critical talent will help mitigate future disruptions caused by human capital. These efforts help future-proof organizations, as a robust talent pipeline across all organizational levels will be ready to react to changing business conditions.

Culture

In a recent article, Willis Towers Watson’s John Bremen, Amy Devylder Levanat and Don Delves described how high-performing companies are remaining committed to their employees, organizational purpose and values in these difficult times. Effective organizations are using purpose and cultural values to make fast decisions and create as much certainty as possible for employees, consumers and investors. Boards and organizations should work to create a culture where employees feel they know what to do to support the overall strategy.

Moving forward, organizations are likely to look for meaningful ways to measure culture and show progress. By working with their boards to define two to three important cultural attributes and measuring those attributes against market benchmarks, organizations can track cultural performance and develop strategies to maximize employee experience and, importantly, financial performance. Cultural dashboards will likely gain traction as boards actively work with CEOs and management teams to maximize sustainability efforts and align culture with stakeholder interests during both the crisis management and recovery phases of the pandemic.

Bringing it together

Organizations that recognized the importance of human capital before the COVID-19 crisis have been able to mitigate some of the pandemic’s effects and better position themselves for future success. As we learn more about the vulnerabilities of our economy and risk specific to each industry and business, we will undoubtedly develop new understandings of human capital and its importance to long-term value creation. Relative to peers, we anticipate superior financial performance in the coming quarters for those organizations that have prioritized human capital as part of a broader sustainability strategy. Organizations that undertake strategic action related to human capital will be in a better position to mitigate risk and support value creation more broadly over both the short and long terms, demonstrating sustainability to key stakeholders.

Authors

Head, Willis Towers Watson Chicago’s Talent Line of Business

Managing Director, Executive Compensation (Toronto)

Associate Director, Executive Compensation (Toronto)

Associate Director, Executive Compensation (New York)

Associate, Communication and Change Management (Chicago)

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