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Article | Executive Pay Memo North America

Making the smartest choices to recover post COVID-19

Executive Compensation|Total Rewards|Future of Work
COVID 19 Coronavirus

By Benjamin Viney | May 12, 2020

Insights into what we’ve learnt from past crises; how to make dramatic cost savings in reward and minimise impact.

Whilst there are certainly some significant and obvious differences between COVID-19 and ‘9/11’ there are also some important parallels. As a result of both situations the world has changed beyond recognition and some things may never be the same again: our perspective on life in general, our attitude towards health and security, how we work, how we shop, how much disposable money we have, and so on.

This is mingled with a sense of hope and optimism that the future will be brighter than the past and that we can learn key lessons along the way.

Short-term pressure to cut costs

One of the most obvious parallels between the aftermath of 9/11 and COVID-19 is the financial impact on many businesses across the world. In 2001 there was a profound impact on the airline industry in particular, with unprecedented declines in passenger traffic, especially in the US, and record financial losses. The pressure for airlines to cut costs post 9/11 was intense, and it is likely to be already greater today for airlines than it was then. Only this time it is not just airlines that are under financial pressure but businesses of all shapes and sizes in most sectors.

Our recent COVID-19 pulse survey indicates that most organisations are still at an early stage in their approach to financial management when it comes to human capital costs, having so far focused more on controlling, rather than cutting, costs. For example, figure 1 shows that 27% of organisations have reduced or delayed merit increases, or are planning to do so, whereas only 12% have actually taken (or are planning) action to reduce salaries.

We know that major cost cutting will be necessary in many businesses, whether airlines or in general industry. The key question is: how can organisations plan for, implement, and communicate human capital related cost cutting in a way that is measured, effective and which takes employees’ best interests into account to the fullest extent possible?

How organisations can use Total Rewards Optimisation to identify optimal cost savings

What organisations need is a comprehensive and statistically powerful way to assess employee reward preferences relative to cost to help them make the best possible decisions on allocating reward investments. There is a tool available that can do exactly this, referred to as Total Rewards Optimisation (TRO). TRO uses a sophisticated survey technique called ‘conjoint analysis’, which asks employees to make choices among different reward elements in a structured, statistically-derived pattern of questions. This survey methodology has been successfully used for decades by market research professionals to understand customer preferences and spending patterns. The true power of this approach, however, comes from combining the employee preference data from the conjoint process with data on the actual cost of the various programmes.

At its simplest level, TRO means ensuring that whatever funds are available are spent for maximum value to the organisation and to employees. And it is not limited to pay. Benefits come into play as well – as can virtually any element of the employee experience (e.g. talent related programmes, training, recognition etc) – and, in some respects, involve more complex decisions. For instance, benefits continue to represent a very significant cost for most organisations and they are an increasingly important element of security for employees. The key issue for employers in optimising benefits is to determine the right balance of cost and risk sharing with employees.

For organisations that are faced with the need to cut costs, TRO provides guidance on what to cut in a meaningful way that has the least negative impact on employees.

Watch a short video explaining how TRO works.

Total Rewards Optimisation video

Finding your total rewards sweet spot

Case Study – Major Airline

After 9/11 we worked with a major airline with 60,000 employees which was under intense pressure to reduce employee costs amid changing workforce demographics, all whilst under the threat of unionisation activity. The organisation embarked on a strategic review of core benefits programmes, including health, welfare and retirement programmes in terms of their structure, cost and competitiveness, as well as reviewing other elements of the wider employee experience.

The organisation felt strongly that any changes to benefits programmes should be aligned with employee preferences and so the approach included an integrated change management, communications and engagement strategy that included interviews with key senior executives, focus groups with employees and managers and a TRO survey. A project website was launched for all employees to access to stay informed of the project details and programme changes that were being made.

The results were impressive. Not only did programme changes identify cost savings of $500 million over five years, but employees actually thanked management for not making more drastic changes to their health care benefits, and the company avoided unionisation activity. The change management, communications and engagement strategy was critical to the success of the project. Survey and focus group results were posted on the company intranet site with clear linkage to changes that were made to employee benefits. TRO was subsequently rolled out in a number of international markets.

It is not hard to see the enormous value such an approach can generate, ensuring that significant cost savings can be achieved in a manner that involves employees and aligns their interests with those of the company to the greatest extent possible, whilst also helping to reset key rewards and benefits and ensure they are sustainable for years to come.

Author

Senior Director, Talent and Rewards

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