Research

HR must be ready for Brexit changes

September 5, 2016
| United Kingdom

Two-thirds of employers believe their business in the UK will be significantly affected by Britain’s vote to leave the European Union (EU), according to a Willis Towers Watson survey. While 50% see Brexit  as a threat, more than treble the 15% who see it as an opportunity, the majority are unsure how to act amid heightened uncertainty.

Willis Towers Watson’s survey – the first in a series aimed at helping clients understand the implications of Brexit for HR and reward – found that while employers have yet to make a comprehensive assessment of Brexit’s effects, concern about its impact on workforce planning and talent retention is already high.

The survey’s results, along with actions that managers can take in the short and longer term, are explored in a Brexit Compass Webinar: Creating HR Readiness and Employee Resilience. You can find the slides and half-hour audio file on Willis Towers Watson’s EU Referendum microsite.

Brexit two months on

The survey aims to help clients understand employers’ current thinking around the implications of Brexit as  well as what they are planning to do to prepare their organisation and employees for the changes, according to Martin Emmerich, Director of Willis Towers Watson’s Talent and Rewards practice (Western Europe).

There were 196 responses from senior HR and reward executives, representing 140 organisations around Europe and 15 in the US.

The portion of organisations that state that their UK business will be significantly affected by Brexit is 66%, and 63% say their workforce will also be affected. The equivalent figures for elsewhere in Europe are 55% and 39% respectively. Manufacturing and professional services firms foresee a particularly strong impact on their UK business.

Half of organisations see Brexit as a threat, while only 15% see it as an opportunity. The remaining 35% see it as more or less neutral, which may reflect uncertainty about what is likely to happen. A large portion (56%), of businesses will wait and see before deciding what to do, while only 26% so far are planning to take action.

Mr Emmerich said: “There’s kind of a tension here because on the one hand organisations clearly see that it’s going to have quite an impact and it’s going to be a threat, but only a few are acting at the moment. So it will be an objective to think about what the immediate next steps can be and get into a more action-oriented mode.”

Almost four-fifths of companies have begun a broad consideration of the implications of Brexit and more  than half have conducted an assessment of what it means for key areas, but so far only 24% have carried out a detailed impact assessment and only a third have done any scenario planning. The most scenario planning was seen in financial services (carried out by 45% of companies) and the least in technology, media and telecoms (20%).

Mr Emmerich said: “I think this is clearly an objective – most of the organisations should think about moving into a more detailed analysis of the implications.”

HR priorities

Richard Veal, Director of Willis Towers Watson’s Talent and Rewards practice (UK), outlined the HR issues that survey respondents saw as priorities. The biggest concern was the impact on the workforce and talent, cited by 76% in the UK and 77% in the rest of Europe.

“This seems the obvious area of attention and it’s the area of immediate concern – understanding the number of workers affected and how it impacts the business,” Mr Veal said. This heading includes topics such as mobility of staff between the UK and EU, expatriate arrangements, and the attraction and retention of critical skills.

Total rewards was also important, cited by 49% in the UK and 44% in the rest of Europe. Organisational change was cited by 51% in the UK but only 38% elsewhere in Europe, while engagement and communication was cited by 49% in the UK and just 23% in continental Europe.

Organisational change

Half of companies are thinking of reassessing their current operating model and organisational structure, while just under half are looking at the HR implications of business disruptions or delays to corporate transactions. However, Mr Veal said: “The data implies that half of our respondents are not assessing or not even in assessment mode yet in terms of change.”

There is a slightly stronger trend for organisations in financial services and professional and business services, where 59% and 67% respectively are assessing implications for organisational change. “That would suggest that organisations in these sectors are perhaps slightly more advanced in their thinking,” Mr Veal added.

Less than half of businesses are creating a specific HR Brexit team, suggesting that HR may be lagging behind in terms of business readiness.

Under each heading, Willis Towers Watson suggests a series of immediate and long-term actions that HR and reward managers should consider, bearing in mind that the earliest article 50 is likely to be invoked is early 2017, triggering a two-year exit process from the EU.

On organisational change, the immediate proposals are to:

  1. Stay close to the business to understand the current and potential impact on the business operations, model and structure.
  2. Be involved in business impact assessments and plans.
  3. Collate HR data, run HR impact assessments and scenarios to complement business analyses.
  4. ‘Health check’ the business’s ability to lead and manage through Brexit changes.
  5. Implement short-term mitigating actions such as assessment and development of managers.

Longer term, possible actions include working with the business as occur, developing complementary HR plans, addressing any HR blockages to change and updating HR’s strategic plans and scorecard.

If a company’s leaders are not up to scratch, its structure is overly complicated, its management capabilities are suspect and its performance culture is creaking, it will  find the fault lines are exposed and amplified by the challenges of Brexit. By the same token, HR can help with a planned response to Brexit by encouraging skilled managers to navigate uncertainty and keep people focused and motivated.

Mr Veal said: “Brexit might provide a potential accelerator to improve the general organisational capabilities for change across the business. Longer term it’s obvious that HR needs to have more of a say in terms of business strategy because the impact of Brexit is largely about workforce and talent planning.”

Workforce and talent

The majority of respondents are auditing the number of employees affected by Brexit in the UK and the rest of the EU, and more than half are assessing the possible effects of an end to the free movement of labour. This will help to create a better understanding of talent exposure, which in turn can inform a broader consideration of Brexit’s impact on an organisation.

In addition, there is an increased focus on the attraction and retention of staff with critical skills, most pronounced in the UK where it is an issue cited as important by 50%, as opposed to 24% in the rest of Europe.

So far, most companies do not appear to be looking to impose tighter cost controls – only 23% are considering a hiring freeze. This is more prevalent among small and medium-sized employers and in financial and professional services.

Immediate actions that could be considered in this area are to:

  1. Identify affected staff and business-critical roles.
  2. Confirm which roles are location-dependent.
  3. Assess workforce implications across a range of Brexit and business scenarios.
  4. Be ready to respond to any financial pressures with easy access to hiring, staffing and cost data.
  5. Audit talent pipeline and succession planning in readiness for change.

Longer term, the potential actions include detailed workforce planning, development and delivery of critical skills and workforce plans, and consideration of alternative work models to provide greater flexibility on location.

Mr Veal said: “It’s worth noting that succession planning is a long-term action in any context. We are suggesting that could be a lasting improvement in an organisation’s ability to become more agile in navigating change and may be a catalyst to getting better succession planning in place.”

Total rewards

The main impact so far is on pensions, with 59% of companies assessing the impact of financial volatility on pension schemes. Although hedging strategies may have offered some protection, there are fears that movements in investment markets and further declines in discount rates will worsen the funding situation, and increase ongoing costs. Financing of company pension schemes has become a more important issue to 27% of respondents as a result of Brexit.

There is less of an immediate effect on pay, with only 23% of businesses thinking about increasing or freezing salaries or reviewing salary budgets. “I would say that is due to the level of uncertainty,” Mr Emmerich said. “It will be interesting to see if the reaction to this might change as we go along.”

Immediate actions that can be taken in total rewards are to:

  1. Consider retention measures for critical, EU and expatriate talent.
  2. Assess the impact on outstanding annual and long-term incentive awards and future awards.
  3. Model the impact on UK pensions under a broad range of Brexit-related economic scenarios.
  4. Model salary planning under a defined range of economic scenarios.
  5. Analyse total rewards costs versus engagement impact in readiness to manage costs with minimal impact.

Longer-term possibilities include: focusing more reward spend on critical talent; preparing for renewed focus on the UK executive and equal pay agenda; further developing pension strategy, with a focus on cost and risk mitigation in relation to funding and investment arrangements; revising regional benchmarks; and establish a long-term employee value proposition (EVP).

Engagement and communication

Just under half of companies have made any specific formal communications to their staff in response to Brexit. Fewer still have communicated to particular groups such as EU nationals working in the UK, UK nationals working in the EU, or those with critical skills. Only 15% have communicated with members of pension schemes. “Given concerns about pension funding, the lack of communication to members of pension schemes is looking like an opportunity missed, ”Mr Veal said.

Only two in five have comprehensive employee communication plans in place. Mr Veal said: “We would suggest that now is the time to start thinking about more active planning.”
Most of the messages given out by employers are efforts to provide reassurance and state that it is business as usual after the Brexit vote.

A total of 65% of respondents – 70% in the UK – report that their EU employees located in the UK are worried about their place in the organisation, with concern being highest in professional services. More than half say UK employees located in another EU market are worried about their place in the organisation, while 44% overall are worried about job security and 42% are worried about their pension savings and personal finances.

 “Clearly there is potential to say more or do more in terms of engagement and communication to calm people’s nerves,” Mr Veal said.

Immediate actions to consider in this area are to:

  1. Listen actively to the views of EU, expatriate and critical skills groups to establish actual and specific perceptions and concerns.
  2. Communicate to dispel myths, separate the known from the unknown and restate current business objectives.
  3. Communicate with UK pension members on key pension considerations in light of Brexit.
  4. Establish a Brexit communication and change plan.

Longer-term steps include: adapting an employee listening strategy to navigate the next two years, outlining any potential implications as they become known, providing further pension-specific communications as required, and integrating Brexit communications with overall business communication plans.

Is HR ready for change?

Perhaps unsurprisingly, the biggest barrier preventing HR departments from responding effectively to the changes is a lack of clarity on the future direction of Brexit negotiations, cited by 63% of respondents. In addition, however, more than a quarter feel they lack the data, expertise, time or budget. Almost half say their technology and HR strategy are not fit for purpose.

Mr Veal said: “HR teams need to marshal their resources very effectively with the increased pressures they are likely to face. Organisations that will live through Brexit and emerge stronger for it are likely to be the ones that were better prepared.”

He concluded: “The data shows that employers are acknowledging the change implications of Brexit and we see that some organisations are now taking change readiness actions. There is still, however, a significant proportion of employers that are in a more passive mode. We would suggest that even with uncertainty on exactly how and when Brexit will happen, there are actions and preparations that you should be putting into place now.”