As businesses move forward operating in new ways in the midst of this global pandemic, many are rethinking how their employees are compensated. In the pre-COVID world, compensation fell into two main categories: direct compensation (salary, hourly, commission and bonuses) and indirect compensation (benefits). In the new world, businesses need to rethink their compensation packages.
Rethinking Compensation
At the height of the pandemic, businesses had to deal with the immediacy of the situation. Many tried to retain staff and keep things as they were before the pandemic. As things progressed and businesses began to recognize the long-term effects on their bottom line, they had to weigh the trade-offs between salary cuts, furloughs and layoffs against the reality of reduced cash flow and increased technology costs. The high unemployment rate illustrates the sad result for many employers, particularly those in industries like travel and entertainment, restaurants and retail.
Through whatever combination of luck and circumstance, many other businesses found an opportunity in these times of adversity. Among other advantages, some of these businesses had the financial wherewithal to hire top talent and pay top compensation from the large talent pool that was suddenly available to them. That pool is even larger now because of remote work, which likely will remain a factor even after the pandemic eases, making it possible to hire someone who does not live near the company’s physical location.
Hiring and Retaining Talent
Hiring top talent is more complicated for companies that must balance current cash flow and cash flow projections before they can design a competitive COVID-19 compensation package for their existing employees and for new hires. How, for example, should salespeople be compensated who are used to a compensation structure that provides a significant portion of their income through commission? What trade-offs do you have to make to keep hire the talent that will allow your business to succeed?
Consider the following options for a new compensation package:
Pay cuts: Companies across the board are asking company leaders and employees to take a permanent or temporary pay cut, including bonuses. According to a Gallagher study of 151 U.S.-listed public companies, the median compensation reduction to at least the CEO’s salary was 50 percent. If compensation was cut for other executives, those cuts usually were lower.
In addition, 16 percent of companies reported a reduction for salaried employees, ranging from 15 percent to 50 percent. The median reduction was 20 percent. In many instances, the cut was greater for higher-salaried employees.
In some instances, these cuts were characterized as deferrals, meaning the deferred amounts would be repaid in the future.
Commission: Retaining top salespeople can be challenging for businesses that are struggling to make payroll and keep operations going. Companies in these situations are responding to the economic impact COVID-19 has had on its market segment. They are not things the company or the salesperson has direct control over. Keep in mind that replacing high performers is expensive, so the company’s goal should be restructuring the person’s compensation package.
Companies can restructure pay for these employees by including more compensation in salary and less in commission or by deferring bonuses, compensation and salary.
The financial and economic impact of COVID-19 continues to evolve. The best option for a business planning compensation may be to plan for the short term and keep an eye on the longer term. Consult with experts before making any final decisions to ensure that you’re in compliance with laws, collective bargaining agreements and other requirements. The last thing any company needs right now is a near-term fix that causes long-term problems.
Questions? Contact an MCB Advisor at 703-218-3600 or click here. To review our business planning articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.
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