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Pandemic Forces Employers to Cut Pay

Companies are trimming salaries and wages, revisiting incentive plans

April 1, 2020 | Stephen Miller, CEBS

A group of hands holding dollar bills in front of a white background.

Employers, whether large, midsize or small, are cutting salary and hourly wages, at least temporarily, in response to their revenue losses during the coronavirus pandemic:

General Motors is furloughing 6,500 salaried employees, who will receive 75 percent of their normal pay. Senior executives will take a pay cut of 5 percent or 10 percent and defer 20 percent of their salaries, to be paid at a later date. Ford took similar steps, deferring salaries of its top 300 executives.

BuzzFeed, a news website, told its approximately 1,700 employees it would implement a graduated salary reduction for April and May. Those who make less than $65,000 will face a 5 percent pay cut, and those who make more than $125,000 will take a pay cut of more than 10 percent. Executives' salaries will be cut between 14 percent and 25 percent.

Creative Noggin, a marketing company in Boerne, Texas, will cut salaries companywide by 20 percent to 30 percent rather than lay off any of its 14 employees. But layoffs may occur, said the organization's CEO, if the crisis persists.

Half of small businesses (2 to 99 employees) can't afford to pay employees for a full month under quarantine, a survey of 512 small business owners reveals. The poll, on behalf of the Society for Human Resource Management, was conducted through March 16.

A survey by law firm Blank Rome, conducted through March 23, found that among the approximately 150 client respondents, just 49 percent of the employers that had temporarily shut down business operations were continuing to pay all employees full wages. That finding "reflects the tip of the iceberg as businesses begin their response" to the pandemic, the firm said.

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Managing Communicable Diseases in the Workplace

Reconsidering Raises

When WorldatWork, an association of total rewards professionals mostly at large, North American companies, asked if its members were moving forward with salary increases, it received these responses:

57 percent had already paid or planned to pay 2020 salary increases.

17 percent were canceling 2020 raises.

2 percent previously had no plans to adjust base pay.

The rest weren't sure what actions they would take.

The poll was taken March 23, and the results are based on responses from 238 employers.

The situation was slightly better at the biggest U.S. corporations. A survey conducted the week of March 23 by consultancy Willis Towers Watson found that among 812 large U.S. companies, mostly multinationals:

12 percent of respondents had reduced or delayed salary increases.

8 percent had frozen salaries for 2020.

22 percent were planning to take or considering these actions.

Relatively few of the biggest employers, however, had actually cut salaries.

"We expect companies will continue to evaluate their human capital programs and associated costs for managing people on a regular basis," said Adrienne Altman, managing director and North America rewards leader at Willis Towers Watson.

Payroll Aid from the CARES Act

It's too early to say how much the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law March 25, will help avoid pay cuts. Under the measure, businesses with fewer than 500 employees may be eligible for emergency grants and loans to help make payroll and cover other employer expenses. Some loans may qualify for forgiveness. The legislation will also provide $500 billion in loans for airlines and large corporations.

Eligible businesses may also defer the employers' share of the payroll taxes they would otherwise pay to the federal government until Dec. 31, 2020. The amount deferred must be paid in two installments: half by Dec. 31, 2021, and the remainder by Dec. 31, 2022. If a business's loan is forgiven under the terms of the CARES Act, the business will not be eligible to also defer payment of the employer's share of the payroll taxes.

"The CARES Act doesn't bring customers or revenue back, but it does give small-business owners tangible tools to ensure they can make payroll," said Amy Friedrich, president of U.S. insurance solutions with Principal Financial Group. While the law's emergency grants and loans can position small businesses for short-term stability, she said, "long term, there's a growing need for supplemental stimulus that can help small businesses rebuild as conditions normalize."

For more information on help meeting payroll, read the SHRM Government Affairs Team's CARES Act Paycheck Protection Program FAQs.

Backtracking Bonuses

For many companies, incentive awards for the prior year are reviewed and approved in February through April. WorldatWork asked organizations if they were moving forward with bonuses based on 2019 performance:

67 percent had already paid or planned to pay bonuses.

16 percent said bonus payments were on hold.

8 percent were canceling these payments.

6 percent previously had no plans to pay bonuses.

Despite a substantial revenue loss for many businesses, "the majority of organizations have already moved forward with or are planning to move forward with salary increases and bonus payouts for 2020, and only a handful of organizations have decided to cancel salary increases or bonus payouts," said Chris Moodhe, head of insights at WorldatWork. That could change, however, if work stoppages and stay-at-home orders by state governments continue past April.

[SHRM members-only policy: Merit Increase Policy and Procedure]

Can Employers Cut Pay During the Pandemic?

Yes. Unless employees are protected by an employment contract or collective bargaining agreement, an employer can reduce salaries and work schedules, subject to certain limits. Employers cannot reduce wages lower than the minimum wage in their state, and pay cuts must not discriminate against legally protected categories (i.e., cuts must not be based on an employee's race, gender, religion or age under federal law, or other factors under state and local statutes).

For hourly employees, employers may have to comply with local predictive-scheduling laws, which require employees to receive advance notice of work schedules and shift changes. However, there are typically exceptions to these statutes in cases of natural disasters and other crises.

Helping with Hazard Pay and Telework

A March 24 WorldatWork poll asked about hazard pay incentives, such as spot bonuses, for employees who are required to work onsite during the pandemic. The findings, drawn from responses from 267 organizations, revealed that 26 percent plan to provide hazard pay, either as a flat-dollar cash incentive; a cash incentive tied to hours and shifts worked; or bonuses based on a different formula, such as a percentage of salary.

Meanwhile, 65 percent of respondents with workers onsite said they were not planning on offering extra hazard pay but instead would provide perks such as free meals.

Similarly, the Willis Towers Watson survey of large U.S. companies found that many were offering compensation to employees who continued to work during the pandemic:

Pay premiums for critical employees. Eight percent were providing pay premiums (typically 10 percent above baseline compensation) for mission-critical employees and employees who must be present at work and have increased risk. About one-third of respondents either will or might do the same.

Subsidies for working remotely. Nearly 17 percent of employers are providing subsidies to manage the cost of working remotely, including for Wi-Fi, child care, borrowed office equipment, and heat and electricity. Almost a quarter (23 percent) either will do so or are considering doing so in the future.

Pertinent Perks

While pay is under pressure, employee perks are getting a fresh look. Law firm Seyfarth received more than 550 responses to a recent poll on the topic, mostly from large companies with 500 or more employees. About 14 percent of respondents were providing additional benefits, which included creative options such as leave donation, tolerance of negative paid-time-off balances, and commuter or parking benefits to keep employees off public transportation.

Revisiting Incentive-Plan Metrics

On March 27, WorldatWork asked total rewards professionals if they were adjusting performance metrics in their annual incentive compensation plans in response to the pandemic and economic uncertainty. The results, based on 90 responses, showed that:

43 percent were considering but had not yet decided on changing their incentive plans.

17 percent decided not to adjust their plans now but intend to revisit the matter.

15 percent were still setting 2020 performance metrics.

14 percent considered changes and decided not to make adjustments.

5 percent lowered performance hurdles previously set.

5 percent were taking other actions.

HR consultancy Mercer is advising employers to consider the following actions for long-term incentive plans:

Postpone setting performance goals for one to two months, when the likely impact on performance results might be clearer.

Build in more discretion to adjust performance targets or award payouts.

Provide less-stringent plan leverage, such as by setting wider performance ranges around target goals so that, for instance, plus or minus 5 percent of target performance yields target payout, "which may mitigate goal-setting challenges in volatile situations where predictions are difficult," Mercer suggested.

For long-term incentive plans in particular, Mercer's consultants suggested these steps:

Set goals each year rather than at the start of a multiyear award, since setting annual goals is easier than setting long-term goals during times of uncertainty.

Use relative metrics, calibrated as a percentile rank against industry peers, rather than attempt to forecast internal financial metrics, since the financial impact is likely to be similar for companies in the same industry.

"Model potential scenarios as more information becomes available," Mercer advised. "In coming months, most companies will be able to estimate the financial impact on their operations."

Also, consider how to communicate changes to incentive programs, and be prepared to answer questions from incentive plan participants.

Compensation attorneys at Troutman Sanders noted, "Well-drafted incentive plans contemplate potential adjustments to the measurement of performance goals for unusual or unforeseen events."

Related SHRM Report:

COVID-19 Research: Implications for the American Workforce, SHRM Research, April 2020

Related SHRM Articles:

Employers Adjust Pay and Incentives Amid Economic Turmoil, SHRM Online, April 2020

Use Caution When Cutting Exempt Employees' Salary, SHRM Online, April 2020

Weathering Coronavirus: Furloughs, Layoffs or Pay Cuts?, SHRM Online, March 2020

Hourly Workers Lose Pay Due to Coronavirus, SHRM Online, March 2020