Many businesses are feeling the strain or predicting the strain on future cash flow and revenues brought about by the COVID-19 pandemic.  This in turn is placing pressure on rewards and performance management even if furlough, redundancy and reduced hours are already being exercised.  However, HRO advocates that companies take a balanced approach and avoid making short-term rash decisions which could lead to future negative ramifications such as retention and engagement challenges.  This article provides some alternative options businesses should consider regarding rewards before taking the decision to implement pay cuts or rigid individual performance management. 

With recruitment freezes now in place across many organisations, employees may seem unlikely to leave during a crisis. However, as much as economically possible, I would suggest riding out the storm and ignore the urge to cut bonuses, shed benefits, freeze salary increments or shed talent unless macroeconomics make this an absolute imperative. The risk otherwise is that when demand picks up again – and it will – your best performers will be the first ones to go.

That said, even with government subsidies, furlough options, loans and payroll tax credits, it is inevitable that some employers may need to take additional steps to control costs, such as compensation reductions or deferrals. Here are some considerations:

Temporary Freeze on Pay Increases & Pay Cuts

In lieu of reducing compensation, employers may consider seeking a temporary freeze on salary or merit increases.  Where employees have a contractual right to a salary increase, however, this right generally cannot be modified without employee consent.

Generally speaking, detrimental changes to key terms and conditions of employment, including changes in compensation, are not permitted without written employee consent (and, if there are collective groups, without union or works council consultations).  Being transparent about the company’s current financial position might aid in obtaining employee consent in some instances.  Ultimately, however, such employees can reject a detrimental change in compensation and, depending on the circumstances, could potentially bring a claim for breach of contract and/or constructive dismissal if their employer implements this change without their consent.

Further, businesses should be aware of the potential for resentment between employees where some remain at work (on either full or reduced pay), some are on furlough leave receiving at least 80 per cent of pay (up to £2.5K) for doing nothing, and some are off sick (ill or self-isolating) and receiving only statutory sick pay (around £95 per week).

Unpaid and Paid Leave

Given the challenges of reducing or freezing employee compensation, enforcing employees to take paid leave, and seeking volunteers for unpaid leave potentially might be a more successful strategy in many businesses in light of reduced business demand. Although requiring staff to take holiday would not save money in the short term, it would ensure a full workforce once business picks up and enable everyone to focus on rebuilding the business.

Where an employer has a restrictive unpaid leave policy (e.g. with conditions as to length of service or the number of unpaid leaves available), it may decide to communicate a waiver of these to encourage take-up of leave.

Part-time working; Compensation Deferrals and Increased Stock Options

Another suggestion is to consider exchanging pay reductions for reduced contractual hours, increased holiday allowance, a compensation deferral, or offering of employee stock options. Online food delivery major Zomato, hospitality chain Oyo Hotels & Homes, grocery delivery company Grofers and mobility venture Bounce, are among those bulking up employee stock option pools in exchange for immediate interim pay reductions, helping with a commitment to ‘pay forward’ hard work and loyalty that get them through the crisis.

In HRO’s experience, employees may be more willing to accept reductions or other changes to compensation where the employer agrees to gross them up for the lost amount at a future date.  This type of salary deferral, generally speaking, may be permissible as long as the employee consents to the change in writing.  When taking this approach, it would be prudent to build in a review mechanism to avoid a subsequent cash flow crisis if business does not improve as swiftly as anticipated.  While deferring salary would not reduce personnel costs, such action might provide some immediate cash flow relief and therefore may be an attractive option to certain employers seeking to retain their top performers.

Finally, regarding compensation levels, be flexible in rewarding those who rely on performance such as sales commissions. Supporting staff now will win hearts and minds for a long time and if you are a B2C or B2B business engagement will be crucial to your bounce back.

2020: consider it a two-cycle performance year

Focus on different objectives in each half. It’s important to assess what can realistically be achieved during the first six months of the year. Irrational targets can make employees feel like you’re setting them up to fail. If they are discouraged and deflated, you’ll risk losing them.

In the first review period, HRO advocates that leaders should set corporate targets, rather than individual goals. In the second half, leaders can implement a more traditional scorecard/personal performance approach. Performance reviews will need to take place at least twice this year, to reflect the likelihood of vastly different business environments and ensure your employees stay engaged. Beyond this the level of 1:1 manager coaching check-ins will need to be increased.

Weigh up internal performance vs external impact

Differentiate between a lack of performance caused by the virus’s impact on the market and specific issues with individuals. The pressure is on to differentiate between your top and average performers, to avoid the risk of losing your best people.

Employee wellbeing

This should be at the top of your priorities. People are looking for employers they can trust, and there is a huge reputational risk for those who fail to act with compassion during periods of crisis like this.

Start planning now for long-term programs

To overcome the recent COVID-19 crisis quickly and respond to the ‘new normal’ of lower revenues in the mid-term, most businesses will need to deploy structural performance improvement programs. For these programs, leaders will first have to develop a clear target picture for the company in three to five years. This should include the future core business model and operating model, but also define profitability targets, resourcing levels and profit and loss goals.

Treat people like adults

Many organisations will come out of the current crisis unscathed and perhaps even stronger – these will be the ones that avoid drastic, near-term actions and whom communicate openly with their teams and build trust. If there’s ever a time to be transparent with your employees about rewards and performances, this is it.

 

 

 

Hannah Powell