We are all dealing with the impact of COVID. For some, business is soaring, others it is a struggle to survive. Whichever is impacting your business, it will impact compensation planning for 2020 and beyond. As I said a few months ago, your budget and plans as of March should be in the shredder and along with them your compensation structure.
From what I hear, companies are following the courses of action:
- Cutting or increasing compensation budgets;
- Changing work hours and/or rates of pay;
- Indefinitely laying off, or, significant increases in hiring; and
- Changing incentive and sales compensation plans (both plus and minus) to retain valuable talent and customer relationships.
So what is your company doing or planning to do? All your employees are wondering and watching, so the sooner you address these issues, the better. Communication is essential, and compensation is all about communication during times like these.
Your Financial Position
How has your business been financially impacted? Managing significant increases in business levels can be as challenging as big declines. Therefore, you need to have realistic forecasts, and an understanding of your ability to pay your employees is critical. Many have taken PPP loans; however, they were a bridge gap, and it looks like the canyon is much more extensive than the bridge. We will be living with the trials and tribulations of COVID for another 12 months or more, so Congress’ eight weeks cover is insufficient.
Review employees and their value to the “new” organization
It is time to review all your employees. Do they fit with the “new” organization and its direction? Many great people have been laid off, sidelined, or are unhappy in their current positions. Thus there is an opportunity to hire better people that would have been unavailable before or people you need to execute the pivot you are experiencing.
Also, look at your employees and determine:
- Who rose to the occasion, and who didn’t?
- Who has pulled their weight and more during these hard times?
- Who has lead and supported others when they were struggling?
- Who didn’t?
Now is the perfect time for a talent assessment exercise, e.g., a 9 Box matrix to determine who is performing and their potential in your “new normal.”
Review base compensation plans
How long is it since your compensation structure system was last updated? What data did you use to develop your base pay program? How was that data aged, and to what point in time?
Currently, it’s critical to understand your compensation structure and related pay practices. As businesses adjust to the “new normal,” compensation and pay practices are in a unique position. Some employees will receive a pay rate that is less than what they were making with unemployment compensation, especially with the federal support. Some employees will have received premium pay (e.g., hazard or appreciation pay differentials) because they were “critical workers.” How long will can you support this? How do you communicate with employees if, or when, you stop the premium pay? Since the COVID crisis continues unabated, how do you justify to your employees that they were critical a month ago, but not now, or not in four months when we expect the winter to make the crisis worse? Managing your communication is vital as you may alienate good employees who feel betrayed. Furthermore, realize that employees will have become dependent on the additional income.
The market is providing so many mixed messages about pay structure, that it is hard to know what one should do. Some of the views are:
- No need to adjust pay ranges this year, maybe not even next year.
- Reduce pay ranges temporarily, at least, which is becoming common, especially if it means keeping staff.
- To remain competitive and attract the best talent, you may need to increase your pay ranges.
- Those organizations that are reducing staff may need to increase the compensation of remaining employees who will have to take on additional roles and responsibilities.
- Those organizations pivoting to new markets, products or services and need new people, what industry norms do you use to determine pay structure?
Salary survey data lags the market and survey data will not be available until 2021 or later. Thus, without reliable data, you need to understand your competitive market for the people you need and determine what you can offer in that situation.
You need to review your employees’ compensation in terms of:
- New or fewer responsibilities;
- Value to the organization as a result of any changes due to COVID;
- Value to the organization as a team player and going beyond, or not reaching, what is required:
- Comparison-ratio data (current rate of pay divided by target/market rates) once the revised base compensation structure is determined.
It may be necessary to change starting pay rates for positions and employees in your pay structures. If, however, you are looking to reduce pay, ensure beforehand that you are not stepping into a minefield, and get advice from an HR professional. Issues to be avoided are:
- Reducing the compensation of those on contracts with specific payment;
- Appearances of discrimination or retaliation; and
- Reducing compensation of those on H-1B and E3 visas.
Finally, if reducing pay for existing employees, you need to communicate the changes, what will it take for compensation to return to previous levels. With regard to the trigger event to return pay, it must be something that everyone can see. If not it will seem arbitrary by management and therefore detrimental to morale and performance.
Review incentive compensation plans
With your strategic plan in now the shredder, hopefully, a new one is now ready or on its way. Your incentive compensation plan needs to be tied to your strategic plan to ensure alignment with the organization’s goals, and so incentive compensation should be adjusted annually. However, most companies will have to adjust mid-year as, during this accelerating period of COVID, six or more months is too long to wait.
Examine all your incentive plans and review them to understand all of the plan provisions. You need to stress test plans monthly in light of changing market and financial conditions to evaluate their impact on business and individual employees. The rapidly changing business environment requires careful examination of such plans to ensure they represent the intent of and are aligned with the business strategy.
For those employees who receive a significant portion of their compensation in the form of incentive compensation, there are several factors to consider.
- If your business plan is out the window, the compensation targets need to change.
- If, due to falling revenues, compensation is likely to drop dramatically, resulting in retention issues, then migrate more to base compensation.
- Adjust goals so that there are wins! Incentive compensated employees, usually salespeople, are very competitive. If you remove wins from their life, their performance may suffer.
- Those businesses that are realizing a significant increase in activity, incentive compensation is an excellent way to reward performance. However, a best practice is to establish maximum award payout levels as well as performance thresholds, as the increased performance may be due more to unexpected economic forces than the efforts of employees.
- If employees are likely to realize unexpected windfalls that are not a result of their efforts, be prepared to make adjustments
- Due to the uncertain nature of the economy, revisit your payout schedule to ensure it continues to make sense in today’s environment.
- Run Monte Carlo simulations on your incentive compensation plans to ensure that they don’t pose a risk to the company.
However, most of all, communication is key! Communicate clearly, early and often. Managing employee expectations during difficult times is critical. Failure to communicate no matter how good the resulting plans are will cause problems in the organization that could be damaging at times like this.
In case you missed it, communication is key!
Compensation is an emotional issue, and it impacts the lives of all your employees and their families. At this time, everyone is experiencing a great deal of stress:
- Is my job safe?
- Can my children return to school?
- Are my parents safe?
- Do I have enough cash to survive?
So now is not the time to add to that stress, as it will sabotage employee performance and thus corporate performance. Communication is essential — it is genuinely all about communication.
You cannot stop rumors and “water cooler” talk, especially in a virtual world. Thus, even if you say nothing, your employees are watching and listening. Your behavior, in the absence of a clearly stated rationale, will drive assumptions about both the organization’s and their own prospects. Many will assume the worst possible scenario.
No news is NOT good news during uncertainty and overly optimistic pronouncements, which contradict the information they see if even worse. Whatever the report, the employees still want to know what their leaders are thinking and doing concerning strategy and tactics. This communication will provide the background to the reasoning involved when making compensation decisions. While they may not agree, they will appreciate honesty and transparency. It will also stop the rumor mill, reduce wasted time due to stress and worry, and provide focus.
Therefore, your managers and supervisors must have conversations with their direct reports on what to expect, what you know right now, and what you don’t know yet.
The key to achieving long term goals is to define short term goals that lead you there. Focusing those short term goals around a key metric is essential. However, ensure that the metric will not lead other areas astray by having an appropriate counter critical metric act as a counter balance.
Defining an organization’s culture as a “Family” culture reflects tolerance to subpar performance. Rather focus on those characteristics of a “family” culture that you want.
Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”
The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.
Many business owners want to sell at the top of the market. However, market timing is tough. Is this the best strategy? Probably not.
Working with many companies looking to grow, I am always surprised how many have not built a financial model that drives growth. I have mentioned before a financial model that drives growth? Here I am basing on Jim Collin's Profit/X, which he laid out in Good to...
As we emerge from COVID, the current employment environment makes me think of a surfing concept: “Being Caught Inside When a Big Set Comes Through.” Basically, the phrase refers to when you paddle like crazy to escape the crash of one wave, only to find that the next wave in the set is even bigger—and you’re exhausted. 2020 was the first wave, leaving us tired and low. But looking forward, there are major challenges looming on the horizon as business picks up in 2021. You are already asking a lot of your employees, who are working flat out and dealing with stress until you are able to hire more. But everyone is looking for employees right now, and hiring and retention for your organization is growing more difficult.
“Why don’t they use common sense?!” You may have said this phrase yourself, or heard it with your managers, when discussing an employee’s actions. However, the frustrated appeal to “common sense” doesn’t actually make any meaningful change in your organization. We all make decisions based on the information we have and the guides we have to use. So if the wrong decisions are being made in your organization, it’s time to examine the tools you give decision-makers.
You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.
If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.