COVID-19 has created uncertainty and changing business priorities for employers. Whether an organization is faced with a major restructuring or increased pressure to manage costs to stay competitive in a contracting economy, companies want to minimize disruption to their business. Often times this means doing more with less. This FGMK alert provides potential employee compensation program changes companies may consider as part of management actions to address potential employee retention and motivation risks.
The employee “value proposition” — those tangible and intangible job benefits such as financial incentives, job security and career growth potential — has been impaired. Left unchecked, it can lead to lost productivity. Employees may become disengaged and vulnerable to turnover. A company’s most critical asset —talent —is perhaps the most important success factor needed to get through this crisis successfully. Key issues companies’ management faces include:
The First Step – Manage Fixed Payroll Costs and Leverage Federal Programs
In response to the current business environment, companies are prudently freezing or reducing base salaries, and managing headcount. An important point to remember companies need to make sure they are in compliance with Fair Labor Standards Act ("FLSA") rules covering actions such as work hours, overtime pay and salary reductions.
Congressional action has provided much needed relief to employer’s ability to retain employees via the Families First Coronavirus Response Act ("FFCRA") and the Coronavirus Aid, Relief, and Economic Security Act ("CARES" Act). The FFCRA provides additional funding for unemployment compensation, expands family medical leave and provides new paid sick leave for employees impacted by COVID-19, and establishes new, associated payroll tax credits for employers (including similar credits for self-employed). The CARES Act provides for a refundable employee retention credit, delay of employer payroll tax payments, direct cash relief to individuals (based on their adjusted gross income), increased access to retirement funds, and an expanded exclusion for employer-provided educational assistance.
The administrative guidelines are very detailed and complex, and must be followed carefully in order to realize their benefits. Please find additional information regarding these programs by visiting FGMK’s Thought Leadership.
The Next Step – Address Existing Compensation Plans
The Congressional programs are essentially a short-term bridge, and will not address all employees or cover employee compensation challenges for 2020 and beyond. A need to restructure presents an opportunity to strengthen employee retention and motivation by re-thinking a company’s approach to compensation. Done appropriately, it can be a source of competitive advantage. Once a company believes it is at a point where it can manage the business going forward, there are a number of actions that companies may consider to realign their employee compensation plans.
Many companies have already awarded (or may still plan to award) salary increases in 2020. However, a growing number of employers are waiting to decide on whether they will proceed with planned salary increases or cancel planned salary increases in 2020. A salary freeze or reduction are perhaps the easiest (though painful) step companies can take to control fixed costs. Of course, these actions may increase retention risk and impair employee motivation.
A more thoughtful approach, if affordable, would be to exercise greater selectivity regarding salary increases in 2020, focusing on critical skill and top performing employees only.
Bonus payouts likely will decrease across most companies in 2020 as compared to 2019. Companies need to consider if they still plan to pay out bonuses in 2020, wait to decide whether they will pay out bonuses or whether they will cancel bonuses in 2020. Bonus decisions entail the complicated challenge of aligning such compensation impact with effective goal-setting in this current economic environment.
Any decision regarding bonuses needs to be made in tandem with the base salary program. The worst case scenario would be to cancel or reduce bonuses along with an ongoing freeze or reduction in base salaries, without a corresponding “make-whole” plan in place. This is an invitation to lose top performers and employees with highly marketable skills.
A more thoughtful approach would entail several actions: refresh the 2020 business plan, review the 2020 salary and bonus components of the cash compensation program, and review and adjust the performance metrics and “mechanics” associated with the bonus program as necessary to reflect greater business uncertainty Given the current economic conditions, companies would be advised to use greater discretion than used in the past. Finally, companies may consider establishing (or enhancing) a deferred or long-term compensation plan for its senior management team to compensate them for reductions to current cash compensation.
Special Retention Programs
Special retention programs are often used when a company is going through a restructuring or facing a potential sale. They are either selective to retain key employees whose loss would impact company value or broad-based to maintain operational productivity. There are two possible components to these plans: (1) predetermined cash bonus to be paid out at a certain defined date(s) or event in the future ; (2) enhanced severance protection to reduce uncertainty associated with potential job loss. A retention bonus is an obligation made to the employee, while severance is only triggered upon the loss of employment.
Business uncertainty coupled with the difficultly associated with setting bonus plan goals may give rise to the need to implement a special retention program. A retention program can help companies that are taking action to control or reduce salaries and headcount and need to strengthen retention and motivation of those deemed important to the company’s future success. The impact of COVID-19 will not be the same across companies, or employee groups.
2020 will be a challenging year for business growth and financial stability. As companies recast business plans, this will impact compensation programs dramatically, specifically, reduced spending on salaries and bonuses. To the extent that talent retention is a concern, companies may need to focus their compensation program on a more selective group of employees and/or revise existing or introduce new programs that strengthen employee retention and motivation.
Many factors beyond pay, such as leadership and communications, have a high impact on employee retention and motivation. Addressing compensation plans to respond to a business downturn and uncertainty is one of the most tangible and actionable steps companies can take.
If you have further questions, contact Don Nemerov or your relationship partner at FGMK for more information or to discuss your specific circumstances. For additional information and guidance from FGMK’s Covid-19 Response Team, please see FGMK’s Thought Leadership.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.