Since the onset of COVID, leaders have been confronted with difficult organizational decisions and have been required to act without knowing the details that would typically inform these kinds of decisions. Unlike past economic crises, crucial information like how long employees will be working remotely or how long customer and supplier operations will be disrupted, remain unknown.
Without these answers, we are expected to make choices that both preserve capital and maintain readiness to ramp back up quickly. Human capital decisions driven by the crisis are tough and will impact culture long after COVID-19 passes. Below we share the trends we have seen so far across our network, as well as suggestions to strengthen your culture as you manage through this disruptive event.
How are companies responding to the competing pressures of preserving culture while conserving cash?
Headcount reductions and hiring freezes are the most common tactics being used to preserve cash for impacted companies. However, there are some other trends that companies are deploying as they strive to navigate the unclear road ahead.
While not as common as hiring freezes or layoffs, many more companies appear to be doing this than in the 2008 economic crisis. Unlike layoffs, furloughs allow employees to remain “on the books”, but without pay. As furloughed employees, they are permitted to participate in health, dental, and vision benefit programs and be active in 401k programs, although depending on local laws and the terms of benefits programs, there may be exceptions to this. Furloughed employees in the U.S. can fully collect unemployment benefits in their respective states, thereby making up at least part of their lost wages. (*All firms should consult with their legal counsel to determine specifically how furloughing impacts their employees depending on where they live and work.)
Companies tend to do layoffs when the business cannot afford the carrying costs or does not expect to return to previous volumes in the foreseeable future. The reason furloughs are common in this crisis is that they provide flexibility to bring people back online quickly. It also gives employees a sense that their job will return after a set period of time. Employers hope both of these facts result in a more positive outcome culturally than layoffs.
This brings up the biggest question about furloughs: how long should they be for and what are the options if the crisis extends longer than anticipated? Furloughs have historically been used in more cyclical industries where companies expect a temporary reduction in demand and don’t want to lose skilled workers for good. Most employees will expect furloughs to be short-term in nature, i.e. 3-6 months. Lengths may vary by state but are not recommended for longer than a year, and if they extend for too long could result in the same outcome as layoffs, but with more expense.
2. Salary (+ schedule) reductions
This action to preserve teams is another big difference between 2008 and COVID. It is seen as a less risky way to retain talent through the crisis, while still conserving some capital. ScaleUp cultures that are team-based and collaborative may prefer that everyone is impacted slightly so that all jobs are preserved, rather than downsize the team with some people losing their jobs.
We have seen salary reductions in several combinations. Here are a few examples:
- Across the board reductions: Example: Everyone gets a 20% wage reduction
- Graduated reductions: Based on salary. Example:
- 0-10% for $60k and under
- 10%-20%: $60k – $100k
- 15%-25%: $100k – $150k
- 20%- 30%%: Above $150k
- Executive Team reductions: From 20% up to 50% on the high side (the latter for some CEOs). If the Executive team is subject to an even greater cut than their teams, this sends a very strong signal to employees about executive leadership during tough times.
- Schedule reductions: A variation of this is a 4-day workweek with a 20% pay cut.
While no employee wants to take a salary reduction, the feedback we have heard is that, in many cases, employees are willing to do what it takes to save jobs – their own and that of their colleagues’. However, this strategy could cause unknowable hardship as some employees may not be able to afford even a small cut in their salaries, based on their financial commitments.
There are other factors to consider and that employees may inquire about when implementing salary reductions. Those include:
- Are the reductions for a defined period, or indefinite?
- Do you intend to restore salaries to their prior levels or some fraction of their prior levels? Is the plan to do it all at once, or gradual?
- Do you restore everyone on the same schedule, or by function, geographic region or salary level?
Variations on these questions include restoring only part of the previous salary while putting the rest in a variable bonus program to be paid if the company performs at previous level.
Other possible areas to find saving as it relates to headcount related costs include:
- 401k Matches: Generally, we have seen these put on-hold, with the possibility of matching later in the year, if feasible.
- Merit Increases: Often delayed or cancelled for this fiscal year.
- Bonuses: Many of these were paid out before substantial financial impacts were felt. For companies who haven’t yet paid out last fiscal year’s bonus, many are delaying these (some only for executive bonuses). We haven’t heard about impacts to 2020 bonus plan designs yet, but the ability to hit the thresholds of them will surely be impacted.
- Cancellation of internships and college recruitment training programs.
During such disruptive times, Culture becomes a more crucial factor as you implement your human capital strategy.
“Culture isn’t made during a crisis. Culture is revealed during one.”
Regardless of what choices you make, how you handle those choices will have a huge impact on how they are received, on your team’s morale and ultimately on company performance. Key questions to ensure that you can answer prior to announcing any salary or organizational changes and as your company moves forwards after any changes include:
- Have you clearly explained the business rationale for the decisions you made? Is your CEO communicating frequently and transparently with the organization?
- Furloughs and Salary Cuts are new to most employers and employees. Have you thought through what happens if the crisis persists, and are you ready to answer those questions?
- Is your communication plan considerate, thoughtful, and sensitive? Are you having 1:1 conversations with impacted individuals (ideal), or are they finding out difficult news by mass zoom (not ideal)?
- Consider how your conduct will reflect on your company culture – for those leaving the company, those staying, and for outside stakeholders (including the press). To further explore Crisis Communication principals, see Insight Partners blog on this topic.
- Are you treating employees consistently and fairly, aligned with a set of principles? For example:
- Will you cut evenly across the board to avoid making hard decisions and choices, or will your decisions be informed by business need and employee performance?
- Will your severance packages either be the same for everyone, or tied to some objective criteria like tenure, level, etc?
The options each company considers and ultimately enacts should be governed by a mixture of short-term financial requirements and cultural impact. Your actions will shape how your company resumes life and business in our new normal.