Learn creative compensation strategies for retaining employees while protecting your business’ financial health during uncertain times.

When
businesses go through a crisis resulting in abnormal (or interrupted)
operations and significant economic challenges, many companies look to their
compensation budgets as an obvious means of cutting costs.

The
delicate balance is: How do you handle compensation during uncertain times to
protect the financial health of your business but without losing valued
employees?

This
scenario could occur in any type of economic downturn or industry shift –
really, anything that disrupts business continuity and impacts the bottom line.

Of
course, a global pandemic such as COVID-19 is a prominent
example of this. Depending on state and municipality, some businesses were
forced to close for weeks to months. Numerous other types of businesses
operated at diminished capacity or faced other extreme disruptions. As a
result, many business leaders had to make tough choices for their companies to
survive. Unfortunately, millions of workers were laid off.

Layoffs can be an
immediate, much-needed measure to reduce costs. But, in some cases, it can be a
short-sighted decision. There very well could be a better path forward.

If
you’re facing economic hurdles, here are some common, alternative ways to
retain employees while reducing expenditures and mitigating the pain felt by
your team.

It
should be noted that these strategies could be temporary or permanent in
duration, depending on unique circumstances.

Creative compensation strategies for struggling businesses in crisis

1. Hiring freezes

This
simply means that all hiring of new personnel stops for a period of time.
Hiring freezes are often among the first strategies considered by business
leaders because it minimizes the impact on the current workforce.

2. Pay freezes

This is
when merit-based pay increases cease and promotions are no longer given. They
can be resumed at some point in the future when company leadership feels
comfortable giving raises.

From the
employee perspective, pay freezes are usually preferable to reductions in regular
wages or interruptions to payroll. Again, the impact on the current workforce
is minimized.

3. Elimination of perks

Workplace perks are the
“extras” that make your workplace unique and enhance your employees’
experience. Sometimes these perks come with expenses for employers, such as:

  • Ordering in lunch
    for employees
  • Paying their
    membership dues for industry associations or even to the nearby gym
  • Offering monetary
    awards or gifts

Unfortunately,
in times of financial crisis such expenses are non-essential and can be
discontinued.

4. Adjustment of annual incentives or targets

You have
the option to end bonuses that employees can earn – usually on a quarterly,
semiannual or annual basis – for meeting predetermined performance criteria.
You could also consider merely reducing the percentage of their base salaries
that employees are eligible to earn.

Another strategy for compensation during uncertain times is to adjust performance goals or delay setting them until you have more information about how your business will be impacted by an event. Lengthening merit cycles can buy you some time while you make necessary decisions about compensation budgets.

It is best to make changes to annual incentives or targets well before payout for the annual incentive or target would be due. Waiting until the date of the payout to announce that the funds will not be paid can result in significant employee relations concerns.

5. Pay reductions

This is when
regular wages are decreased without altering work schedules. Employees are
drawing a lower paycheck for doing the same work and spending the same amount
of time on the job.

Understandably,
it’s an unpopular and painful decision for employers and employees alike.

You have a few options for how to implement this reduction:

  • Reduce pay by a certain percentage across the board for all employees.
  • Reduce pay by a certain percentage according to pay grade in organizational hierarchy, job or some other strategic consideration. Usually, higher-wage earners take a larger reduction in pay to preserve lower-wage earners.

Understand
the associated legal issues and ensure compliance when applicable:

Review state and local laws for where your
business operates.

Some states require a specific amount
of notice of pay reductions be given to employees so they have adequate time to
prepare. Where such laws don’t exist, 30 days’ notice is best practice. At a minimum,
you should give employees notice of one pay period.

Some states also require written
notice to employees of changes in pay, along with a signed acknowledgement from
each employee.

The Fair Labor Standards Act (FLSA) sets federal minimum wage and overtime pay requirements for exempt and non-exempt workers.

With any pay reduction for employees,
make sure that your business still meets minimum payment requirements:

  • Minimum wage of
    $7.25 per hour for non-exempt employees
  • Minimum salary of
    $684 per week ($35,568 annually) for exempt employees

If
your business operates in a state or municipality with higher minimum wage
requirements, the applicable minimum wage is the greater of the state, local or
federal minimum wage. Apply overtime accordingly.

An amendment to the FLSA, the Equal Pay Act mandates equal pay for equal work.

All employees who are similarly
situated – those who occupy similar roles, in the same department, with similar
levels of experience – should earn approximately the same amount.

The law’s original intent was to prevent pay disparity
between genders. Today, understanding of the law has expanded to also prohibit
unequal payment of employees on the basis of any protected class, such as race
or religion.

If you’re implementing a pay
reduction, make sure you’re not targeting and adversely impacting an individual
or a group without a legitimate business justification. Otherwise, you could
face charges of discrimination and find your
company the subject of a complaint with the Equal Employment Opportunity
Commission (EEOC).

Other considerations

  • Your employees’ new
    salary should be enough to cover their current benefit contributions. Reductions
    in pay may cause benefit contributions to become a greater percentage of an
    employee’s monthly living expenditures, but this doesn’t constitute a mid-year election-change
    event.
  • Pay reductions
    should be processed prospectively, meaning that you shouldn’t change pay for
    hours that have already been worked.
  • Let your
    employees know that they can apply for unemployment. However, be clear that
    it’s up to the state unemployment agency to examine and approve their claim –
    and there’s no guarantee their claim will be accepted.

6. Alternative work schedules

In this
strategy, employees are paid less – but they’re also spending fewer hours on
the job, too.

Common
examples of alternative work schedules:

  • Reduced hours worked each day
  • Reduced days worked per week
  • Alternating weeks worked – for example, one week on, one week off

If you
have some flexibility about which employees could switch to alternative
schedules, consider making it voluntary – at least initially, or until the
situation evolves. Otherwise, make determinations based on business need.

Depending
on the state and municipality where your business operates, you may need to
comply with predictive scheduling laws mandating a minimum notice period for
changes in hours, days and times worked.

If no such
laws exist, try to give reasonable advance notice so employees have adequate
time to prepare. Best practice is 30 days.

7. Furloughs

Furloughs are
a bit different than layoffs. A layoff is permanent, but a furlough means that
you intend to retain your employees and bring them back to work within one year.

Their
employment is still active, and they may retain access to benefits. They’re just
not coming in to work or being paid in the meantime. It’s like their job is on
hold.

The
decision as to which employees should be furloughed is usually based on
business need.

Although
employees don’t lose their jobs, furloughs can present significant, prolonged challenges
for your team.

How to talk to employees about compensation during uncertain times

It’s
hard to deliver unpleasant news to employees – especially when it’s about
changes in their pay.

Compensation
never affects only employees – it also impacts their families and can drive
painful adjustments in lifestyle and other tough decisions. It can put people
in difficult financial positions that can have long-lasting consequences.

That’s
why it’s best to deliver unwelcome news in person, if possible.

Senior
leadership may want to consider being present. These are the people to whom
employees look at as their guideposts, especially in times of uncertainty.
Their active leadership can be crucial in providing a sense of security and
stability.

Throughout
this period of disruption, be:

1. Empathetic

Communicate to employees that you understand the difficulty this decision puts them in. This is a reflection of the crisis the company is facing, not an indictment on their performance or value. Everyone at your company is in this situation together.

2. Transparent

Be honest about the severity of the
situation and clearly explain what the business must do to survive. But take
caution to only share what you know for certain.

If you don’t have all the answers at that moment or a firm idea when things will return to normal, it’s OK to say so and commit to providing regular updates.

Do all you can to prevent rumors from
circulating and panic and negativity from festering.

3. Open

Encourage two-way communication. Make
sure your employees know where to go to discuss their concerns.

4. Methodical in developing and distributing information

Have a process in place for efficiently communicating updates with employees and clarifying inaccuracies. If your workforce is distributed or remote, use a variety of media to reach them, including videoconferencing, company- or department-wide emails and Intranet messages.

5. Inclusive

Employees want to know what’s going on
and how they’ll be impacted. They also want to be part of the solution – after
all, they have a pretty big stake in the outcome.

Solicit their feedback. Leverage the
intellectual capital within your team to brainstorm ideas for how to reduce
expenditures while saving jobs.

This is also a critical step to
obtaining employees’ buy-in to whichever direction you choose.

Displaying
emotional intelligence in your communications can go a long way
toward developing
a mindset of resilience in employees.

Downsides to changes to compensation during uncertain times

Pay may be linked to some employees’ feelings of value and self-worth. It’s also tied to their financial stability and personal comfort.

So it’s often unavoidable that low morale, low engagement and high turnover can be the byproducts of changes in compensation – though there are steps you can to take to mitigate morale and engagement issues and better retain employees.

Some employees may be angry and upset about changes in their pay. Calmly
explain to them that decisions must be made for a business to stay open.

The flip side: Compensation
strategies for businesses that continue operating in crisis

While
some businesses struggle in a crisis, others continue to operate – some at
enhanced levels.

For example, some companies during the COVID-19 pandemic were in high demand and had to remain open to the public to provide essential services, such as hospitals and grocery stores. These companies often sought ways to reward their employees.

This
type of compensation strategy serves the purpose of:

  • Maintaining
    adequate staff levels to keep daily business operations intact
  • Acknowledging
    employees’ dedication and hard work
  • Boosting employee
    morale and engagement

Companies
looking to incentivize
employees in a crisis can deploy these motivational strategies.

1. Premium pay

This is pay that’s in addition to employees’ base wage or salary
as a “thank you for being here.”

Before
implementing premium pay, consider:

  • The circumstances
    that justify premium pay
  • The criteria for
    qualification
  • The amount of
    premium pay employees can receive
  • General
    guidelines for administration

Premium pay must be
included in the regular rate of pay and in overtime calculations.

2. Retention bonuses

This is a
bonus – either in the form of a lump-sum payment or spread out in multiple
payments within a specified time period – to keep employees on board at least
until a certain date, and hopefully beyond.

This could
be available to all employees, or only to especially high performers. If you
opt to reward select employees, document the criteria for earning the bonus and
why certain employees were given the bonus. Be consistent in the administration
of bonuses to avoid charges of discrimination.

Retention
bonuses must be included in the regular rate of pay and in overtime
calculations.

3. Shift differentials

This is
when you reward employees who work “off shifts” (evenings, nights and weekends)
in the form of extra wages for the inconvenience of coming in to work at a less
desirable time.

4. Non-wage-related incentives

Sometimes
it’s not about extra pay – it’s the feeling of importance you give someone.

Some
low-cost (or free) ideas to show employees how much you value them:

  • Distributing gift cards
  • Providing meals at the office
  • Offering lunch or some form of face time with senior leadership
  • Delivering notes of appreciation

Summing it all up

When a crisis happens, and your business can’t operate normally, permanently losing valued members of your team doesn’t have to be a foregone conclusion to save costs.

There are many creative strategies you can implement to adjust compensation during uncertain times to satisfy both goals of keeping employees on board while protecting the financial health of your business.

Of course, in the event that your business is able to continue normal operations in a crisis, there are other compensation strategies you may want to leverage to reward employees for their dedication. Either way, you have a great opportunity to show employees how much they mean to you and how far you’ll go to show your appreciation.

For more information on how to compensate employees during periods of normalcy and crisis alike, download our free magazine: The Insperity guide to benefits and compensation

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