Originally published in WorldatWork’s Workspan Daily, Aon’s Liz Snyder and Brooke Green discuss strategies for managing costs to avoid layoffs or furloughs in the economic downturn.
Since the COVID-19 pandemic began shutting down non-essential businesses around the world, companies began bracing for an uncertain future. The first priority for many of Aon’s clients was securing remote working arrangements (where possible) for their employees, ensuring their safety and making decisions about whether, and how long, to pay employees that could no longer work.
Now that we are months into the crisis, business’ concern is shifting to developing alternative financial scenarios, shortening forecast periods, altering compensation and hiring plans to conserve cash and making tough decisions about whether workforce reductions may be necessary.
In an effort to minimize layoffs, which would put stress on an already strained unemployment insurance system, the United States Congress included provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to incentivize companies to keep workers employed. The act allows businesses to utilize subsidized loans and payroll tax credits and Workshare Programs to encourage employers to consider reducing hours and pay in place of wholesale layoffs.
And the message has been heard loud and clear. About three-quarters of the 1,889 employers surveyed in Aon’s “COVID-19 Pulse Survey” from mid-April said they were not implementing layoffs, and 68% said they were not planning furloughs. While some employers cannot avoid layoffs and furloughs, as certain industries have been almost entirely shut down or drastically slowed (e.g., hospitality, airlines, entertainment venues, etc.), many high-profile CEOs have signed a 90-day “no layoff pledge” initiated by Salesforce CEO Marc Benioff.
But even with a pledge to keep workers employed, organizations are not immune to the worsening economy and are looking to a variety of alternatives to cut costs, minimize the impact of lost earnings and avoid workforce reductions. When we asked the question of what cost-cutting actions employers were taking in early April, we generally saw a wait-and-see approach (less than 30% of employers had taken any concrete actions to reduce costs). However, by the end of April, we started seeing more and more companies actively implementing more drastic measures, including:
- Temporarily reducing executives’ pay and eliminating many fringe benefits (e.g., company car benefits, club and association memberships, travel benefits, etc.).
- Offering unpaid sabbaticals for employees who want to take them with minimal disruption to the business.
- Reducing hours and/or pay for some or all non-executive employees.
- Implementing hiring freezes.
- Cutting back or eliminating training programs.
Shifting a portion of the budgeted bonus pool to secure hourly wages for furloughed workers or hazard pay for employees still working in essential roles with public exposure; some of these funds have also been diverted to special payments to help offset the pressure of school closures, elder caregiving, home office setups and other hardships.
We expect this trend to continue, as the full impact of this global pandemic continues to emerge. Even while companies are starting to talk about re-opening and are determining how to restore business operations in a post-quarantine world, we do not see the cost-cutting trend ending anytime soon. Many public companies have already disclosed in new filings that their executives and board are taking pay cuts to conserve cash and shares and minimize involuntary turnover. As of April 23, 364 Russell 3000 companies had disclosed changes to executive and director pay because of the pandemic and resulting economic downturn.
Determining which cost-cutting measures are appropriate for your organization requires flexible decision-making and a robust combination of quantitative and qualitative analysis.
Understanding the Unique Response Arc of a Global Pandemic
Historically, crisis events have typically unfolded with an event arc that includes identified start and stop dates, followed by a period of recovery and a return to normal. The event arc of the COVID-19 pandemic is different. Rather than a defined beginning, middle and end, there will be distinct phases that will hit different parts of the world and the economy at different times. Waves of infection in the communities in which an organization operates, and where their employees reside, means a company will need to tailor its response for different locations. Leaders must develop strategies to address each stage with flexibility and a clear understanding of how COVID-19 is unfolding for their firm and how their actions may affect the trajectory.
Aon’s suggested COVID-19 Response Framework for Employers helps organizations make decisions in an uncertain environment and act with timing and priorities designed to fit each stage of the organization’s unique experience. The model enables flexible timeframes for business impact actions to coincide as needed with the event arc. The illustration below highlights the three phases in this journey, which will be unique for each organization’s circumstances: react and respond, recover and reshape.
Using Qualitative Surveys to Understand the Needs of Your Employees
Most employers would agree that layoffs should be a last resort. Reducing your workforce is a blunt instrument and may have a further negative impact on both cash flow and morale. If we learned anything from the previous crises, it’s that giving employees a say in the remedy for tough times can go a very long way to keeping them loyal when the tides turn. In addition to arming yourself with as much quantitative data as possible, taking the pulse of your own employee population can help inform how your cost-savings decisions will impact culture, engagement, and your brand.
One way to do this is to use the same method that many HR teams began experimenting with when the economy was robust: Survey your employees to understand their priorities and use that information to customize your total rewards program to have the maximum impact. During the SARS outbreak in 2002, one of our clients gave employees the choice to take temporary pay cuts with zero bonuses in order to prevent a 20% workforce reduction. This was voluntary, but the entire workforce agreed and received stock in lieu of the foregone cash. Following the recovery, the firm was well known to have an exceptional culture and became an industry leader for many years. The stock recovered, and employees ended up in a significantly better financial position than they would have been with the cash bonus. We saw companies take similar actions during the 2008-09 Great Recession.
Soliciting employees’ opinions does a few things. First, it treats employees as partners in the business and empowers them. It also reinforces your culture and makes people feel they are in this together, working as a team and helping one another. Finally, it provides valuable information to leaders around what types of changes may be most tolerable to the largest percentage of the organization. Surveying your employees can be used to test multiple options, including lower pay, unpaid leave, early retirement, benefit reduction and lowering bonus targets.
Once you have the results of your employee survey, you need to be analytical in your interpretation of what it all means. Understanding the difference between the perceived value of a type of reward vs. the actual cost is critical for good decision making.
After you’ve made a decision on whether, and how, rewards will be modified, communicate with employees the rationale for any changes and how their input was factored into the decision. Use this communication as an opportunity to redefine the current state of your rewards philosophy. Be clear with employees on what actions were avoided, what actions are temporary, for how long, and whether any changes will be permanent.
The Rise of Corporate Sustainability Influences Companies’ Responses
Economic downturns are cyclical and expected, but this crisis is different and its legacy on how we work and respond will be different too. Most recessions are rooted in underlying economic factors, but this downturn is triggered by a humanitarian crisis. The public health risks posed by COVID-19 have placed greater social responsibility on business leaders, making it more imperative for them to look at ways to manage costs while keeping employees working and receiving their health benefits.
The corporate response has, so far, been much different than what we saw in recent recessions.
“We really need to be sure that we have [employees’] health and their finances at heart as we deal with this crisis right now,” PayPal CEO Dan Schulman told CNBC in early April. PayPal is one of several large companies that has vowed to avoid layoffs.
The corporate environment also has changed since the last recession. Many public companies have expanded their vision of the role of business beyond delivering value for their shareholders. In August 2019, the Business Roundtable updated its Principles of Corporate Governance document to expand the purpose of a corporation. “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities,” said Tricia Griffith, president and CEO of Progressive Corporation, when the new principles were announced.
Expanding the role and purpose of a corporation has been accompanied — if not driven — by the efforts of many institutional investors who have been urging companies to consider the impact of environmental, social and governance (ESG) issues on their business operations. ESG funds raked in $20.6 billion in new money in 2019, according to Morningstar. That’s four times the amount in 2018, which had set the previous record for inflows.
“Many companies are approaching this current crisis with a sense of duty to their employees and their communities that they didn’t have 10 years ago,” said Brooke Green, partner and head of the employee rewards practice at Aon. And that is the driving force behind efforts like the 90-day no layoff pledge that Salesforce’s Benioff is leading.
Given the momentum and rallying cry around avoiding layoffs, it’s also important to recognize that for some organizations, particularly smaller businesses and private firms with less capital, layoffs and furloughs may be necessary for the survival of the firm. Figure 3 below provides a guideline for determining whether furloughs or layoffs are necessary for companies, depending on the level of savings they need to make from taking workforce and compensation actions and the time frame over which action is needed.
What’s Next: Planning for a New Normal
The way many business leaders have responded to the current crisis is remarkable. Leaders who are communicating proactively to employees and finding equitable ways to cut costs, while avoiding or limiting layoffs, are likely to instill a sense of loyalty among their workforce.
As companies emerge from this crisis and look to the future, they will find many of the ways they were forced to act in a short amount of time laid the groundwork to accelerate innovation.
For example, companies that made strides to enable a more remote workforce — from improving technical infrastructure to changing cultural mindsets — will be better positioned to hire key talent in new markets in the future. With a more remote workforce, businesses can hire in-demand roles in markets where they may not have looked before. Similarly, businesses that are having employees move cross functionally, perhaps out of necessity with constrained resources, will likely find they are developing a more agile workforce in the process. And agility is seen as an essential quality for keeping pace with the rapid technological advances our world is experiencing.
While we’re in the thick of this crisis and nobody knows exactly when it will end, it’s important for business leaders to keep in mind that some of the hardest decisions they’ve had to make, whether it’s moving their workforce remote or asking employees to pitch in outside of their core jobs, can also be the ones to give them a competitive edge in the future.
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