We recently connected with two dozen senior venture capital talent partners to learn more about how they are working closely with portfolio companies to address employee concerns, manage cash flow through equity exchanges, redeploy workforces and adjust sales plans.
While the COVID-19 pandemic is first and foremost a humanitarian crisis, it’s economic toll is immense and continues to grow. A global recession is now almost certain, with only its depth and duration truly in question. For venture-backed companies, the economic uncertainty unleashed by the COVID-19 pandemic will force business and HR leaders to make difficult compensation and workforce decisions in the months ahead, especially as future funding rounds become harder to secure.
In light of this rapidly changing environment, we connected by video conference with two dozen senior talent partners at some of the world’s leading venture capital firms in late March and again in late April to discuss how they are helping portfolio companies navigate this crisis. This article, while not a comprehensive assessment of market practices, summarizes key themes from our conversation and provides insight into how venture-backed companies and their investment partners will approach upcoming compensation and workforce decisions.
We recognize the COVID-19 pandemic continues to unfold differently across geographies and industries, and we remind our readers that this article represents a specific point in time in what is an ever-changing environment.
Maintaining a Focus on Long-Term Success Means Taking a Cautious Approach to Major Workforce Changes, For Now
Many talent partners we spoke to emphasized the need to be cautious and are advising their portfolio companies not to react too quickly in an environment that can change from day to day. “Don’t do things prematurely,” said one talent partner at a leading venture capital firm. He added, “Everything is still unfolding, and you don’t want to take actions that might limit what you can do in the future.” Another senior partner reiterated a similar sentiment: “Don’t lose sight of the future and your long-term plans.”
With this in mind, while we observe an increase in the number of venture-backed firms with selective hiring approaches or hiring freezes, most venture-backed firms are holding off as long as possible on layoffs or limiting layoffs and furloughs in favor of other cost management actions. Most firms recognize the broader social good of preserving employment where possible and understand that layoffs will slow down growth trajectories when an economic recovery comes. Towing this line will undoubtedly get harder in the weeks and months ahead, as evidenced by a rising number of layoff announcements in places like the San Francisco Bay Area.
Overall, between our March and April calls, talent partners report a pivot from crisis management and business continuity issues to a longer-term focus on strengthening balance sheets. In March, companies were preoccupied with setting up employees to work from home, whereas now “leaders are starting to think about preserving cash and the impact of COVID-19 on business models and growth strategies,” says Conrad Lee, a director in the Rewards Solutions practice at Aon.
Adjusting Sales Compensation When “At-Risk” Pay is High
One area where venture-backed firms are starting to make important adjustments to compensation programs is for sales team members, especially when they have an aggressive mix of at-risk pay. “If 50% or more of your sales compensation is considered at risk, we see a slightly higher percentage of companies taking action to adjust the goal posts,” says Mark Davis, an associate partner on the sales force effectiveness team in the Rewards Solutions practice at Aon. “However, by and large, companies aren’t making major changes to their sales compensation yet,” he adds, “as they don’t want teams to assume the worst and give up on key goals.”
Where we see changes to quotas, companies are primarily making targeted adjustments based on where the need is greatest. “Quota adjustments are happening in cases where there is a lot of pay at risk, or when sales people are being blocked from engaging directly with their customers,” Davis says. Some companies are also considering reducing their quota measurement period, which would allow for more flexibility throughout the year as most firms are struggling to forecast financials beyond a quarter at a time in this environment.
Still, almost half (46%) of the more than 350 companies we surveyed around sales compensation practices related to COVID-19 in mid-April said they have not reduced sales quotas. That said, we expect more companies to take action over the next four to six weeks as the economic toll of the pandemic and stay-at-home measures becomes clearer.
Conserving Cash by Leveraging Equity Programs
When it comes to employee equity in this environment, the talent partners we spoke to are all getting the same two big questions from their portfolio companies: What are my peers doing with equity to protect cash flow? And what is the right ratio for an equity exchange program?
“This is the ‘hot topic’ with our clients right now, especially around refresh programs,” notes Kyle Holm, partner and leader of the private market practice within the Rewards Solutions practice at Aon. “It is a problem that needs to be solved in fairly short order that has a number of variables attached to it.” When it comes to voluntary cash for equity exchanges, companies need to consider factors such as the number of employees participating in the exchange and the current valuation of the business when determining the best ratio. We’ve seen ratios for cash-to-exchange programs range from 1:1 to 4:1.
A senior talent partner at a venture capital firm told us one of his portfolio companies is planning for a downturn but is not taking a direct hit from the pandemic. Still, the business took immediate measures to control costs by implementing a hiring freeze and is now rolling out a voluntary program for senior directors and above to exchange half of their salary for stock options at a favorable ratio of four times the value of the cash. The firm has had greater than 50% participation so far, resulting in over $3 million in cost savings to the business. “It really showed that people were willing to buy into the company, which was positive for overall employee morale,” the senior talent partner says.
There are other short-term alternatives private firms can take to boost employee engagement for little cost, including shortening the vesting period of refresh programs and offering low-cost perks like extra computer equipment, grocery deliver services and mental health services. “Companies that are connected to the wellbeing of employees and have that reflected in their incentive programs are boosting engagement and retention,” says Holm.
Additional Resources from Aon
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General Disclaimer: The information contained in this article and the statements expressed herein are of a general nature and not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without the appropriate professional advice after a thorough examination of the particular situation.