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Reward Considerations for Business Crisis: #2 – Base Pay

13 April, 2020

My Intent

This second installment covers base pay actions to help control cost, intelligently. Let me briefly remind you of my intent, which I shared at greater length in the first of this series. I want to be helpful and not hurtful. For years, I have been influencing decisions on rewards, employment, work at home, etc. I am still learning, and I don’t have all the answers. Hoping to be helpful, here are my thoughts for your careful consideration. This is not actual advice for your organisation, but only considerations.

Base Pay

Salaries are the biggest cost in most organizations. Here are several ways to control base salary cost intelligently, considering both short- and long-term effects. There are many mistakes to avoid.

Pay for Work, not Time

Pay for work completed, not for time. Clocks were not meant to measure work. The best measure of work completed should be determined by every manager who is accountable for work outcomes. In manufacturing, companies measure units produced, or equivalent units (when there are a mix of simple and complex products). Measure only quality output, not sloppy output. There are industrial engineers and quality experts to help determine how to measure output of quality products.

When it is impractical to measure output by individual, we can try to measure team output. If that is impractical, then we generally fall back on paying for time worked. But remember, this is does not guarantee output is sufficient in terms of quantity or quality.

For knowledge workers–anyone who works at a computer, or works by speaking or managing or thinking–measurement of work is very difficult, so we have generally fallen back on paying for time, paying a monthly (or biweekly or semi-monthly in the U.S.) salary, rather than paying for output. The best we can do for knowledge workers is to use pay for performance–merit pay and variable pay where we link raises, incentives and bonuses to specific measures, using SMART goals, KPIs, KRAs, OKRs, the “what and the how” and other constructs cooked up by various industrial psychologists (both qualified and not) that help define output.

Now more than ever–especially when distancing makes supervision more difficult, let’s really figure out what the outputs are for everyone. I am not saying “crack the whip”. I am saying that pay for time is not sustainable if productivity drops while revenues are also dropping. Business continuity and survival require higher than ever productivity. If the sales people are still selling (see previous blog on Rewards Considerations for Business Crisis #1: Sales Compensation), then those orders must be fulfilled effectively. Productivity is a matter of survival. Roles that do not contribute to sales, or to delivery of what is sold are in question!

So as I address below some specific actions, remember, I am talking about limiting or managing a cost which is not directly proportional to output. If I had the data, I would correlate pay versus output and time. I suspect output could explain less than 50% of what we pay people (i.e. r-square of <.5) while time worked would probably explain pay more strongly, for a given occupation.

Following, in no particular order, are the ways you can manage base pay during a crisis, brought about by a virus, or any other cause.

Flatten the Curve: Focus on Basic Needs

A business crisis is no time for anyone to earn millions while the many struggle to pay their rent. Your people may still have their jobs, but your people may have a family member who has lost theirs, or whose self-employed income has dropped off dramatically (I think of the taxi drivers, normally the most productive workers in the world.)

Flatten your pay curve by freezing or reducing pay for the well-paid, and redirecting that money in the form of subsidies to help people with basic costs of living. Tap into government funding or loan guarantees to keep payroll paying, but your cuts should start at the top.

Salary Freeze

A very simple first step is to announce a salary freeze. Absolutely no pay increases allowed. In my current open survey on Impact of COVID-19 in Rewards, Policies and Practices, Asia, 17% of over 100 companies responding indicated they had implemented a salary freeze in response to the COVID-19 crisis.

A salary freeze usually goes along with a hiring and promotion freeze, although if someone leaves, you may need to promote someone from within to cover higher level duties, but you can do it on an “interim” or “acting” basis, while keeping the position officially vacant.

Pay Freeze

A pay freeze goes further than a salary freeze, putting an end to raises as well as bonuses or any other one-off payments. Some allowances that are considered perquisites, such as car allowances, might be frozen.

Modified Salary Increases

In the same survey 17% of responding companies indicated they were implementing reduced or modified salary increments/increases. For example, the salary increase budget of 3.5% for Singapore increases may have been reduced to only 2.5%, perhaps with greater restrictions on who gets a raise. In some organisations, the budget may be reduced to only a fraction of the original budget, and those getting raises would only be key performers, key position holders, business critical roles, high potentials, successors, or other special categories of people, if their pay was deemed to be low versus market pay.

Salary Reductions

Reduce salaries, starting with the highest-paid management. Reductions should be in percentage terms, not dollar amounts, to ensure the highest-paid are contributing the most to cost savings.

Salary reductions should be across-the-board and immediate. Those organisations that have current salary ranges, performance ratings and talent management practices may be in a position to include performance, pay equity or other criteria to guide pay reduction decisions, but generally speaking pay reductions are normally done using a universal standard such as 5% or 10% or 30%.

Communication

Communicate to affected employees what will happen in the future. The first question on everyone’s mind will be whether their pay will be fully restored. Some will even claim they are entitled restoration as well as “their” merit increase.

Upon recovery from this crisis, employers can restore pay following the guidelines they communicate now. If pay cuts are a matter of saving jobs and saving the country, then “bite the bullet” and communicate that there the company will review pay following recovery, dependent upon the strength, timing and circumstances of recovery, as well as economic, industry and business conditions. Communicate that there is no guarantee that salaries will be restored to contractual levels, but only an intent to restore pay to a level that aligns with market conditions, to enable the company to retain needed talent.

Salary Ranges

My advice to everyone (yes, this is actual advice for your organisation) is to ensure your salary ranges are up to date. Yes, I mean it: if your salary ranges are 1 or 2 or 5 years old, update them! Do this because once the crisis is over, those who are most important to your company–the highest performers, etc.–these people will be the most marketable. Your salary ranges can tell you whether any key people are low internally or externally in the market, if your salary ranges are calculated from actual market data. (See How to Build a Salary Structure from Market Data, in my YouTube channel.)

Contract Considerations

Except for Americans where employment is “at will” and people generally do not sign an employment contract, and ignoring the billion-people+ in the world who work on a cash basis, most of the rest of us have an employment contract, according to the laws of the country where we are employed.

Contracts serve society by creating a barrier for employers to simply reduce pay or fire workers. In times of crisis, however, courts are hesitant to block employers who wish to reduce pay or at least curtail raises or other forms of compensation, because the alternative would be layoffs, i.e. redundancies. It is a matter of public policy that giving everyone a 10% pay cut (or mandatory unpaid leave, etc.) is preferable to job cuts. It is advisable for employers to contact their manpower/labor ministries prior to enacting pay cuts of any form, to ensure they will not get into trouble.

Of course, before making pay cuts, make every possible effort to save non-people costs, such as freezing travel and entertainment, negotiating reduced facility rental or material costs or other supply costs.

People-Centered Approach

Many organizations are deliberately seeking to take a people-centered approach to employment practices. By putting people first, ahead of profits, these organizations believe all stakeholders are best served in the long run. Make sure all employment actions taken in response to this, or any crisis, reflect your company’s values, as well as the better values of society.

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