Most Companies Leaving Pay Programs Alone for Now

Forecasters see a short-term economic contraction

Stephen Miller, CEBS By Stephen Miller, CEBS March 17, 2020
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[For an updated look an how employers are adjusting compensation programs, see the SHRM Online article Pandemic Forces Employers to Cut Pay]

Despite rising concerns about the effect that COVID-19, caused by the new coronavirus, will have on their businesses, most U.S. companies appear to be taking a wait-and-see approach to adjusting their compensation programs. Economists, meanwhile, now expect negative U.S. business growth at least through the second quarter of 2020 but are optimistic about a recovery later in the year.

"The concern over the economic impact of COVID-19 is growing and being felt all around the world," said Adrienne Altman, managing director and North America rewards leader at consultancy Willis Towers Watson. "As companies grapple with the volatility of financial markets and the effects of COVID-19 on their business and employees, we expect they will closely monitor how to align compensation, as well as their broader HR policies and practices, including merit increases."

Because so much of the impact of the virus is uncertain, "compensation committees and executives are not making immediate changes to their organizations' pay programs—at least for now," Altman added.

The consultancy's recent survey of 204 mostly multinational companies focused on executive compensation issues but may suggest companies' broader expectations about making pay adjustments, if necessary. The survey results showed:

  • 44 percent of companies said their annual executive incentive plan has been or will be affected by COVID-19, but 19 percent intend to adjust funding or targets for the plan.
  • 46 percent of companies that intend to adjust said they plan to maintain the current design of their annual incentive plan but reserve the right to make discretionary changes at year-end, when the extent of the pandemic's fallout will likely be clearer.
  • 44 percent had yet to discuss the impact of COVID-19 on their short-term incentive plans.

Annual Bonus Programs

Companies that have set 2020 performance targets under their annual bonus programs "may be considering appropriate and necessary adjustments to targets in light of the COVID-19 outbreak and its impact on businesses," according to law firm Sherman & Sterling. However, "adjusting targets too soon may necessitate further adjustments as the impact of COVID-19 on the business is evaluated," noted attorneys in the firm's compensation, governance and ERISA practice. They suggested, however, that employers "consider setting new and additional shorter-term goals (such as quarterly goals) relating to COVID-19 response and recovery targets while longer-term impacts on a business remain uncertain," and to consider metrics that tie individual performance to effective crisis response.

Companies that haven't yet set 2020 annual performance targets "should consider delaying until more is known about the impact of COVID-19," the firm advised.

A Wait-and-See Approach

Many multinationals are treating the outbreak as they would treat any downturn in business or even a recession, said Bob Wesselkamper, vice chairman of the global rewards and benefits practice at consultancy Korn Ferry. There may be layoffs or hiring freezes, he noted, but usually not regular salary cuts.

At least at large companies, which have compensation-related policies that account for business disruptions, "the continuation of pay is what organizations are prepared to do," he said.

For now, it's mostly a wait-and-see approach, Wesselkamper added. Large firms have yet to announce they're changing their metrics on stock-based compensation plans or sales or growth incentives, and they are "likely to wait until at least the second quarter to even review, let alone make, a change."

[SHRM members-only policies: Merit Increase Policy and Procedure]

No Guarantees

Compensation researchers had been expecting another year of average pay increases at around 3 percent, said Sudarshan Sampath, director of research at PayScale, a compensation data and software firm.

"It's likely that companies will do some hard analysis on their workforces—to identify their top performers and key occupations—and devote their budgeting toward keeping those employees engaged and retained," he said, citing the firm's 2020 Compensation Best Practices report, released this month.

All industries won't face the same business challenges, he added. "There will likely be significantly less hiring in industries especially affected by coronavirus, including travel, restaurants, entertainment and manufacturing." As the labor market loosens up, there may be less pressure to raise wages in those sectors.

Slow Growth Ahead

Economists polled by TheWall Street Journal see "significant drag" on 2020 U.S. growth and a greater chance for recession.

The 55 business and academic economists surveyed from March 6-10 now expect, on average, U.S. gross domestic product (GDP) to contract 0.1 percent in the second quarter. That is a large downgrade from February, when they still expected GDP growth of 1.9 percent from April to June.

For the full year, measured from the fourth quarter of 2019 to the fourth quarter of 2020, economists expected growth of 1.2 percent, down from 2.3 percent in 2019.

The outlook is rapidly changing, however, and not for the best. On March 15, Jan Hatzius, chief economist at global banking and investment firm Goldman Sachs, lowered his first-quarter GDP growth forecast to zero from 0.7 percent, with a 5 percent contraction in the second quarter. However, he expects that would be followed by sharp snapback for the remainder of the year.

"Even with monetary and fiscal policy turning sharply further toward stimulus … these shutdowns and rising public anxiety about the virus are likely to lead to a sharp deterioration in economic activity in the rest of March and throughout April," Hatzius told CNBC.

He foresees GDP growth of 3 percent in the third quarter and a 4 percent expansion in the final three months of the year. Factoring in his new estimates, for 2020 he sees the economy growing 0.4 percent, compared with a prior growth estimate of 1.2 percent.

However, Hatzius offered a caveat: "The uncertainty around all of these numbers is much greater than usual."

Update: On March 20, Goldman Sachs updated its projection for U.S. GDP. The firm's analysts as of that date expected an economic contraction of 24 percent in the second quarter of 2020, the result of a "sudden stop for the U.S. economy," following a revised forecast of a 6 percent drop in the first quarter. Even with significant positive growth in quarters three and four, that would mean an annual decline in the U.S. economy of 3.8 percent.


Withstanding Business Interruptions

Small and midsize businesses may face bigger hurdles due to a drop in business, but as of the end of February, most were still hopeful that they could continue operating.

According to a survey of 300 U.S. business owners with two to 500 employees, conducted at the end of last month for payroll firm Paychex:

  • 75 percent of respondents said they had enough cash or credit to survive a pandemic-related business slowdown or shutdown.
  • 59 percent had a business continuity plan to address any interruptions in operations.
  • 54 percent could accommodate either working remotely or from home if a quarantine were to go into effect. This varied by industry, however, as 65 percent of manufacturing businesses could not accommodate working from home or remote work.

"Navigating a rapidly evolving environment such as this can present challenges," said Paychex President and CEO Martin Mucci. "This is an opportune time for business owners to evaluate response plans for any potential crisis situation, including developing a comprehensive business-continuity plan."

Related SHRM Articles:

Pandemic Forces Employers to Cut Pay, SHRM Online, April 2020

Employers Advised to Ponder Worst-Case Scenarios, SHRM Online, March 2020

Hourly Workers Lose Pay Due to Coronavirus, SHRM Online, March 2020


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