Performance Appraisal & Rewards in Response to COVID-19

Most organizations don’t have a playbook to pull through the ongoing public health crisis. A pandemic of this scale has not emerged in many countries in well over 100 years (i.e. Spanish flu). And the lessons from most recent events in the last 20 years like the relatively mild swine flu (H1N1) in 2009, the dot-com bubble of 2001, and the 2008-09 Great Recession, are nowhere near suitable to withstand the social and economic impacts of the COVID-19 pandemic. Buzzwords such as “agile,” “resilience,” and “flexibility” have become almost banal to describe the grim reality of our daily lives and the decisions we must take, as the full effects of the coronavirus pandemic now unfold.

During this time of disruption, governments, societies, and organizations around the world are navigating with great caution, care, and agility. Lockdowns and virus-testing have only begun ramping up in many parts of the world, so the full magnitude of the economic impact is yet unknown. Management gurus are seeking to provide clarity, stability, direction to their employees and customers.

Performance Appraisal

Money talks, honey.

It is quite likely that as the situation unfolds, we might see employers continue to rapidly evolve. Six weeks from now, and another six months from then, things will be quite different in the corporate sector. At this moment, most organizations are focused on helping their customers and employees with immediate safety and security needs, recognizing the immediate short-term financial impact on their end goals.

These key areas include:

• Manage operations with minimal loss and disruption to daily business flow.
• Establishing an incident management plan to ensure a safe working environment for their customers and employees.
• Initiating measures to help support employees’ physical and emotional well-being, whether at work or at home.
• Providing guidance on social distancing practices, and employee information updates.

Managing Rewards and Mobility

This is part of the emerging new normal. Before COVID-19, many organizations could effortlessly retain and reward their people. Unfortunately, the coronavirus, leaving one with no time to prepare, has thrown many organizations into a turmoil, where they must decide whether to sink or swim, in terms of making through the economic shock/uncertainty. Many organizations aren’t in a position to retain their people, let alone stimulate feelings of financial security and solidarity with bonuses and rewards.

When it comes to internal communication, many organizations are primarily focused on direct and frequent communications from leadership urging their people to be calm about how they deal with the aftermath. Communications about wage, benefits policies, and sick leave are still a focus, as is support in FMLA, and general family wellbeing. It cannot be dismissed that employment and wage still remain dominant concerns of both employees and employers.

According to a recent survey in USA Today, Americans are far more worried about their finances than their health amid the COVID-19 outbreak. This suggests that there are far greater concerns with employers’ financial viability during the pandemic, especially if it is prolonged over 2021 and beyond. CareerBuilder notes that 80% of American workers live paycheck to paycheck, and 60% of the world’s working population have less than $1,000 in savings. Household income and savings are ultra-low in most global markets.

Outside the US, particularly in European countries which are known to have the best workers’ right, the concerns revolve around irregular payments and the large populations of the gig workers.

80% of American workers live paycheck to paycheck.

Source: CareerBuilder 

In Nordic countries there is a great focus on sick leave policies. Organizations are now taking charge regarding benefits continuity for their employees, in addition to the aid made by federal, state, and local agencies. In order to accomplish this, organizations are further clarifying their employment, benefits and compensation policies. This includes:

• Providing daily wage workers compensation for hours not worked due to the impact of this virus.
• Renewed paid sick leave policies so that infected and quarantined employees, as well as those who stay at home to care for sick family members, will receive sick pay.
• A strong Employee Assistance Program or EAP to help employees deal with coronavirus-related stress and mental health issues.
• Updating disability benefits if they contract the virus.
• Reviewing work from home policies.
• Designing incentive compensation structure as a response to the COVID-19 pandemic.

Many of these changes are being directed against proposed government support, such as cash handouts to workers below a certain income threshold and/or extended healthcare insurance coverage.

In worst hit parts of the world (especially Italy and China) many announcements have focused on compensation reduction for senior executives (especially in the hospitality, automobile and airline industries). The move is aimed at leading by example, motivating employees and ensuring business viability in the short-term.

Below the C-suite, some industries have undergone massive furloughs and permanent layoffs. While some businesses are actively investment in supplemental payments for workers as a priority. JPMorgan is one such company which is paying its front line workers $1,000, but not more than 10% of their salary in certain parts of the world.

A Sustainable Reset: Key Stages of Action

We recommend organizations a few mid-term to long-term performance and reward considerations to manage workforce engagement during this time of economic uncertainty.

Phase 1

Review the organization’s performance and reward strategy. Create a team of leaders across the organization to develop the benefits framework while also keeping in mind the cost of labor.

Phase 2

Design a multi-pronged strategy to reduce labor costs versus relying on the more traditional approaches such as layoffs, hiring freezes, delaying bonuses, reduced hours and furloughs. Headcount reductions are naturally a default strategy, but there are considerable downsides to this, especially in rebounding the business later.

Phase 3

Review the financial impact of cost reduction strategies versus the employee relations risk. This involves: A review of litigation risk, impact to employee engagement, productivity, and involvement of cross-functional team (Legal, HR, Compliance) to determine the cost factor of the risks involved in cost reduction opportunities.

Phase 4

Implement the strategy with empathy and care. A well thought-out communications plan needs to be put in place to adapt as needs demand.

Executive Pay

As we’ve seen before, not every company is badly hurt by the COVID-19 pandemic. Many organizations are opting for a playing a waiting game before taking significant action in executive compensation. While organizations that face a survival threat (e.g. airline and hospitality sectors) are making immediate changes including implementing drastic cuts to Chief Executive Office and senior executive pay. The following practices are likely to unfold in the coming months given these uncertain times.

Remuneration and Compensation Committees

Organizations need to re-calibrate and design an immediate plan of action. Short-term decisions include temporary pay adjustments and suspension of incentives and bonuses that are projected to be unachievable. Such measures are limited to situations where the economic shock on the business is high. In almost any other situation it is imperative to monitor and abstain from taking any immediate moves. Furthermore, we suggest giving the center stage of exception management.

2020 & Beyond

If plans have already been implemented or disclosed the Compensation Planning Committee can still make significant changes. In order to management by exceptions, the Committee needs to consider replacing the short-term incentive structure with a stub plan, especially if the incentives are unachievable or misaligned. The Compensation Planning Committee should set up timely checks and be ready to make corrections to potential changes for the coming year.

When it comes to short-term incentives…

We suggest:

• Establishing “adjusted” financial objectives that reduce the impact of the ongoing crisis.
• The Compensation Committee can always adjust rewards later if they are inconsistent with overall outcomes.
• Considering shorter incentive plan measurement periods (e.g., semi-annual, quarterly) in industries hardest-hit, could help improve “line of sight” to performance goals.
• Widening incentive plan payout curves (the shape/slope of threshold to target, or target to maximum), particularly below target levels, to manage the uncertainty of incentive plan metrics results.

When it comes to long-term incentives…

We suggest:

• Assess how to set rewards in a depressed stock market.
• Introduce measures such as a longer average stock price for setting grant levels (2-6 month averages) or simply using last year’s share awards levels, reducing or excluding the link to delivering a defined compensation value.
• Rely on complex processes such as using discounts to market, or setting share/ dilution limits. Although, it should be noted that these generally return similar results and are more challenging and more difficult to communicate to participants.

Monitor Impact

As mentioned, the Compensation Committee needs to monitor the current situation closely. There are a few ways to do this most efficiently:

• Immediate Committee notification of peer group changes.
• Realizable pay analysis.
• Monte Carlo simulations on goal attainment.
• Equity usage analysis.
• Organizations might consider doing each of these at least quarterly and this can provide a view as to how well your plan is working and whether you need any in-year or following-year changes.
• Proxy advisors may not support all of the changes described above, but they respond better when companies provide well-constructed arguments.

Sales Compensation

There is no doubt that COVID-19 will impact sales for many months, perhaps even in 2021 or longer. However, not all sectors will be impacted by the ongoing crisis. Most organizations are now implementing measures to help protect their employees and secure the bottom line. There are a range of options to manage sales compensation amid slow growth. Organizations facing higher risks may consider layoffs and furloughs of salesforce to reduce costs as sales opportunity dwindles. This strategy, however, proves to be counterproductive during natural disasters and short-term crisis. As growth picks up, it becomes more challenging for companies to meet pent-up demand for their products, which can result in even longer slowdown for them.

A more holistic approach is to review your sales compensation strategies. In the past, companies have seen better results in incenting their salesforce to keep working hard. Enacting a short-term increase to cost of sales via sales compensation design components and policies will likely pay dividends over time. It will also be viewed as a morale booster and an investment in your people.

So what should company leaders consider? Organizations must remain mindful of the needs of the sales teams by following these rules:

• Set up an incentive compensation review team to manage decisions and review cases on a regular basis.
• Identify key growth areas or channels.
• Redefine acceptable performance levels.
• Identify and determine compensation policies best suited for the salesforce.
• Provide spot incentives and rewards for star employees.
• Offer a stay bonus if there is an imminent threat of sales reps leaving.

It is important to ensure all measures have a clear-cut timeline and performance expectations associated with them. Organizations need to manage their overall cost of sales in order to thrive during these unprecedented times until they return to normalcy.

These are challenging times, with no end of crisis in sight. For organizations, there is one decision roadmap to follow: focus on employee wellbeing, make the necessary changes, and invest in the future.

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