When a major event, such as the COVID-19 outbreak, disrupts lives and the flow of business, compensation professionals begin thinking about how compensation will need to be updated to reflect the new reality. One thing is certain, there will be change. However, the scope, sectors, and jobs affected remain to be seen.

ERI started a survey on compensation responses to the virus on April 1st, with the hope that organizations will want to consider some plausible outcomes of this outbreak.  If you’re an ERI subscriber, click here to participate in the survey. If you don’t subscribe to our services, click here to participate. Organizations that participate in this survey will remain anonymous.

Below are some thoughts on how this event may change the compensation landscape. These notes are based on ERI’s experience from previous crises and ongoing conversations with customers. We will start by focusing on overall trends and then specific sectors.

Overall Trends

Overall, compensation growth in the U.S. will likely slow, but reductions in pay will be avoided as much as possible because cutting guaranteed compensation is usually considered the “nuclear” option for most organizations. Reducing compensation is demoralizing for existing employees, so saving costs by reducing the workforce is generally seen as the lesser of two evils. Of course, higher unemployment increases competition for existing job openings as more people compete for fewer jobs. This increased labor market slack generally creates a low wage growth environment, so we can expect low wage growth for at least the next year.

Let’s also look to the last recession as an example. In 2008, we saw wage growth slow to near zero for most occupations, with total cash decreases at the executive level. We found that executive total compensation dropped because a larger portion of this compensation is tied to revenue. Thus, base compensation remained consistent (low growth), but incentive compensation that was based on organization performance suffered.

The current recession is not caused by a financial crisis leading to a drop in demand across almost all sectors.  Rather, it is a pandemic that is shutting down some sectors, reducing demand in most while increasing demand in a few. However, significant revenue loss is expected, which could lead to a pattern similar to that in the last recession. The Economist’s Intelligence Unit reported their revised growth forecasts for all G20 countries across the world.  They forecast that the majority of G20 countries will enter a recession in 2020, resulting in an economic downturn of the global economy (GDP) by 2.2%.

Of note, the low wage growth environment of 2008 lasted for about three years after that crisis. It is unclear whether this trend will be repeated given the speed of this event, but it is a possibility. Overall, it is reasonable to expect low wage growth for between one and three years going forward.

Specific Sectors

While we expect overall trends to remain flat, disparate sectors are expected to react differently to this event. Some will be positively affected, and others will be negatively impacted.

Examples of positively affected sectors: shipping and logistics, medical, non-durable necessities, and grocery

Large and small organizations in these sectors are currently seeing significant growth and are increasing staffing to match. There are also reports of wage increases in these sectors, but the policy changes appear to be temporary in nature (e.g., bonuses or four-week raises). Also, while we are seeing hiring from these organizations, it is unlikely that the hiring will be large enough to offset layoffs.

A few examples follow:

Costco is offering an additional $2 an hour to its hourly employees across the U.S. as the coronavirus outbreak causes massive shopping surges.

J.B. Hunt Transport Services Inc. announced it will be giving $500 bonus checks to its drivers, field operators, and customer service facilities personnel.

Target is temporarily increasing employees’ wages by $2 an hour and giving bonuses of up to $1,500 to thousands of employees as the retailer experiences a surge in shopping during the coronavirus outbreak.

Safeway workers and other employees of supermarkets owned by Albertsons Co. have gained hefty pay raises as they scramble to keep shelves stocked with food, household items, and other key products amid panic shopping in response to the coronavirus.  The pay raises amount to $2 an hour for employees of Safeway, Vons, Albertsons, and Pavilions supermarkets, according to the United Food and Commercial Workers labor union and Albertsons Co., owner of the grocery chains.

J.M. Smucker will pay $1,500 hazard pay bonus to employees amid coronavirus concerns.

Walmart reports full-time hourly workers hired by March 1 will receive $300, and part-time hourly workers will get $150 on April 2, the company said in a statement. Those extra payments add up to $365 million, which will be supplemented by another $180 million in early first-quarter bonuses for store, club, and supply-chain employees.

Contract travel registered nurses are being recruited throughout the country at Crisis Pay Rates due to COVID-19.

Examples of negatively affected sectors: personal travel, energy, and durable goods

Large organizations in these sectors will likely suffer and experience layoffs, but they will probably survive. A primary concern is the smaller firms that support these sectors. For example, we’ve heard from smaller software companies, and they are reporting temporary 10-30% pay cuts. This is significant because pay cuts are generally a last resort after nonessential employees have been laid off. Organizations of this type will likely experience the largest changes in compensation. Of course, while these dramatic examples decrease average growth rates, it is unlikely that they will be widespread enough to bring the overall growth rates into the negative.

A few examples follow:

Lawrence Culp, Jr., Chairman and CEO of General Electric, announced that he would forego his entire salary for the remainder of this year.  

GE Aviation announced plans that impact its U.S. population, while the business works with the appropriate parties to properly address its global workforce:

  • GE Aviation is planning to reduce approximately 10% of its total U.S. workforce.
  • There will be a temporary lack of work impacting approximately 50% of its U.S. maintenance, repair, and overhaul employees for 90 days.
  • Starting April 1, David Joyce, vice chairman of GE and president and CEO of GE Aviation, will forego half of his salary, as reported by Yahoo Finance.

Ford’s top 300 executives will defer 20% to 50% of their salaries for at least five months as it attempts to manage the coronavirus pandemic, as CNBC reported.

Dick’s Sporting Goods (DKS) also announced its CEO, Ed Stack, and President, Lauren Hobart, will forgo their salaries, except for an amount covering company-provided benefits. The company’s other named executive officers will take a 50% reduction in base salary, as reported by CNN.

The airline industry has also taken a severe economic downturn as a result of the pandemic.  These are just a few executive compensation cuts reported:

  • Delta (DAL) CEO, Ed Bastian: “As I mentioned last week, I’ve cut my own salary by 100 percent through the next six months. Our Board of Directors elected to forego their compensation over the next six months as well.”
  • Alaska Air (ALK) CEO, Brad Tilden, is cutting his base salary to zero.
  • United (UAL) CEO, Oscar Munoz, and President, Scott Kirby, “will forego their base salary at least through June 2020.”
  • Southwest (LUV) CEO, Gary Kelly, is taking a 10% pay cut. 
  • JetBlue (JBLU) CEO, Robin Hayes, is taking a 20% pay cut. 
  • Allegiant (ALGT) CEO, Maurice Gallagher, and President, John Redmond, will take a full pay cut.

Steps to Consider

Due to the significance of the pandemic on the cash flow and stability of non-essential and other businesses, over 6.6 million unemployment applications have been filed in the United States due to COVID-19.  Some of these organizations have gone out of business, many have experienced a significant decrease in revenue, and others have temporarily shut down. 

If your organization finds itself in a survival situation, reductions in the cost of labor may be necessary, using one or more of these strategies:

  • Reductions in staff
  • Hiring freezes
  • Freezing employee pay
  • Deferring employee pay increases
  • Reduction in employee pay
  • Mandatory paid (accrued vacations) or unpaid time off
  • Elimination of bonuses, incentives, and supplemental pay programs

Always check legal plan documents to ensure changes may be made and consult with your labor attorney.

Ensure eligible businesses are utilizing the funds, tax relief, and resources available under the approved federal CARES Act.  Provisions are offered to support businesses in maintaining their employees’ pay and benefits.

What Else to Consider

Consider the impact of COVID-19 on current and future sales and non-sales incentive compensation, as well as the impact on financial and non-financial results.  Review legal plan documents to determine if plan changes can be made.  This is an appropriate time to calculate financial assumptions and model the financial impact to incentive compensation as a result of the economic downturn. 

Equity compensation should also be reviewed.  It may be appropriate to establish a different timeframe, such as three to four months, when calculating the recommended grant size.  Always ensure compliance with legal plan documents and stock ownership guidelines.  Stay up to date with federal, state, and local legislation.

Always ensure proactive communications with both management and non-management employees to maximize engagement during this challenging time. 

Conclusions

Overall, ERI expects actual compensation rates to stagnate over the next one to three years as wage growth decreases and unemployment increases. While some organizations are cutting wages, the planned temporary duration and last resort nature of this practice lead us to believe that a large-scale decrease in compensation rates is unlikely. Of course, larger decreases could happen if the event continues for an extended period.

Another factor to consider is the recent federal stimulus package. The package is expected to improve balance sheets and mitigate the negative effects of this event, but there are risks. Specifically, the additional funds could lead to inflation without stimulating an economy locked down due to pandemic, which could in turn lead to a stagflationary period. This would reduce real wages, even as nominal wages remained consistent. This situation would create upward pressure on nominal wage growth, which might be expected to lag other economic indicators, such as the CPI.

Coronavirus Response Survey

ERI has complied and reported salary survey data for over 30 years. Reports on our research, such as ERI’s National Compensation Forecast, help forecast and predict compensation changes in various industries. Reliable data will continue to be important as we move through this crisis and into the next several months. To contribute information about the impact of the coronavirus on your organization, please participate in ERI’s Coronavirus (COVID-19) Response Survey. Results will be provided complimentary to participating subscribers when compiled.

If you are an ERI subscriber, click here to participate in the 5 minute survey. You will have to log in to your ERI account to access the survey. Organizations that participate in this survey will remain anonymous.

Linda Cox also contributed to this article.