As the dust settles from the initial disruption of the novel coronavirus, it has become painfully clear that some amount of financial hardship will persist for the foreseeable future. Economic activity shrank 33% last quarter, a record surpassing even the worst period of the Great Depression. This reduction has brought with it the grim necessity of reducing human capital cost through layoffs, furloughs and pay reductions. The numbers are unprecedented. Initial jobless claims have been over one million nationally for over 19 consecutive weeks. But even those with positions intact may still be suffering. According a University of Chicago study, the 2008 recession caused only half the number of pay cuts for employed workers.
If your firm is facing lower revenue projections or higher costs of doing business, reducing salary expenditure may be necessary to ensure long-term viability. The decision to reduce pay (or headcount) can be painful and should be undertaken with deliberation and care. When weighing options, it is important to ensure that immediate actions are aligned with the expected longer-term evolution of your business environment. For example, how will the salary saved from a layoff compare with the cost to hire and train a new employee? How fungible has your labor market been, and how might possibilities of remote work change these considerations? How can layers of compensation be considered as a source of flexibility—for example by deferring commissions rather than reducing pay?
These considerations reinforce the necessity of aligning compensation philosophy to corporate strategy. In more typical times, this alignment would have occurred through an analysis of both industry and competitor landscape: for fast growing industries or highly competitive employment environments, high percentile pay (and depending on the role, aggressive incentive plans), are often necessary to ensure that a firm attracts and retains the best people. These same principles still apply, and in fact become a source of important differentiation amidst the disruption of COVID-19. With a huge portion of the labor force now detached from steady employment and remote work gaining widespread acceptance, developing and maintaining a strategic compensation plan will be necessary to stay ahead of the competition.
Salary.com has been providing the data and the tools necessary for firms to design, maintain and improve their compensation plans for more than 20 years. We’d be happy to review how our suite of solutions can provide critical intelligence to ensure that your firm is equipped to succeed as the “new normal” starts to seem ever more normal.
 Washington Post summary of “WORKING PAPER: U.S. Labor Market During the Beginning of the Pandemic Recession” Becker Friedman Institute, University of Chicago.