Easing the pinch of pay cuts for employees

Salary freezes, or outright cuts until further notice, have become commonplace in today's economic climate as businesses hunker down to ride out the COVID-19 recession. Over the last few months, various surveys have indicated that approximately a third of employers in the Asia Pacific, Europe, and the Americas have either reduced pay rise budgets, frozen pay or deferred planned raises, or outright cut pay.

Although pay cuts have typically been done to save jobs, they also result in their own slate of people problems. Morale is inevitably affected; there are questions about who gets a cut, how much, and for how long; there are issues surrounding the implicit devaluation of people's work. And there is the difficult social reality that the lower someone's pay, the more likely they are to have been affected by pay cuts or layoffs. An April study by the US-based Pew Research Center found that 52 percent of lower-income adults had suffered a pay cut or even lost their job, whereas the number fell to 42 percent for middle-income workers, and 32 percent for upper-income households.

Much of the time, alternative compensation has not been an option in the current environment of strict cost control. But there are still ways for employers—stuck between low revenue and trying to preserve cash—to ease the pinch for their employees without incurring extensive additional expenditure.

Offer better and relevant benefits

Employee benefits have taken on greatly increased importance during this period. One recent study by SAP and Oxford Economics suggests that almost 40 percent of companies worldwide have increased benefits in response to the pandemic, and the majority of employers consider that benefits and perks are both the most important factor and the top HR challenge in employee experience.

Experience aside, it may be possible to partially compensate for pay cuts by offering benefits that cover more of an employee's relevant expenses. For example, one common benefit now implemented by many companies is intensified health coverage that provides additional support for COVID-19 infections or suspected infections. Some employers have even extended this coverage to family members. Mental health benefits—including company-expensed access to therapy—are also becoming more common. Furthermore, many insurance providers are now providing such extended coverage at usually relatively low cost, making it a reasonable option for employers.

Additional support for home offices is another potentially valuable benefit at a time when remote work is becoming the norm. Quite a number of companies have already invested in paying for their employees' home office equipment, and some are going to the extent of subsidizing employees' childcare, phone, Internet, and utility bills.

Allow greater flexibility in work and working hours

Reduced working hours have become a common way of controlling costs without actually reducing hourly pay. But this is not necessarily an equitable way of compensating for pay cuts, since the end result is still a lower paycheck. Furthermore, workload differentials may mean that hours cannot actually be reduced for some roles, giving rise to the sticky question of fairness.

On the other hand, a growing number of workers are demanding more flexibility in the way they work. One survey by Boston Consulting Group found that 50 percent of workers want at least some flexibility in where and/or when they get their work done; a poll by professional network Blind suggests that white-collar professionals are more likely to accept a pay cut in exchange for better work-life balance.

In contrast to a simple reduction of working hours which only reduces pay without providing any compensatory benefits, flexibility gives employees better control over their work-related expenses, whether related to their commute or to childcare costs. And for cash-strapped workers, it can even provide the opportunity to supplement their income by seeking secondary employment—which some employers have already recognized. Singapore Airlines, for example, has actively encouraged employees to seek secondary employment during their prolonged downtime. If companies are willing to allow employees to take a concurrent second job, or even actively assist them to do so, that would go a long way towards compensating for pay cuts.

Equity compensation or profit sharing

The idea of compensating employees in the form of stock options or even a proportion of the company's cash proceeds has been around for a long time, with startups in particular using this as a way to attract talent. Now, even established and mature companies are returning to this strategy as their revenue dries up.

"For companies that implemented pay cuts at more senior levels, some of the cash reduction was 'returned' in the form of increased stock grants," observes Kulapalee Tobing, Career Products Leader at Mercer Singapore. "While companies might be more cautious in deferring short-term incentives as this essentially just defers costs, using long term incentive plans to 'compensate' employees for pay cuts is a smart way to lock in and retain key senior employees while still ensuring the company has sufficient cash flow to tide over this difficult period."

At present, most companies are still reserving stock options and profit-sharing for senior executives. But there is no reason why this cannot be extended to employees down the ranks: even if these forms of compensation do not immediately affect employees' disposable income, they can help to boost morale, acting as an indicator that firstly, the company will survive, and secondly, employees who stick with the organization during this period of difficulty will be rewarded when things improve.

Pay attention to employees' financial well-being

The pandemic and the resulting economic recession has destabilized the financial arrangements of many, especially those with commitments or obligations that cannot be deferred or avoided. Even in an environment of cost control, companies can still help employees to manage this source of stress by providing access to financial counselling and education to improve their financial literacy. For example, budget airline Scoot partnered with DBS Bank to run webinars on a range of personal budgeting and other topics for employees.

In some cases, companies have deliberately made allowances for employees' work-related financial obligations. Expat employees, for example, are less likely to suffer cuts to their pay or benefits even if repatriated, as companies are conscious that these employees continue to have financial commitments associated with the overseas assignment. "Companies have continued to ensure that these commitments can be met in order to ensure that employee obligations are met (such as rental agreements on accommodation leases) and to ensure that the employee’s family can continue to function as normal during the period of repatriation," says Lee Quane, Asia Regional Director for ECA International.

Address the long-term risks

Finally, companies need to consider the risks associated with pay cuts, ranging from the effect on morale and productivity to the danger that some employees may, even in the current labor market, choose to jump ship if their income takes too great a hit. As one Gartner report describes it: "Organizations need to view the effect of cost-cutting measures on employees as a hidden cost."

Some factors that can reduce those risks are transparency: providing employees with full information about pay cuts including who will bear the burden and why; providing certainty if possible, such as a reassurance that pay levels will be restored if the company passes a certain milestone; or at least, planning to make the cuts a one-off measure rather than a series of repeated events.

While assuredly not as major as the risks associated with layoffs, the impact of pay cuts cannot be discounted either, and employers should consider the tools available for ameliorating the impact.