In a Post COVID-19 World, Human Capital Is at the Forefront for Financial Services Firms

Published: July 2020

 

Originally published in Bank Director, this article dives into the business challenges of the COVID-19 pandemic and resulting economic slowdown, and highlights key lessons and tips to consider.

The COVID-19 global pandemic has created a literal life-and-death struggle for many; the resultant economic slowdown has imperiled businesses, employees and shareholders. Not surprisingly, a few key lessons have already emerged from the fallout.

How companies manage employment and compensation throughout the crisis is under intense scrutiny. Positive and negative case studies will undoubtedly continue to emerge, offering insight into best (and worst) practices when it comes to human capital and non-financial risk management. 

Human capital is an intangible company asset, often thought of as the economic value of an employee’s experience and skills. Already, investors focused on environmental, social and governance issues, commonly known as ESG, are tracking how companies address human capital issues in light of the pandemic and economic shutdown.

Our team has tracked corporate reactions to COVID-19 since the start of the crisis, recording a wide array of responses through May 2020 from 66% of companies in the Russell 3000. In our analysis, we found that firms had already taken steps to curtail executive (14.7%) and board (9.5%) compensation, work hours (2.1%), hiring (2%) and dividend payouts (3.9%), while others have gone further and closed locations (12.1%) and furloughed (6.2%) or terminated (1.9%) employees. By May, 387 diversified financial services firms reported making executive compensation changes; however, none were community banks, which have mostly taken a wait-and-see approach.

Because human capital is a major driver of corporate profits in any industry, how companies manage workforce issues during a crisis and on a daily basis is important. In the banking and financial services industry, however, human capital is even more critical.

Human capital issues rank in the top material ESG risks that commercial banks should proactively manage, along with data security, business ethics, systemic risk management and product-related considerations, such as access and design. And this was true before the onset of COVID-19. In a post-pandemic world, several urgent human capital issues have taken center stage at banks and financial institutions, which we discuss in further detail below.

Customer Access and Workplace Safety

Financial institutions are considered essential businesses and must therefore simultaneously balance remaining open to maintain market liquidity with workplace safety for front-line staff. While organizations should do all they can to maintain strict social distancing and cleaning regimes, some have gone further by offering hazard pay to customer-facing employees. When evaluating hazard pay options, it is also important to weigh one-time versus ongoing pay adjustments, or whether to include this compensation in hourly wage figures. While one-time or periodic bonuses may impact short-term cash flow, executives should consider the effect of needing to potentially roll back pay increases in the future. 

Staff Compensation

While hazard pay is one component of compensation as a result of the COVID-19 pandemic, it is certainly not the only one. Many banks have faced a staggering increase in loan application processing due to both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and mortgage refinancing. Planning for any overtime or performance bonus payments during the pandemic period will be a critical element of human capital and cash flow management. These decisions should be made in consideration of pay equity laws and best practices, which are additional focuses of ESG. 

Executive Compensation

In light of the COVID-19 economic slowdown, many financial institutions may decide to reevaluate and make material changes to the performance metrics used in their incentive compensation plans. 

Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have offered guidance on such changes. ISS encourages boards “to provide contemporaneous disclosure to shareholders of their rationales for making such changes.” Glass Lewis cautioned companies that proposals “that take a proportional approach to the impacts on shareholders and employees look more likely to be widely supported.”  

Next Steps

No one knows for sure how long the effects of the COVID-19 pandemic and economic fallout will last. What we do know, however, is that the methods companies choose to manage their human capital through the crisis will be a key differentiator, both from an economic and a public relations standpoint. A one-size-fits-all solution does not exist. Carefully consider your options and determine what approach best fits your firm’s specific needs.

For additional questions about the impact of COVID-19 on rewards, please contact one of the authors or write to rewards-solutions@aon.com
 
You can view Bank Director’s original publication of this article here. To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.

COVID-19 Disclaimer: This document has been provided as an informational resource for Aon clients and business partners. It is intended to provide general guidance on potential exposures, and is not intended to provide medical advice or address medical concerns or specific risk circumstances. Due to the dynamic nature of infectious diseases, Aon cannot be held liable for the guidance provided. We strongly encourage visitors to seek additional safety, medical and epidemiologic information from credible sources such as the Centers for Disease Control and Prevention and World Health Organization. As regards insurance coverage questions, whether coverage applies or a policy will respond to any risk or circumstance is subject to the specific terms and conditions of the insurance policies and contracts at issue and underwriter determinations.

General Disclaimer: The information contained in this article and the statements expressed herein are of a general nature and not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without the appropriate professional advice after a thorough examination of the particular situation.

General Disclaimer
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use
The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.



Talk to an Expert

Let us know how we can help and a member of our team will be in touch shortly.

The Rewards Solutions practice at Aon and other Aon group companies will use your personal information to contact you from time to time about other products, services and events that we feel may be of interest to you. All personal information is collected and used in accordance with our privacy statement.

If you do not wish to receive these communications, please check here: