Pandemic Salary Cuts are Being Restored – But Not for Every Company

Published: July 2020

 

Some companies, seeing a slightly improved business outlook, are lifting temporary pay reductions for senior leaders and broad-based employees. Here are the latest actions businesses have taken and what to consider when determining the right time to restore pay.

During the months of March through June, many companies implemented cuts to salaries and cash retainers for CEOs, other executive officers and board of directors amid economic uncertainty caused by the COVID-19 pandemic. (See our article To Conserve Cash, a Growing Number of U.S. Companies are Adjusting CEO and Board Pay for more information). By early May, about 18% of the Russell 3000 reported pay adjustments. 

Most of these pay adjustments for the CEO and other employees have centered on reducing salary as opposed to adjusting short- or long-term incentives, likely due to the timing of when the pandemic hit the United States and when most companies make decisions on bonus payouts. As we head into the late summer and fall planning period, many of our clients are now considering what, if any, adjustments need to be made to incentive plan goals and metrics — in addition to whether they need to exercise discretion.

Many businesses are still impacted by the pandemic and operating with greater uncertainty into future performance. However, some companies that proactively cut pay to address short-term cash losses from stay-at-home orders and prepare for worst case scenarios are seeing some level of recovery. The stock market has also begun to recover. As of mid-July, the S&P 500 hit its highest level since February 2020.

Given these business and economic indicators, we have seen a slowdown in the number of companies instituting pay reductions. In the months of June and July, we found only 20 additional companies reducing pay. During this same period, we have also observed some organizations announcing they are reinstating or restoring pay. While both terms are being used interchangeably, in some cases businesses are eliminating pay reductions for all affected parties; in other cases, businesses are reinstating pay while also restoring lost wages during the pay reductions. 

Overall, 16 Russell 3000 companies are reporting pay reinstatements as of July 22, 2020, according to our database that tracks 8-K disclosures. Most of these firms are restoring all or some of the prior pay reductions to salary.

Key Considerations

In the coming weeks, companies who have made workforce reductions or adjustments to pay and incentive plans will face key decisions in how long to maintain these temporary policies. The issue of when to restore pay will be even more complex with continued economic uncertainty and how that uniquely affects each industry and individual company. In addition, the timeframe is shortening for companies that are still in a wait-and-see mode regarding year-end plan adjustments. 

As companies consider restoring pay, the action may not always be as simple as bringing back the same policy as before. There will certainly be more interrelated questions to consider such as:

 

  • Will pay be restored for all employees or will reductions for the CEO, board or other top executives remain?
  • Will only salaries be restored? Will this have an impact on target bonuses or long-term incentives that are tied to salaries?
  • If pay is reinstated, will employees also be repaid for any amounts withheld?
  • What is the appropriate timing for reinstating pay?  Is this an immediate action?  Or are reinstatements dependent on factors such as cash flow position or the year-end financial outlook?
  • How much does employee engagement and retention impact pay restoration?


Aon’s database of pay actions related to COVID-19 is available for special analyses of peer groups or industries. To learn more, please write to rewards-solutions@aon.com

To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.

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