
2020 has been a challenging year for leaders, their companies, and their employees. When we asked 600 CEOs earlier this year what keeps them awake at night during this global pandemic, many cited the need to reduce expenses, including payroll costs, in response to dramatic revenue losses. “I went from 260 employees to 38 in 10 days,” one CEO shared. “Decisions had to be made swiftly. It was heart-wrenching. My mindset has changed. Priorities have changed, personally and professionally.”
Executives have turned to a handful of potential solutions, including salary and benefit cuts, furloughs, and layoffs. Questions that CEOs raised with us included: “What are best practices for digital terminations?” and “If the economy worsens and you have to consider reducing payroll, what’s the most effective way?”
As we look ahead to what we hope is a better 2021, it is worth considering the different ways in which organizations met the challenges of 2020. What strategies and actions worked better than others? What can we learn from these?
While many companies reduced payor headcount, some pledged at the outset of the crisis to do whatever they could to avoid layoffs:
When Starbucks closed most US and Canadian stores, it also announced it had “committed to pay all Starbucks US and Canada retail partners for the next 30 days whether or not their store is closed, or they are otherwise unable, or even uncomfortable, coming to work. We believe no partner should be asked to choose between work and their health.”
· In a memo to employees, Morgan Stanley’s CEO, James Gorman, wrote, “While long term we can’t be sure how this will play out, we want to commit to you that there will not be a reduction in force at Morgan Stanley in 2020. Aside from a performance issue or a breach of the Code of Conduct, your jobs are secure. This decision was made with 100 percent support of the Firm’s Operating Committee. At the end of this year, we will know what we are dealing with, and hopefully, the economy will be on the mend by then.”
Brian Moynihan of Bank of America also committed to no layoffs in 2020. “We told them all, there’s no issue, you’re all going to be working now through year-end. No layoffs, no nothing,” Moynihan said. Citi and Wells Fargo communicated similar messages to their employees. Marc Benioff, CEO of Salesforce, asked other CEOs to join him in a “90-day layoff pledge.” Benioff has long espoused the need for a more equitable economic system and has stated that the current pandemic “is a tremendous opportunity for all CEOs and all businesses to really put their resources right out there and say, 'We're going to do everything we can to lead and help the world get through this.’”
Salary and benefit cuts
Many salary cuts in 2020 have been top-heavy, focused around boards of directors, CEOs, and other senior executives. During the pandemic, executive pay cuts are not about assigning blame but about executives shouldering their share of the pandemic’s costs. CEOs are taking short-term pay cuts largely to show solidarity with their employees.
"A lot of it is symbolic…,” Itay Goldstein of The Wharton School commented. “When we come into a crisis like the one we have right now—where it's a difficult time for the economy, for workers, people are losing their jobs, people don't know what to expect—I think for CEOs to come out and say, 'We are going to give up our pay,' it's a signal that they are sharing the pain."
TJX Companies announced its CEO and chair would have their base salaries reduced for three months by 30 percent. All other executive officers took a 20 percent reduction. After it was forced to close many of its stores, Columbia Sportwear’s CEO Tim Boyle announced he would reduce his compensation to $10,000 (from $3 million compensation in 2018). Other employees would continue to be paid.
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Some companies have opted to make pay cuts commensurate with salary ranges, with higher-paid employees taking a larger percentage cut than lower-paid workers. Estée Lauder Companies announced a 50 percent chop in base salaries for the chairman and CEO, and that salaries of the executive leadership team, senior vice presidents, and directors/vice presidents would be cut by 30 percent, 20 percent, and 10 percent, respectively.
In a letter to employees, Aon CEO Greg Case announced that the board and named executives would take a 50 percent, temporary salary cut and that Aon’s country leaders had worked together “to determine the most equitable way to apply a temporary salary reduction to our broader colleague base and … developed a tailored approach based on a set of criteria, including the cost-of-living.” Based on that analysis, 70 percent of employees suffered a 20 percent salary reduction. Case wrote: “Throughout this trauma, our team has demonstrated incredible resilience. We all understand the gravity of this crisis and recognize the important role Aon plays in an increasingly volatile, interconnected, and uncertain world. Which is why we have committed to you that no one at Aon is going to lose their job because of this COVID-19 outbreak.”
Alternatives to salary cuts
In addition to salary cuts, firms announced other initiatives to reduce payroll expenses without letting employees go. These have included four-day workweeks, unpaid leave, pay freezes, elimination of bonuses, a freeze on 401(k) matching, and reduced vacation allowance. Some CEOs believe salary cuts are a way to spread the pain of reducing salary costs across a broad number of people. They provide immediate cost savings—while layoffs can involve significant upfront costs in the form of severance. Pay cuts can be temporary or permanent.
The challenge with salary cuts is that your best people, the ones with the most work options, may choose to leave the firm. A study of an inbound call center showed that when across-the-board commission decreases were instituted, the company’s most productive salespeople left the firm at a significantly higher rate (28 percent) than other agents. The result was a 6 percent sales decline. However, among those who stayed, their workloads did not decrease, and some actually worked harder. Another challenge for many companies is that widespread salary cuts may not be workable because of existing employee agreements.
Furloughs
A furlough is a mandated unpaid leave of absence, utilized by private (such as General Motors during the 2019 United Auto Workers strike) and public (such as the US government during the 2018-19 shutdown) organizations. Some firms with seasonal business, such as landscaping companies, use furloughs regularly. Furloughed workers generally keep their benefits, such as health insurance, but are still eligible to file for unemployment and search for another job. They also retain employment-related rights such as arbitration but cannot do any work for their employer. If the no-work rule is violated, the employee must be paid.
Furloughs often have a specified end date that can be adjusted as the economic outlook becomes clearer. Companies like General Electric and Nordstrom initially furloughed their workers during the pandemic, but some of those workers were subsequently laid off. Furloughs have long been used in some European and Asian countries but are less common in the United States. Many European countries have programs, such as Germany’s Kurzarbeit or France’s chômage partiel, under which the government pays a portion of a company’s wages in times of economic distress to limit layoffs. During the 2008-2009 recession, furlough programs were estimated to have saved 395,000 jobs in Japan and 221,000 jobs in Germany, but only 22,000 jobs in the United States. Only 0.5 percent of the US workforce was furloughed during this downturn.
Many firms announced furloughs at the start of the pandemic, including Uber, Marriott, Lyft, Disney, JC Penney, Tesla, Sotheby’s, and Macy’s. And companies have taken a broad approach to using them.
Restaurant chain Cheesecake Factory temporarily furloughed 41,000 hourly employees, providing them with continued benefits and “a daily complimentary meal from their restaurant.”
When Best Buy closed its electronics stores and moved to curbside pick-up only, retail employees were initially paid for their regular hours, even where shifts were canceled due to closures. When the lockdown continued, the company then furloughed 51,000 store employees—while still retaining 82 percent of its full-time store and field employees on payroll. To support workers through the crisis, Best Buy and its founder, Dick Schulze, created a $10 million employee assistance fund. Other actions included 50 percent salary reductions for the CEO and directors and a suspension of its 401(k) matching program.
Some firms have entered into arrangements with other organizations to help ease the financial pain of employee furloughs. Restaurant-supply company Sysco reduced staffing levels by a third via furloughs and layoffs but also did a deal with Kroger supermarkets to provide some of Sysco’s furloughed workers temporary work at distribution centers.
Another option is to rotate furloughs: one group is furloughed for a short period, followed by another group, and so on. This allows the financial burden to be spread more evenly across employees.
Many firms believe that keeping employees on payroll will leave them better positioned to take advantage of the eventual upturn. This is a lesson from the 2008 downturn when American companies reported trouble staffing up when the economy began to recover. "Helping workers keep attached to their prior employers could speed up the recovery," explained Till von Wachter, an economist with the University of California at Los Angeles.
Furloughs provide employers with options. Should the economic environment worsen more than anticipated, employers can layoff furloughed workers as a last resort. Furloughs are also administratively simple. Finally, furloughs allow for immediate cost savings. Once an employee is furloughed, their salary comes off the books. There are none of the upfront costs associated with layoffs.
There are also administrative and benefits costs associated with furloughs. For this reason, some CEOs argue that furloughs make sense in response to a temporary change in demand but not in response to permanent shifts.
Still, some workers, such as part-time or contract workers, may not be eligible for unemployment benefits during a furlough. Employees working under certain contracts will need to have that contract renegotiated before they can be furloughed.
Layoffs
Horror stories of insensitive layoffs are not hard to find.
Bird, which makes dockless scooters, let 30 percent of its workforce go via a Zoom conference call. In response to criticism, founder Travis VanderZanden tweeted, “We did ask all managers to reach out to the impacted employees 1on1 immediately after the zoom call, so it's already happening. I've personally been in contact with many.”
Sephora laid off 3,000 part-time and seasonal employees, primarily those with “short tenure” and those who “worked limited hours.” Elaborating on why they chose to do layoffs rather than furloughs, the company stated: “With all of the uncertainty right now, we have no firm timeline on exactly when stores will reopen or what our ability to rehire will be at that time. We chose a course of action where we could be upfront and transparent with impacted employees, offer severance, and open the door for employees to seek other immediate work.”
Like Bird, Sephora was criticized after laying people off via a conference call. One laid-off worker turned to Twitter to vent. “Sephora ruined our lives. Lol. Point blank period. Great conference call guys! Thanks for hanging up and not letting anyone speak. Thanks for breaking all our hearts. But ‘beauty stands together’ right?” The tweet had more than 7,000 likes by the following day.
Employers contemplating layoffs should take care to follow all legal requirements, recognizing recent changes in this respect. Many states have implemented temporary legal guidelines regarding employment that companies must follow during the pandemic. For example, New York Governor Cuomo issued a series of regulations surrounding sick and paid family leave and disability benefits.
Employers should also focus on maximizing compassion and care despite the limitations of a virtual work world. Rebecca Knight writes that if a company needs to lay off employees (which should only be a last resort), the first step should be to gather information. Before speaking to employees, make sure to have as much information as possible about next steps and available resources. Next, find the time when both parties can ensure a private conversation. Set the right tone and avoid making it about yourself. Communicate the message directly and stress that this is about a global situation rather than the person’s performance. She adds that while it is good to offer assistance to terminated employees, it is equally important not to overpromise. Employers should attempt to be as transparent as possible with the entire organization in discussing layoffs.
Elaine Varelas, managing partner of Keystone Partners, stresses that senior leaders should be present on teleconference company calls during layoff announcements. “Leaders should be affectionate and professional and verbalize their appreciation and communicate all the benefits that can be provided,” Vareleas adds. Experts argue that where a town hall format is used, executives should always be on camera.
Final thoughts
No matter which tools a firm uses to reduce payroll expenses, the actions will likely affect all employees, even those not impacted directly. HR firm Korn Ferry provides thoughts on communicating with employees during these challenging situations.
Executives should demonstrate “empathy for disruption.” Support employees in coping with the work-from-home environment's challenges—help them with child care needs, provide technology tools, and ensure they have what they need to safeguard their health.
Communicate the context underlying salary or headcount reductions. How has the pandemic affected revenue? What other cost-cutting measures have been taken? What benefits are being made available to laid-off employees?
Maintain employee engagement in the midst of a challenging work environment. One way to boost engagement: Utilize two-way communication tools such as virtual forums to allow employees to voice their concerns.
While we remain hopeful for an improving economic climate in 2021, the situation remains uncertain. As of early December, new COVID-19 cases are near all-time highs. Close to 800,000 people are applying for weekly unemployment, and Congress has not yet passed a new relief package. The lessons of the past year remain all too relevant.
In speaking to executives across industries, the message we continue to hear is that execution matters as much as the strategies and tools being used for cost-cutting measures. Organizations benefit when their leaders prioritize transparency, fairness, and compassion.
About the authors
Boris Groysberg is the Richard P. Chapman Professor of Business Administration at Harvard Business School. Sarah Abbott is a research associate at Harvard Business School.
[Image: InYang]
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