In a matter of three months, COVID-19 has rapidly transformed from a local virus outbreak to a global pandemic. While the stress it has put on society at large and healthcare systems around the world is unprecedented, it has also almost brought the global economy to a grinding halt.
This slowdown is likely to be prolonged, and given the scale and severity, businesses need to adapt quickly. In the short term, organizations will need to adopt some cost-containment measures, and rethink their cash flows and working capital requirements.
An important piece of the jigsaw for organizations from this perspective is remuneration. Often constituting one of the largest “controllable” costs, organizations need to undertake careful planning to retain, reward and motivate employees through this crisis.
Several companies in Singapore and around the globe are already implementing pay cuts, voluntary no-pay leave and bonus reductions for senior management in response to the COVID-19 crisis. These include United Airlines, Marriott, Lyft, Singtel, Singpost, SATS, SP Group, Singapore Airlines and Temasek Holdings, among others.
While the overall financial impact of executive pay cuts on the company’s bottom line is likely to be limited, such cuts are critical from a leadership, perception and messaging perspective. At a time when share prices are plunging and as companies may need to consider headcount reductions, executives cannot be seen as financially insulated.
From a remuneration standpoint, however, most senior executives are paid significant proportions of their total compensation through performance-linked variable pay awards — both cash and equity. These awards are bound to be dramatically affected by the slowdown.
To put this in perspective, senior executives in Singapore typically receive between 40% and 70% of their total pay in performance-linked incentives, up to half of which could be in long-term, equity-based vehicles. In comparison, most other employees only receive between 10% and 20% of their total pay in incentives — usually as annual cash bonuses.
It’s now become critical for organizations to effectively navigate and manage variable pay components by trying to balance the affordability aspects with fairness to ensure that motivation and productivity levels do not drop — which can arguably have a major enduring impact on business performance.
In Mercer’s discussions with multiple boards and management teams over the past few weeks, we’ve seen that a number of alternative approaches are being considered with respect to variable compensation for executives: