When businesses go through a crisis resulting in abnormal (or interrupted) operations and significant economic challenges, many companies look to their compensation budgets as an obvious means of cutting costs.

The delicate balance is: How do you handle compensation during uncertain times to protect the financial health of your business but without losing valued employees?

This scenario could occur in any type of economic downturn or industry shift – really, anything that disrupts business continuity and impacts the bottom line.

Of course, a global pandemic such as COVID-19 is a prominent example of this. Depending on state and municipality, some businesses were forced to close for weeks to months. Numerous other types of businesses operated at diminished capacity or faced other extreme disruptions. As a result, many business leaders had to make tough choices for their companies to survive. Unfortunately, millions of workers were laid off.

Layoffs can be an immediate, much-needed measure to reduce costs. But, in some cases, it can be a short-sighted decision. There very well could be a better path forward. If you’re facing economic hurdles, here are some common, alternative ways to retain employees while reducing expenditures and mitigating the pain felt by your team. It should be noted that these strategies could be temporary or permanent in duration, depending on unique circumstances.

Creative compensation strategies for struggling businesses in crisis

1. Hiring freezes

This simply means that all hiring of new personnel stops for a period of time. Hiring freezes are often among the first strategies considered by business leaders because it minimizes the impact on the current workforce.

2. Pay freezes

This is when merit-based pay increases cease and promotions are no longer given. They can be resumed at some point in the future when company leadership feels comfortable giving raises. From the employee perspective, pay freezes are usually preferable to reductions in regular wages or interruptions to payroll. Again, the impact on the current workforce is minimized.

3. Elimination of perks

Workplace perks are the “extras” that make your workplace unique and enhance your employees’ experience. Sometimes these perks come with expenses for employers, such as:

  • Ordering in lunch for employees
  • Paying their membership dues for industry associations or even to the nearby gym
  • Offering monetary awards or gifts

Unfortunately, in times of financial crisis such expenses are non-essential and can be discontinued.

4. Adjustment of annual incentives or targets

You have the option to end bonuses that employees can earn – usually on a quarterly, semiannual or annual basis – for meeting predetermined performance criteria. You could also consider merely reducing the percentage of their base salaries that employees are eligible to earn.

Another strategy for compensation during uncertain times is to adjust performance goals or delay setting them until you have more information about how your business will be impacted by an event. Lengthening merit cycles can buy you some time while you make necessary decisions about compensation budgets.

It is best to make changes to annual incentives or targets well before payout for the annual incentive or target would be due. Waiting until the date of the payout to announce that the funds will not be paid can result in significant employee relations concerns.

5. Pay reductions

This is when regular wages are decreased without altering work schedules. Employees are drawing a lower paycheck for doing the same work and spending the same amount of time on the job. Understandably, it’s an unpopular and painful decision for employers and employees alike.

You have a few options for how to implement this reduction:

  • Reduce pay by a certain percentage across the board for all employees.
  • Reduce pay by a certain percentage according to pay grade in organizational hierarchy, job or some other strategic consideration. Usually, higher-wage earners take a larger reduction in pay to preserve lower-wage earners.

Understand the associated legal issues and ensure compliance when applicable:

Review state and local laws for where your business operates.

Some states require a specific amount of notice of pay reductions be given to employees so they have adequate time to prepare. Where such laws don’t exist, 30 days’ notice is best practice. At a minimum, you should give employees notice of one pay period.

Some states also require written notice to employees of changes in pay, along with a signed acknowledgement from each employee.

The Fair Labor Standards Act (FLSA) sets federal minimum wage and overtime pay requirements for exempt and non-exempt workers.

With any pay reduction for employees, make sure that your business still meets minimum payment requirements:

  • Minimum wage of $7.25 per hour for non-exempt employees
  • Minimum salary of $684 per week ($35,568 annually) for exempt employees

If your business operates in a state or municipality with higher minimum wage requirements, the applicable minimum wage is the greater of the state, local or federal minimum wage. Apply overtime accordingly.

An amendment to the FLSA, the Equal Pay Act mandates equal pay for equal work.

All employees who are similarly situated – those who occupy similar roles, in the same department, with similar levels of experience – should earn approximately the same amount.

The law’s original intent was to prevent pay disparity between genders. Today, understanding of the law has expanded to also prohibit unequal payment of employees on the basis of any protected class, such as race or religion.

If you’re implementing a pay reduction, make sure you’re not targeting and adversely impacting an individual or a group without a legitimate business justification. Otherwise, you could face charges of discrimination and find your company the subject of a complaint with the Equal Employment Opportunity Commission (EEOC).

Other considerations

  • Your employees’ new salary should be enough to cover their current benefit contributions. Reductions in pay may cause benefit contributions to become a greater percentage of an employee’s monthly living expenditures, but this doesn’t constitute a mid-year election-change event.
  • Pay reductions should be processed prospectively, meaning that you shouldn’t change pay for hours that have already been worked.
  • Let your employees know that they can apply for unemployment. However, be clear that it’s up to the state unemployment agency to examine and approve their claim – and there’s no guarantee their claim will be accepted.

6. Alternative work schedules

In this strategy, employees are paid less – but they’re also spending fewer hours on the job, too. Common examples of alternative work schedules:

  • Reduced hours worked each day
  • Reduced days worked per week
  • Alternating weeks worked – for example, one week on, one week off

If you have some flexibility about which employees could switch to alternative schedules, consider making it voluntary – at least initially, or until the situation evolves. Otherwise, make determinations based on business need.

Depending on the state and municipality where your business operates, you may need to comply with predictive scheduling laws mandating a minimum notice period for changes in hours, days and times worked.

If no such laws exist, try to give reasonable advance notice so employees have adequate time to prepare. Best practice is 30 days.

7. Furloughs

Furloughs are a bit different from layoffs. A layoff is permanent, but a furlough means that you intend to retain your employees and bring them back to work within one year. Their employment is still active, and they may retain access to benefits. They’re just not coming in to work or being paid in the meantime. It’s like their job is on hold.

The decision as to which employees should be furloughed is usually based on business need. Although employees don’t lose their jobs, furloughs can present significant, prolonged challenges for your team.

How to talk to employees about compensation during uncertain times

It’s hard to deliver unpleasant news to employees – especially when it’s about changes in their pay.

Compensation never affects only employees – it also impacts their families and can drive painful adjustments in lifestyle and other tough decisions. It can put people in difficult financial positions that can have long-lasting consequences.

That’s why it’s best to deliver unwelcome news in person, if possible.

Senior leadership may want to consider being present. These are the people to whom employees look at as their guideposts, especially in times of uncertainty. Their active leadership can be crucial in providing a sense of security and stability.

Throughout this period of disruption, be:

1. Empathetic

Communicate to employees that you understand the difficulty this decision puts them in. This is a reflection of the crisis the company is facing, not an indictment on their performance or value. Everyone at your company is in this situation together.

2. Transparent

Be honest about the severity of the situation and clearly explain what the business must do to survive. But take caution to only share what you know for certain. If you don’t have all the answers at that moment or a firm idea when things will return to normal, it’s OK to say so and commit to providing regular updates.

Do all you can to prevent rumors from circulating and panic and negativity from festering.

3. Open

Encourage two-way communication. Make sure your employees know where to go to discuss their concerns.

4. Methodical in developing and distributing information

Have a process in place for efficiently communicating updates with employees and clarifying inaccuracies. If your workforce is distributed or remote, use a variety of media to reach them, including videoconferencing, company- or department-wide emails and Intranet messages.

5. Inclusive

Employees want to know what’s going on and how they’ll be impacted. They also want to be part of the solution – after all, they have a pretty big stake in the outcome. Solicit their feedback. Leverage the intellectual capital within your team to brainstorm ideas for how to reduce expenditures while saving jobs. This is also a critical step to obtaining employees’ buy-in to whichever direction you choose.

Displaying emotional intelligence in your communications can go a long way toward developing a mindset of resilience in employees.

Downsides to changes to compensation during uncertain times

Pay may be linked to some employees’ feelings of value and self-worth. It’s also tied to their financial stability and personal comfort.

So it’s often unavoidable that low morale, low engagement and high turnover can be the byproducts of changes in compensation – though there are steps you can take to mitigate morale and engagement issues and better retain employees.

Some employees may be angry and upset about changes in their pay. Calmly explain to them that decisions must be made for a business to stay open.

The flip side: Compensation strategies for businesses that continue operating in crisis

While some businesses struggle in a crisis, others continue to operate – some at enhanced levels.

For example, some companies during the COVID-19 pandemic were in high demand and had to remain open to the public to provide essential services, such as hospitals and grocery stores. These companies often sought ways to reward their employees.

This type of compensation strategy serves the purpose of:

  • Maintaining adequate staff levels to keep daily business operations intact
  • Acknowledging employees’ dedication and hard work
  • Boosting employee morale and engagement

Companies looking to incentivize employees in a crisis can deploy these motivational strategies.

1. Premium pay

This is pay that’s in addition to employees’ base wage or salary as a “thank you for being here.”

Before implementing premium pay, consider:

  • The circumstances that justify premium pay
  • The criteria for qualification
  • The amount of premium pay employees can receive
  • General guidelines for administration

Premium pay must be included in the regular rate of pay and in overtime calculations.

2. Retention bonuses

This is a bonus – either in the form of a lump-sum payment or spread out in multiple payments within a specified time period – to keep employees on board at least until a certain date, and hopefully beyond.

This could be available to all employees, or only to especially high performers. If you opt to reward select employees, document the criteria for earning the bonus and why certain employees were given the bonus. Be consistent in the administration of bonuses to avoid charges of discrimination.

Retention bonuses must be included in the regular rate of pay and in overtime calculations.

3. Shift differentials

This is when you reward employees who work “off shifts” (evenings, nights and weekends) in the form of extra wages for the inconvenience of coming in to work at a less desirable time.

4. Non-wage-related incentives

Sometimes it’s not about extra pay – it’s the feeling of importance you give someone.

Some low-cost (or free) ideas to show employees how much you value them:

  • Distributing gift cards
  • Providing meals at the office
  • Offering lunch or some form of face time with senior leadership
  • Delivering notes of appreciation

Summing it all up

When a crisis happens, and your business can’t operate normally, permanently losing valued members of your team doesn’t have to be a foregone conclusion to save costs.

There are many creative strategies you can implement to adjust compensation during uncertain times to satisfy both goals of keeping employees on board while protecting the financial health of your business.

Of course, in the event that your business is able to continue normal operations in a crisis, there are other compensation strategies you may want to leverage to reward employees for their dedication. Either way, you have a great opportunity to show employees how much they mean to you and how far you’ll go to show your appreciation.

For more information on how to compensate employees during periods of normalcy and crisis alike, download our free magazine: The Insperity guide to benefits and compensation