Pay Cut Pandemic

Firm leaders had planned to keep pay levels the same. That might be changing.

At the start of the year, many leaders hadn’t heard of the coronavirus, and fewer still thought it would have any impact on something so foundational to an organization as employee paychecks.

Things have changed fast.

As the virus has spread to more than 100,000 people in more than 100 countries, leaders worldwide are realizing that with the supply chain breakdowns, quarantines, and cutbacks in travel, they may need to pare back salaries to compensate for lost revenues. “Everyone is preoccupied with a duty of care to employees while also managing the business. Those things aren’t always easy to reconcile,” says Bob Wesselkamper, vice chairman of Korn Ferry’s Global Rewards and Benefits practice.

For their part, firms in China, where the virus first struck, needed to move to this alternative if their business came to a standstill. According to an early Korn Ferry survey, one in four firms there said they would make “special” salary adjustments in response to the epidemic. Another 36% said they would consider performance-target adjustments.

Already, top management and CEOs at some airlines—an industry crushed so far—have announced cutting their own pay 10% to 20%. Experts say it’s too early to know the size and scope other firms might need to take across staffs in general, but point to the financial crisis of 2008 as one guide. During that period, nearly six in 10 companies froze or decreased staffing, while 35% froze pay. “Quite often, head-count reductions are the go-to strategy, even though there could be alternatives,” says Tom McMullen, a Korn Ferry senior client partner and leader of the firm’s North America Total Rewards expertise group.

The first step, perhaps surprisingly, is seeing what the workforce is willing to do. As the coronavirus has spread through Asia, workers at many organizations voluntarily took time off without pay or worked more hours for the same pay—reducing the pay cuts that were implemented. Some workers even gifted their accrued vacation time to employees who lost workdays because they were sick or quarantined.

Organizations also shouldn’t discount what governments might do to help out. Countries from Australia to the United States are considering payroll tax deductions, tariff suspensions, and other programs that likely will make it easier to keep paying people their normal wages. Hong Kong is going a step further, giving out cash directly to citizens. 

If the impacts of the outbreak persist, however, experts say companies likely will want to develop a more comprehensive plan to reduce labor costs through a mix of layoffs and pay cuts/freezes. Even so, Wesselkamper says it’s critical that organizations try not to overreact. “Cutting muscle and hurting your ability to recover is far more damaging to an organization than limping along with a couple of quarters of extra expense,” he says.