A little Bit on Salary Cuts During the COVID Pandemic

Let us face it, shareholders will not sustain high operating costs without revenue. In parallel, virtual communication platforms, digitization of processes and technology in general, offer many opportunities to slash operating costs: These two truths make it very tempting for companies to take unpopular actions when revenues decrease suddenly, such as in time of crisis. In other words, during this COVID pandemic, it is not whether redundancies or salary cuts will happen, but when and how much. This article will focus on the human capital department’s role as it relates to assisting management in avoiding a panicked response to the crisis, and in conducting its cost cutting policies ethically and humanely.

A bit on ‘What is Currently Happening’

A recently acquired regional transportation company announced earlier this year (Jan 2020), that they were restructuring and would let go of 5% of their workforce due to improvements in internal efficiency, facilitated by new technologies and the digitization of processes. The company announced they had to do this to strengthen their position as a leader in the public transportation business and, eventually, for the public good. The message that they used was “…we did that to improve the lives of many others…”. Seven weeks down the line, and four after the COVID lock down, the same company decided to lay off more than 30% of their workforce. The reason this time was a drop in business and an unclear economic future. The message was “we took this decision after exhausting all possible means to cut cost…and the decision came to save the company”.

Other companies did not opt for redundancies but for decreasing salaries or canceling already announced benefits such as their 2019 bonuses. But the questions remain the same: Why do organizations decide to throw the white towel into the ring so soon? Is that a kneejerk reaction? What happened to all the profits of the previous years? How come organizations favor adopting the worst-case scenario first? Will there be a company without employees? Is it ethical to eliminate the livelihood of dozens, hundreds or thousands of families at the first signs of danger? And, in case you were on the board of directors of one of those companies, would you do that to protect shareholders’ interest, or are there other factors to consider?

Large companies can, and often do, get away with bad behavior – Many known, respected and even loved global brands still close an eye on the inhumane sweatshop practices of their manufacturing partners in developing countries. And now, with the COVID 19 pandemic in full swing, some companies are hiding behind this crisis to justify the elimination of thousands of jobs, risking the livelihood of workers and of their families. Dodgy behavior by some large organizations, whether in human rights, environmental policies, or tax evasion, is not something new. But even though corporations are powerful and can control the media, downsizing, unfounded salary cuts and bad corporate behavior in general, cannot go unnoticed anymore, and the offenders will eventually face a social backlash. All this to say that we are currently witnessing the emergence of ‘the social enterprise’: Organizations that are conscious of the fact that they can sustain their business and flourish, only if they apply commercial strategies that are considered socially and environmentally sound, while ensuring shareholders’ profits. The ‘social enterprise’ can be considered a kind of evolution over the abused ‘corporate social responsibility’ or the misused ‘business ethics’ concepts. Let us hope and assume that the social enterprise will not end up as merely another marketing jargon.

A bit on ‘Corporate Social Responsibility’ and ‘Business Ethics’

Corporate Social Responsibility (CSR) is a trend that took scale during the 1990’s. The idea was that an organization’s role went beyond maximizing shareholders’ equity: an organization should consider its impact on customers, suppliers, employees, environment, and the communities in which it operates, in addition to its shareholders. Ten years later, global ethical consumerism movements started to emerge leading to the relatively recent development of the ‘business ethics’ concept: the idea that consumers demand and support products and organizations that respect natural resources and the communities that produce their products and goods. Therefore, to gain an advantage over their competitors, many organizations use the two ideas as a subtle advertisement to gain public support and further their position in the market. Some organizations easily earn the badge for being a ‘social enterprise’; others fall into the blind spot trap where the visible impact of their behaviour contradicts their claims. These companies will eventually be labelled as hypocrites or unethical.

An interesting example of an ethical corporate behaviour during both economic prosperity and crisis is that of Dubai Duty Free (DDF). The company was established back in the 80’s and currently employs more than 6,000 employees most of which are front liners. The salaries and part of benefit packages of front liners are reimbursed from partner organizations and brands that wish to occupy some of the very lucrative retail space in Dubai airports (2 billion dollars in sales in 2019). With the lock down, the airport duty free closed down and sales plummeted to zero. DDF decreased the salaries of supervisors and managers but not those of front liners. DDF asked, and negotiated with, their partners to ensure the continuation of salary payments despite lack of sales and force majeure, which could give the partners a legal way out. In order to be fair to its partners, DDF developed a payment scenario where the partners’ share of the paid salaries would decrease on a monthly basis until all of it would be borne by DDF by the end of the year, in case the airport remained closed. Although DDF predicted that ‘back to normal’ would not happen before the end of 2021, they still decided to act ethically.

Colum Mcloughlin, CEO, always took pride in DDF’s values towards employees, partners, and shareholders. This was clearly expressed in a newspaper article written in 2017. Three years later and in the midst of the severe economic downturn, it looks like DDF did more than just produce a code of ethics on paper. DDF has developed an ethical culture in which, in time of crisis and when decisions need to be made, the welfare of employees came before financial gains. No one knows how the future will unfold, but in the short term, DDF managed to increase employee loyalty and strengthen its partners’ trust, which will be reflected in customer confidence when the market opens again. Simply put, DDF achieved the ultimate triangulation of business ethics. You can find the 2017 article on the following link: https://www.khaleejtimes.com/business/local/colm-mcloughlin-beyond-the-call-of-duty-free

A bit on ‘What to Do’, or ‘How to Do it’

Irrespective of the industry or locality your organization operates in, the following steps are broad guidelines to help human capital professionals facilitate sound decisions that take into account their workforce wellbeing.

1. Facilitate scenario planning. A very good model to try and predict how the economy will fare in the future is the Stacy-Certainty Agreement matrix. This matrix can assist organizations unravel uncertainty and facilitate internal agreement. Facilitation methods such as World Café, Virtual Café and Open Space are quite powerful to get the best participation from your people. Development of 2-3 scenarios is pivotal to strategize and allocate resources. *
2. Participate in the strategy development for each of the scenarios mentioned above. Define your key performance areas and act accordingly. This stage is crucial to identify your anticipated manpower needs (quality and quantity) and eventually contribute to the following points.
3. Predict your return on investment and calculate your return on human capital. Do that in accordance with the simulated scenarios. This would give you an idea on how long you might be able to pay for your workforce.
4. Amend salaries or decrease your workforce in accordance with set milestones. And do that while taking into consideration the minimum required to sustain a life in the locality that you exist in.
5. Share you plan. This will increase accountability and acceptance, whatever the outcome. If anything, your employees, and customers will appreciate the organizational ethical behaviour to sustain the business and the livelihoods of stakeholders. Before you know it, you will become employer of choice and the consumer's first choice.

Work with your marketing department to build a case on how investing in your employees will contribute to build your corporate image in the short and long terms. Replace the soft words of commitment and loyalty with activities, metrics and indicators linked to your organization’s market share, productivity and profits. Key performance indicators such as ‘Profits per Employee’, ‘Return on Human Capital’, ‘Cost to Supervise’, ‘Labour Cost’, and ‘Compa-Ratio’ are to be calculated in accordance with developed scenarios and should be the basis for well-supported and ethically justified salary cuts and redundancies.

While salary reduction and redundancies during those tough times are a fact, deciding on when to implement them and by how much is a choice. This choice must be built based on sound dynamic scenarios. Only when the guidelines listed above are applied conscientiously, will organizations have the backbone to communicate their policies transparently and without fear of a social backlash.

“A lot of people are afraid to tell the truth, to say no. That's where toughness comes into play. Toughness is not being a bully. It's having backbone.” Robert Kiyosaki

*In case you need assistance in implementing this scenario model, my colleague M. Nayal, who is quite good in scenario planning and strategy development, can remotely assist you on what you need to develop a strategy that would govern your financial decision-making process. linkedin.com/in/mohammed-nayal