COVID-19 calls for a new remuneration strategy for companies

Author: Yves Stox (Managing Consultant)
Date:

The COVID-19 crisis plunges companies and employees into uncertainty. Reduced turnover and income result in negative cash flow. If the cash flow is negative for too long, a negative spiral is created from which it is difficult to get out. In this way, even the survival of the company may be endangered. A new remuneration strategy can help.

Temporary unemployment is temporary, not a solution

The generalised application of temporary unemployment for reasons of force majeure ("technical unemployment") gives companies financial breathing space. An advantage for both employer and employee because there is no need for dismissals. Of course, it is not always easy to explain such a measure to your staff. Information and engagement are crucial to keep employee confidence.

Temporary unemployment due to force majeure is of course not a miracle solution. Companies must keep in mind that temporary unemployment is an aid measure. Unlike the financial crisis of 2008, companies must arm themselves against the disruptive nature of the current crisis.

Questions after exit from the lock-down

A lock-down exit strategy is not self-evident. Every company has to find an answer to some crucial questions. What if COVID-19 flares up again? How must one deal with the long-term economic consequences of COVID-19? Will demand resume? Should new products be developed, new markets tapped? How can the working environment be adapted so that safe working remains possible? New investments will be needed, how will they be financed? It seems wise to bear in mind that new pandemics can break out.

The financial crisis of 2008: old answers

The answer to the financial crisis will not be enough. The solutions used by many companies focused on the short term. Employees were often asked to sacrifice part of their salary - temporarily or otherwise (salary sacrifice). A softer approach consisted of temporarily waiving wage increases (salary freeze). Those solutions worked in the short term. In the end, their goal was the same as temporary unemployment today.

New solutions

“Business as usual" cannot be the answer. Companies need to change their remuneration policy. High time for a new wage model that brings the interests of the company and its employees into line with each other on a long-term basis. Doing business together is central to this.

Existing pay models all too often link pay to seniority in the company. The longer the employee is loyal to the company, the more he or she earns. Is there an alternative? There certainly is. Reward performance and experience of employees on the basis of their added value for the company.

The introduction of this wage model will generally have little impact for younger workers. In traditional wage models, their experience does not yet weigh so heavily on the level of the basic wage. For other employees it will result in a salary freeze or salary sacrifice. The basic wage will no longer increase or even decrease. In this way, companies can liberate the necessary resources to make new investments in, for example, innovative technology.

Performance and experience of the employees deserve to be rewarded on the basis of the added value for the company. This can be done on the basis of the company's profit. There is no today. What's more, the necessary and sustainable investments weigh heavily on the company's results. By disconnecting the basic salary from seniority, employees invest in the future of the company. When the future of the company is secured and the company objectives are met, employees deserve to be rewarded. In this respect, employees are not different from shareholders. This creates a valuable  financial employee participation.

In order to achieve this, employees do not necessarily have to become shareholders of the company, although that is of course a possibility. A variable remuneration system for all employees is a perfect rewarding system. Variable remuneration is much more than an individual cash bonus. Let employees share in the profits through the profit premium. The CLA 90 wage bonus is also an instrument for employees to share in the results collectively. This can be done by setting objectives that depend on, for example, turnover or EBITDA. Not only do they strengthen employee loyalty, they maximize net revenue for employees. Both the profit premium and the CLA 90 wage bonus reduce the gap between net and wage costs.

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