A New Normal for Pay

Return-to-normal is a popular topic of conversation these days.

Business leaders are focused on return to work plans that will hopefully reengage their workforces in more productive ways. Small business owners are struggling to reopen, serve customers, and comply with local guidelines for keeping people safe. Friends and family are waiting expectantly for the day when kids going to school and adults going off to work become the norm again. These sentiments are quite understandable.

As a compensation professional with decades of experience in the world of business, I have watched with interest as organizations responded on-the-fly to the crisis conditions imposed by a global health emergency and downstream ripple effects on the economy.

Businesses across the country looked to the federal government for economic relief. Many also looked internally, approached business with new perspective, and took action in response to the sudden onset of a legitimate risk. From reducing executive and worker pay, to approving temporary pay increases for front-line workers, and completing layoffs order to reduce payroll exposure, none of these decisions were easy. And unfortunately, a number of organizations, large and small, are taking desperate measures such as filing for bankruptcy or closing their doors for good.

The health and economic crisis we are experiencing has also laid bare some of the unspoken, and largely unreported weakness in pay practices, income growth, purchasing power, home ownership and racial inequities, not to mention changing trends in the accumulation and distribution of wealth.

Let’s not fool ourselves into thinking that all was well six months ago.

Politicians and Wall Street analysts want us to believe that the U.S. economy (six months ago) was the strongest in history. And yes, unemployment was low and indices on the capital markets were pushing all-time highs.

However, celebrations of these new heights of prosperity tended to ignore widespread economic instability just below the surface. One study of 401(k) plans, representing five million Americans, reported that the median account balance is around $22,000 (Pew Trusts, 2016).

Another study estimated that approximately 40% of US workers and small businesses were only two-missing-paychecks away from personal insolvency (Passy, 2019).

The Bureau of Labor Statics’ annual report, A Profile of the Working Poor, found that 40 million Americans were members of the “working poor” in 2017—the latest data available (BLS, 2019).  

So let’s face it, a return to normal on Wall Street does not solve much of anything for these citizens.

The impact of the global pandemic has shed new light on systemic excesses that many find alarming: Income inequality. Under-representation. Racial discrimination. Unethical business practices.

To illustrate, some companies that touted salary decreases for executives turned right around and awarded off-cycle stock grants, creating the likelihood of excessive windfalls. Furthermore, it has been noted that approximately forty large companies have filed for bankruptcy protection this year, and yet over a third of these companies intend to pay executive bonuses in full. Crisis? What crisis?

Recently, a reputable consulting firm published guidance for companies as they return to normal pay practices. The guidance suggested a cadence for reinstating pay to normal levels.

What struck me was that the author did not even entertain the notion that executive pay levels should not return to pre-pandemic levels, and that upon reflection, the crisis facing us today creates an ethics-based opportunity to re-set levels of executive pay that delivers a more equitable new-normal.

Boards of directors have historically depended exclusively on external benchmarking to set executive pay levels. Today, directors have an opportunity to consider other factors such as CEO pay ratio, pay inequity, racial and social injustice, and rates of pay growth. A noted university professor and corporate governance authority has advocated such an approach for years—this may not be new thinking, but these circumstances do present a unique opportunity for positive change.

Balance. Fairness. Stewardship. We must return-to-normal by embracing these core principles, revitalizing our sense of what it means to be human. Those in leadership all across the business world must find the courage to stake out a new normal that actually makes our collective societies equitable, healthier, and economically strong from the ground up.

References

Bureau of Labor Statistics (2019). “A Profile of the Working Poor, Report #1079.” bls.gov
 
Passy, Jacob (2019). “Millions of Americans are just one paycheck away from ‘financial disaster’.” marketwatch.com

Pew Trusts (2016). “Employer-Sponsored Retirement Plan Access, Uptake and Savings: Workers report barriers and opportunities.” Pewtrusts.org

https://www.wsj.com/articles/coronavirus-crisis-dents-salaries-not-stock-awards-for-many-ceos-

https://lerner.udel.edu/sites/default/files/pdfs/Elson_Ferrere_Paper.pdf