Covid-19 has created a literal life-and-death struggle for many; the resultant economic slowdown has imperiled businesses, employees and shareholders. A few lessons have already emerged from the pandemic’s fallout.
How companies manage employment and compensation through the Covid-19 crisis is already under intense scrutiny; positive and negative case studies will undoubtedly emerge offering insight into best (and worst) practices when it comes to human capital and non-financial risk management.
Human capital is an intangible company asset, often thought of as the economic value of an employee’s experience and skills. Already, investors focused on environmental, social and governance issues, commonly known as ESG, are tracking how companies address human capital issues in light of the pandemic and economic shutdown.
Aon and McLagan have tracked corporate reactions to Covid-19 since the start of the crisis, recording a wide array of pandemic responses through May 2020 from 66% of companies in the Russell 3000.
We found that firms had already taken steps to curtail executive (14.7%) and board (9.5%) compensation, work hours (2.1%), hiring (2%), and dividend payouts (3.9%), while others have gone further and closed locations (12.1%) and furloughed (6.2%) or terminated (1.9%) employees.
By May, 387 diversified financial services firms reported making executive compensation changes; however, none were community banks, which have mostly taken a wait-and-see approach.
Because human capital is a major driver of corporate profits in any industry, how companies manage workforce issues during a crisis and on a daily basis is important. In the banking and financial services industry, however, human capital is even more critical.
Human capital issues rank in the top material ESG risks that commercial banks should proactively manage, along with data security, business ethics, systemic risk management and product-related considerations such as access and design. And that was before Covid-19. In a post-pandemic world, several urgent human capital issues have taken center stage at banks and financial institutions.
Customer Access, Workplace Safety
Financial institutions are considered essential businesses and must simultaneously balance remaining open to maintain market liquidity with workplace safety for front-line staff. While organizations should do all they can to maintain strict social distancing and cleaning regimes, some have gone further by offering hazard pay to customer-facing employees. When evaluating hazard pay options, it is also important to weigh one-time versus ongoing pay adjustments, or whether to include this compensation in hourly wage figures. While one-time or periodic bonuses may impact short-term cash flow, executives should consider the effect of needing to potentially roll back pay increases in the future.
While hazard pay is one component of Covid-19 compensation, it is certainly not the only one. Many banks have faced a staggering increase in loan application processing due to both the Coronavirus Aid, Relief, and Economic Security (CARES) Act and mortgage refinancing. Planning for any overtime or performance bonus payments during the pandemic period will be a critical element of human capital and cash flow management. These decisions should be made in consideration of pay equity laws and best practices, which are additional focuses of ESG.
In light of the Covid-19 economic slowdown, many financial institutions may decide to reevaluate and make material changes to the performance metrics used in their incentive compensation plans.
Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have offered guidance on such changes. ISS encourages boards “to provide contemporaneous disclosure to shareholders of their rationales for making such changes.” Glass Lewis cautioned companies that proposals “that take a proportional approach to the impacts on shareholders and employees look more likely to be widely supported.”
No one knows for sure how long the pandemic and economic fallout will last; how companies manage their human capital through the crisis will be a key differentiator, both from an economic and a public relations standpoint.