The COVID-19 pandemic has caused share markets to plummet, with some of largest falls since the global financial crisis. In some industries such as tourism, retail and hospitality, the impact has been immediate, with thousands of employees being stood down. With no clear sight of when the storm clouds will pass, companies are faced with tough decisions on the sustainability of their businesses.
Some may say that those who are able to keep their jobs should be lucky and remuneration should be the last thing on their mind. However, remuneration is one lever that companies can utilise to support the recovery process particularly given the recent JobKeeper1 stimulus package introduced by the Australian federal government.
For many companies, employee remuneration is one of the largest (if not the largest) expense items. To survive, it is not inconceivable that the use of redundancies is one potential tactic to be employed. However, we know that good talent is hard to come by, especially good talent that knows the business and clients. For companies, controlling employee expense can be achieved by restructuring remuneration spend while leveraging the JobKeeper package.
JobKeeper: How it works and what to look out for?
Firstly, if a company faces a reduction in turnover of 30% (or 50% for companies with turnover of more than $1 billion or 15% if a registered charity), then they can apply for the JobKeeper subsidy of $1,500 per fortnight for eligible permanent, part-time and casual employees (casuals require at least 12 months service to 1 March 2020). Further, the JobKeeper subsidy is not subject to superannuation guarantee payments (although employers can choose to pay superannuation if they so wish). While the program requires the employer to fund the salaries and claim the subsidy in arrears, this provides up to $19,607 per employee to support wage payments for the six month period flagged by the government.
The key things for companies to watch out for include:
- The criteria for turnover reduction is a comparison with the corresponding month or quarter in the previous year– suggesting there may be a need to look at revenue run-rates to determine what the reduction is. However, where the corresponding month or quarter was not representative of the usual turnover you can request the Tax Commissioner’s discretion to use additional information to determine the turnover reduction.
- Where employees have multiple employers, only one employer will be eligible to receive the payment. Companies will need to set up processes for employees to verify that they are the primary employer that will claim the JobSeeker Payment on their behalf.
- The payroll team (and their outsourced partners) will need to ensure that the codes and upload files are set-up correctly. Given all the challenges that companies have faced with wage and superannuation underpayments, it is even more imperative in challenging times like this to do the right thing and ensure that the payments reach all eligible employees.
Defer Fixed Remuneration for Executives and Senior Managers
Another way to leverage remuneration structures is to identify where fixed remuneration can be redistributed from the high paid employees to create an emergency pool to fund continued salaries for frontline / lower paid employees. Companies can convert a proportion of fixed remuneration for senior management/executives into deferred remuneration.
Deferred remuneration could take the form of a cash payment ‘drip fed’ back to the employee in (say) 12-18 months’ time. For publicly listed companies, deferred remuneration could convert to equity at the prevailing share price at the end of the deferral period so as to ‘de-risk’ the shareholders and employees given volatile share prices at present.
Be Careful with Incentive Programs
While some may consider using short-term or long-term incentive programs as another mechanism (e.g. changing the mix to more variable than fixed remuneration), that the messaging could be off-putting. Incentives have already taken a beating for many years even though they are a useful mechanism that naturally lend themselves to cost control.
Instead, it might be simpler to allow the short-term incentive to run for the remaining fiscal year after which Boards will need to exercise discretion to review how much ‘pain’ everyone has taken and adjust payments accordingly.
For long-term incentive plans, a lot will depend on the market conditions closer to the grant date. If share price remains volatile, companies should review how to determine the face value of the share allocation as shareholders would not be too keen to issue large parcels of LTIs when a share price is significantly depressed.
Adopting these strategies drives long-term stakeholder value
The bottom line is that companies can derive long-term value from rethinking their remuneration approach in tough times. Redistributing and communicating the redistribution shows leadership and care for the most vulnerable employees. When the recovery comes, there will be significant goodwill amongst employees and the company will benefit from the productivity dividend generated by the retained ‘corporate knowledge’ – at times an intangible asset that is hard to value but undoubtedly generates competitive advantage. This is the time for Boards and Executives to stand tall and lead.
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