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Unemployment Tops 14.7 Percent in April. What Does it Mean for Compensation?

The unemployment rate for April was just announced today, reaching 14.7 percent as 20.5 million people lost their jobs. Economists have been speculating about the unemployment rate for weeks. When 3.3 million people filed for unemployment at the end of March, the unemployment rate jumped to 4.4 percent after having reached historic lows of 3.5 percent in January and February. And then came April, when every week revealed record highs in unemployment claims. In just the last seven weeks, 33 million people have filed for unemployment.

The wave of job losses is unlike anything that has been seen since the Great Depression in the 1930s. Economists have speculated that decades of wealth have been lost. The GDP fell 4.8 in Q1, exceeding predictions of 3.5 percent, and Q2 will be worse — much worse — but we won’t know the damage until the end of July when the advanced report will be released.

But it hasn’t been for nothing. Over 76,000 people have died of the Coronavirus in the United States, making the U.S. the leader in coronavirus-related deaths around the world. There have been over 1.2 million confirmed cases and likely millions more unconfirmed as testing has been reserved for only the sickest and most at-risk patients. But social distancing has kept those numbers from being worse, possibly substantially worse, overwhelming hospitals everywhere all at the same time. There’s no way to tell exactly, but we can see from IMHE data tracking healthcare capacity that states with mandated social distancing have managed to flatten the curve.

For example, Washington State (where PayScale is headquartered) shows over 5,000 hospital beds available for fewer than 1,000 projected beds needed even at the peak in April. Meanwhile, New York was overextended in April, with 13,000 beds available for a projected 20,000 beds needed at the peak but has finally dropped below hospital capacity in May.

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Washington State Coronavirus Flatten the Curve

New York Flatten the Curve Coronavirus

Other states aren’t doing so well and the U.S. as a whole is well over capacity. The New York Times is charting coronavirus case counts across the U.S. including mapping which states are seeing an increase of cases, where cases are mostly the same, and which states are seeing cases decreasing. However, given the severe impact that social distancing has had on state economies, some states are reopening business again even if they are a state where the coronavirus is still increasing.

And it is still increasing. Projections currently estimate that there will be over 134,000 coronavirus-related deaths by August 4, 2020. A draft government report estimates that coronavirus related deaths will rise to over 3,000 deaths a day by June 1st. Johns Hopkins has also published data on the cumulative number of cases by date and country, showing the US as the clear leader.

Covid19 projected deaths in the USA

Coronavirus cumulative cases
John Hopkins: Coronavirus Cumulative Case Data

 

Fortunately, management of the virus has become a little better as hospitals learn about the illness and some treatments are starting to show promise. Still, we are nowhere near reaching herd immunity and a vaccine remains months or even years away.

Regardless, the economy is going to start reopening, at least in some capacity in some states. Whether the economy takes off or another surge in coronavirus outbreaks forces renewed orders for social distancing remains to be seen. In the midst of this, the alarm bells of a recession are ringing and there’s one question we know our audience is asking:

What does all this mean for compensation?

The Great Shutdown means we’re heading into a recession, but recessions don’t usually result in reductions in pay for the workforce.

The reason for this is that businesses traditionally view compensation as an implicit contract between employer and employee.  When you interview for a job and receive an offer, your compensation and total rewards package are the bargain you make with that business to supply your time and expertise to help that business succeed in its goals. If the business rescinds on this bargain, employees can rescind on their side as well. This could mean unproductive turnover as top performers leave for better opportunities, or it could mean a reduction in effort and all-around disengagement and lowered morale, which can have far-reaching consequences that undermine the ability of the business to perform.

An unproductive or rapidly churning workforce makes it hard for a business to succeed and this is just as dangerous — if not more dangerous — during a recession as it is in times of plenty and prosperity.

Therefore, historically, business have not commonly cut compensation when times are tough, and our data supports this. Instead, they tighten expenses and reduce payroll through layoffs with the intent to rehire when the economy starts to pick up again. There are exceptions to this, and we are seeing those exceptions reported more frequently in the current, unprecedented situation, but pay cuts are still largely uncommon.

The reason behind pay cuts during the current crisis is the hope that the situation is going to be temporary. Pay cuts can allow a business to stave off layoffs, which is a viable strategy if the situation is only going to last for a few weeks or a few months and those affected can afford it. Pay cuts can be a way for businesses to show loyalty and generosity to employees who are frightened of losing their jobs in such a bleak economy, especially if they are done with employees’ consent and well-communicated. It also means that businesses won’t have to rehire when things turn around, which can be cost effective, especially if the current workforce is strong and replacing workers would be more expensive than keeping them. This is especially true in industries where workers are high educated and specially trained.

However, if the situation turns out not to be temporary, layoffs can happen anyway, and then you have another breach of (implicit) contract, as well as lowered morale and external pay inequity that can be difficult to resolve and communicate and lead to more unproductive turnover and greater damage to the employer brand.

The right thing to do depends a lot on the specific circumstances of the business—the type of workers it employs and how well they perform, its industry and location, and the state of its financials.  There is no crystal ball for what the future holds, so businesses really have to make choices based on their own projections and values.

Regardless, an economic downturn can be an opportunistic time to revise — or build — a compensation strategy, and then use the data to make careful and well-measured decisions around employee pay and incentives that can save the company money without hurting employee morale. It can also position the company for success when the economy begins to improve and hiring takes off.

As we go into more detail in our article on Why Compensation Matters More Than Ever Right Now, there are several ways that a mature compensation strategy can help a business during a down economy.

First, you can determine who you are overpaying and who you are underpaying. This requires both access to fresh, relevant salary market data and also a compensation philosophy and pay structure that is specific to your business. With the right strategy in place, you can identify employees who are red-circled (overpaid) as well as employees who are green-circled (underpaid). This can allow you to issue pay freezes that are fair to your workers and communicate the reasons confidently and competently.  You can also reset pay ranges for top performers, or even issue promotions when warranted, to ensure that those people continue to put their best effort into your business during a difficult time.

In addition, your compensation strategy can help you resolve pay inequities in the business, both internally and externally, to boost morale as well as performance, and become a more transparent business with your workforce. If you can’t afford the associated costs with resolving pay inequities in the current times, you can still plan for what they will be when the situation changes and work with executive leadership on budgeting for raises when you can afford to give them.

Lastly, you can look into pay-for-performance. Depending on your level of commitment to your plan to give raises when the economy improves and your comfort level with pay transparency, you can communicate to employees what their raises will be if or when the business is able to hit certain financial goals. This is one way to create a performance plan to motivate employees when times are tough. There are also other ways to do this, such as creating individual bonuses, team-based bonuses or company-wide bonuses if the business manages to hit specified goals.

Regardless of what tough decisions your organization has to make in a time like this, it’s important to focus on the future and consider where you want to end up and what you need to do to get there.  In times of uncertainty, many businesses react with fear and take steps to protect themselves. This is appropriate to an extent, but you can’t move forward if you remain huddled on the ground.

A better strategy is to chart a course for where you want to be (one that is reasonable for the times), communicate that course, and commit to rewarding the workforce for successfully achieving the business goals you set out to achieve. This should be communicated company-wide, not just to sales. When all employees understand where you are going and why, what they have to contribute to get you there and what they will earn for doing so, then the whole company will be incentivized to succeed, and the business will be positioned to thrive after the recession ends.

 


Do you want to know more about how the current economic climate is impacting wages? Download our whitepaper.

Curious to know how we are responding to the coronavirus pandemic? Check out our free data offering.

Want to learn how compensation software can help you track pay against performance? Request a demo.

 

Amy Stewart
Sr. Content Marketing Manager at PayScale
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