As the pandemic started unfolding its full potential, the global economy turned into a systemic financial crisis, which eventually started moving towards a recession. In principle, understanding these concepts is not that difficult.
A financial crisis takes place when the trust in the financial system has eroded due to high liquidity risks and volatility in asset prices. This often leads to a tightened circulation of capital, which makes it difficult for businesses to borrow and manufacture. Businesses are not able to make sustainable profits as the sales and the cost of sales start moving in unfavorable directions. Hence, it becomes difficult to retain human capital.
The worldwide economy has taken a hit, and as a result, the entire world is facing a major financial crisis. According to the International Monetary Fund (IMF), the global economy is expected to go down by 3% in 2020. This is said to be the steepest slowdown since the Great Depression of the 1930s. It has already shown signs of overshadowing the 1982 International Debt Crisis, the 1997 East Asian Economic Crisis, the 2000-01 Dot Com Bubble, and the 2008 Financial Crisis.
A lot of people study the long-drawn impact of such crises on capital markets. A critical component of the economy – the people who work for businesses affected by these crises, also need equal amounts of attention.
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Going in the Details: What Happens During a Financial Crisis?
A financial crisis is a situation in which the value of some financial assets goes down rapidly. It often coincides with stock market crashes, banking panics, currency crises, and more. A financial crisis is succeeded by a recession, which usually leads to higher unemployment and lower-income. During the recession, individuals and families struggle to find work and earn wages. Furthermore, businesses also strive hard to survive in such an economic downturn.
This also has a significant impact on employee benefits, which include vacation, medical insurance coverage, profit sharing, retirement perks, and more.
In this article, we will discuss how the financial crisis impacts the employee benefits programs and what can businesses do to support their employees even in large-scale crises.
Impact of the Financial Crisis on Employee Benefits
The impact of the financial crisis on employee benefits has been historically gloomy. As the economy starts shrinking, employees get in a state of worry over the looming risk of job losses. Businesses get in the pressure to cut workforce expenditure and reduce their overall costs. This means that the staff gets paid less and receives fewer or no benefits until the situation gets back to normal.
Employee benefits are essential for the performance of the workers. Such perks and benefits help in promoting the balanced lifestyle of an employee and also ensure that they contribute to the company’s overall success. Without any perks, employees feel demotivated and often switch employers. Thus, the Human Operations Team is left with the challenge of hiring and retaining the workforce.
Some experts make the rational argument that since the business is not growing, and might even be shrinking, expense items such as employee benefits should be reduced to their lowest to bring the income statement under control. Others, who understand the strong correlation between employee benefits, employee productivity, efficiency attained from it and eventual profits, say that businesses should focus on increasing benefits in such times to retain the top talent pool.
Many brands that have taken the approach of advertising aggressively during a financial crisis when their competition is pulling out of public space, have observed a phenomenal phase of growth after the crisis. The same analogy can be drawn for employee benefits.
What should businesses do?
So, what can businesses do to thrive in a financial downturn and at the same time keep their employees motivated so they are optimally productive and motivated to take additional responsibilities? Here are some solutions that might help:
1. Long Term Incentives
Offering long-term incentives, such as employee stock option plans (ESOP), can prove to be highly beneficial in attracting and retaining quality staff. Earlier, such incentives were only offered to senior professionals. But due to major economic imbalance and shortage of talented people, employers have started providing a wide variety of financial perks and benefits to stay competitive and also keep the employees motivated in the long-run.
Stock options come with a vesting period. This way, they can be exercised only after the vesting period is over. The options are designed to give the employees direct benefits when the company’s equity value goes up. With vested interests, employees can ensure that these incentives are aligned in the long run. The best part of it all is – it takes next to nothing in terms of expenses to create ESOP pools.
2. Unpaid Vacations
Frequent layoffs and being underpaid for incremental work results in lower employee morale and productivity. Eliminating employee benefits may have a little impact on the company’s savings. Thus, offering sabbaticals or reducing the headcount temporarily during such a downturn is another highly effective way for companies to reduce their costs. Some companies even take the approach to converting their permanent workforce to independent contractors for the time being. This way, the costs incurred in paying the employees are accurately allocated and in-line with the value produced.
3. Effective and Transparent Communication
Another crucial tip is to communicate with your staff and know exactly what they want. You can spend all the money on an effective benefits package but if it is not aligned with your employees’ needs and wants, it will have no positive effect on their productivity and retention. Hence, the HR professionals must find optimal cost-effective benefits that are not only efficient for the company’s survival but also motivate the employees to a large extent. You can use the modern HR tools that provide on demand data to the employees and increase transparency in your organization.
4. Some alternative approaches
If a business wants to attract and retain key people, staff motivation should be one of the top priorities. The following ways can assist the companies in achieving this even in challenging market conditions.
- Keep your employees engaged and update them about the company’s successes, failures, and challenges.
- Introduce company awards, such as employee of the month, to encourage their positive contribution to the business.
- Talk with your staff on a human level and encourage them to share their feelings with a mentor.
- If you cannot afford expensive perks, make sure to offer benefits like half days on Fridays or leave on their birthdays.
- Consider hiring payroll experts who can revamp your compensation programs and delight employees without putting extra burden on your pocket.
The financial crisis affects the company’s monetary and non-monetary reward system, which can result in less motivated and productive employees. Thus, it should be the responsibility of every business to study such an impact and design innovative and cost-effective benefits to ensure the smooth functioning of its operations, even during the economic slowdown.