Aon to cut staff salaries by 20%

Aon employees are set for salary cuts of around 20% with effect from May 1 as the company takes steps to address the impact of Covid-19 on its business.

In a letter to staff, Aon’s chief executive, Greg Case, said the company had developed a tailored approach to pay cuts that will mean around 30% of employees see no reduction. The remaining 70% will see a 20% reduction.

Case, alongside the group’s named executive officers, will see their salaries reduced 50%.

Those named officers include Christa Davies, the broking group’s chief financial officer, Eric Andersen, Aon’s president, John Bruno, chief operations officer, and Tony Goland, Aon’s chief innovation officer. The group’s board of directors will also see salaries reduced 50%.

“We have spent the last month carefully studying our options and know these proactive steps are the right decision for our firm. We are going on offense to both protect our firm and prepare for the opportunity that lies ahead,” Case said.

In the letter, Case committed to staff that “no one at Aon is going to lose their job because of this Covid-19 outbreak”.

“We have spent the last month carefully studying our options and know these proactive steps are the right decision for our firm. We are going on offense to both protect our firm and prepare for the opportunity that lies ahead”
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Case said it was still the company’s intention to complete the deal.

“Our combination with Willis Towers Watson will be a positive catalyst that enables us to accelerate innovation on behalf of clients. This all-stock combination requires no financing and our intent to complete it creates no incremental financial burden,” he said.

Given the impact of Covid-19 since that deal was announced, Case said the global economy is now forecast to shrink around 3% during 2020, the worst economic performance for close to a century.

“The economic analysis is daunting, but if it were simply a case of marginal revenue declines, we could counter with further expense discipline. Those are fundamentals that we know how to manage. Unfortunately, this downturn is not that simple. This is an immediate, global lockdown of major segments of our economy,” he said.

“In some sectors, organisations have seen nearly all their business disappear in an instant. Airlines have idled most of their fleets. Hotels are all but empty. Retailers have shuttered their storefronts and resorted to layoffs on a massive scale. Energy companies are pressured as demand plummets. Banks are bracing for a torrent of clients unable to repay debt, with the top five US banks alone expanding their loan loss reserves to five times greater than normal.”

Case said the actions by the banking sector were “particularly concerning” as they represent a belief payment behaviour is changing.

“It’s one thing to reduce marginal expense to match declines in revenue, it’s an entirely different challenge if there are indications payments will be deferred to an unknown date in the future.

“We simply do not know at what rate or over what time period payment behaviour could change,” he said.

Amid expectations of a sustained economic downturn, Case said Aon had already “substantially curtailed” spending on contractors and third-party vendors, making a company-wide effort to “reduce all discretionary expense not related to client service”.

Case said Aon had also paused its stock buyback plan and set aside those funds but intended to preserve its dividend.

“Paying a regular dividend is consistent with maintaining an investment grade rating and fundamental to accessing the capital markets,” he said.

Wells Fargo analysts said employee compensation and benefits is the largest expense line for insurance brokers, representing 69% of Aon’s total operating expenses in 2019.

“It is not surprising to see the company take action to manage its expenses in the face of a potential slowdown in its organic revenue,” Wells Fargo said in a research note.

“Typically insurance brokers have managed through economic slowdowns with workforce reductions and in this case the company has said no one will lose their jobs due to Covid-19, so instead it is looking to manage expenses through these salary reductions.

“This is the first employee pay reduction in the history of Aon. It will be interesting to see if other brokers follow suit – our assumption is they might,” the analysts said.