The business of advising corporations on their insurance needs and healthcare and retirement benefits is one of those where, as the saying goes, your assets walk out the door every day.
Aon, the second-largest such company in the world, with 5,000 employees in the Chicago area, appears to be taking a substantial risk with its recent decision to cut most employee salaries by 20%, given its industry's tendency over many decades to poach each other's most productive workers in a bid to bring over lucrative corporate clients.
CEO Greg Case says the steep reduction, which applied as of May 1 to about 70 % of Aon's global workforce of 50,000, is motivated by the company's commitment not to lay off any workers due to the economic ravages of the COVID-19 pandemic. "Our value to clients stems fully from the collective capabilities of our colleagues," he wrote in the April 27 letter that laid out the steps the company was taking, including the pay cuts. "The concerns of all other stakeholders are important, but secondary at this time."
The company appears not to be abiding by at least the spirit of its own corporate severance plan, obtained by Crain's, which offers severance to workers who leave after such a substantial pay cut. It states that a "qualifying event" for obtaining severance includes "a material reduction of 20% or more of your salary." Workers must quit within 30 days of the reduction to get severance under the plan.
Case's April 27 letter described the pay decrease as temporary, but offered no timeline for restoring it. And he described the cut as "approximately 20% of salary." A company manager, who requested anonymity, says human resources personnel at Aon have been asked by workers and their managers whether this cut qualifies for severance, and the answer has been no. One written advisory from HR said, "The reduction that will be applied to the salary will be 19.9% on average. Communications indicate 20% due to rounding up."
Aon spokesman Jason Gertzen confirms that severance won't be made available to those who leave because of the pay cut.
The issue is critical because the insurance brokerage industry makes it difficult to work for a competitor. Most if not all of those who serve clients directly are subject to agreements barring them for a period of time—often 18 to 24 months—from soliciting former clients and prospects when they go to a rival.
In addition, as the CEO of Aon's archrival Marsh & McLennan pointed out on his company's recent quarterly earnings call, U.S. workers appear to be bearing the brunt of the pay cuts. In Europe, where London-based Aon employs thousands, workers must agree to the pay cuts for them to go into effect under employment rules there.
"Doing some sort of broad-based pay reduction programs are very difficult, and the impact oftentimes will fall most heavily and unfairly on the U.S. population," Marsh CEO Dan Glaser said on his company's April 30 call with analysts.
More broadly, he said Marsh, the world's largest insurance brokerage, wouldn't cut worker pay for this simple reason: "Solving the (potential revenue or liquidity) issue by reducing pay is an awfully blunt instrument, and it can have lasting implications. Starting with the notion of battering trust with your colleague base by challenging them when they're in this difficult period."
On Aon's earnings call a day later, Case said, "Our colleagues have embraced it and understand exactly what we're trying to do."
So, how many of Aon's employees in Europe have agreed to have their salaries reduced? On that, Aon's Gertzen declines to comment and also declines to say how many Aon employs in the U.S. versus Europe.
Case pledged in his April 27 letter that "no one at Aon is going to lose their job because of this COVID-19 outbreak." But job losses will occur next year no matter where the economy stands if Aon's $30 billion merger with London-based Willis Towers Watson, the third-largest insurance brokerage in the world, is completed.
The companies have promised $800 million in synergies, more than 70% of which will be in the form of "consolidation of business and central support functions, including leveraging the capabilities of the Aon Business Services operational platform across the combined group," according to a filing in London. That means substantial job cuts after the deal closes, which is expected in the first half of next year.
If the salary cuts linger until the deal closes, some Aon workers may well work at 80% of their salaries only to then lose their jobs as the companies are integrated.
Gertzen declines to comment, pointing to Case's letter in laying out the company's point of view. In that letter, Case said Aon would continue with the deal because "Willis Towers Watson will be a positive catalyst that enables us to accelerate innovation on behalf of clients."
Case also said that shareholders were bearing some of the load of the cost reductions with Aon's decision to suspend share repurchases. Aon spent $463 million on buybacks in the first quarter alone and $2 billion last year.
The issues around stock buybacks in light of the Willis merger are murky, though. The merger agreement appears to bar both companies from stock repurchases until the deal is complete. That's the way Willis seems to interpret it, at least in regard to Willis. "With regards to certain prohibitions under the transaction agreement in connection with our pending business combination with Aon, the board of directors does not expect to repurchase any shares during the remainder of 2020," Willis said in an April 30 Securities & Exchange Commission filing.
Aon in its quarterly filing, on the other hand, said it had "temporarily" ended its buyback program "due to COVID-19." Aon Chief Financial Officer Christa Davies had told analysts on March 9, when the Willis deal was announced, that Aon planned to continue buybacks in 2020. So, apparently, there might be other language that permitted Aon to buy back stock when Willis couldn't. A Willis spokesman declines to comment other than to reiterate the SEC disclosure, and Gertzen declines to comment.
What the merger agreement explicitly does allow is the continuation of both companies' shareholder dividend. In Aon's case, that will cost about $410 million this year. Case himself will receive $2.1 million of that based on his current holdings, which will more than offset the salary reduction of a little over $500,000 that he's taking for the remainder of the year.
This story first appeared in our sister publication, Crain's Chicago Business.