FedEx plans to scrap annual incentive bonuses this year, an austerity move that would cost some employees thousands of dollars depending on their pay grades.
The annual incentive compensation (AIC) program, which bases year-end bonuses on percentages of employee pay, is expected to be one casualty of a $1.5 billion shortfall in revenue in the fiscal year ending May 31.
“The international macroeconomic weakness and resulting revenue shortfall no longer support AIC funding, and our expectation is that there will be no AIC payout this year,” FedEx Corp. executive vice president and chief financial officer Alan B. Graf said in a note to employees Tuesday, March 19.
It’s unclear what the action will cost FedEx’s Memphis area employees, who number about 30,000 out of 450,000 FedEx employees worldwide.
It also calls into question the prospects for annual or cost-of-living pay increases and long-term incentive program payouts later this year.
Memphis-based FedEx is the largest private employer in Memphis and Tennessee and a key driver of the local economy.
FedEx said in a statement Wednesday, “The continued global economic slowdown has led to financial results below our expectations, and we are taking immediate steps to address the short-term challenges and evolving market conditions, including elimination of funding for the FY19 Annual Incentive Compensation (AIC) plan. We remain committed to maximizing our opportunities for long-term growth and success ahead.”
FedEx gave a dismal earnings report for the second consecutive quarter Tuesday, blaming continuing economic softness in Europe and China and a slower than expected integration of European acquisition TNT Express for taking a bite out of international express revenue. It also reduced its full-year profit guidance for the second time since September.
Graf alluded to the cut in annual incentive compensation during Tuesday's earnings call, saying, “Our strategic management committee has been investing a significant amount of time identifying operational and financial steps to address the challenges we are facing.”
“To mitigate the lower-than-expected revenue trends, we have further reduced our variable incentive compensation, launched our voluntary buyout program and limited hiring and discretionary spending,” Graf said. The company is offering voluntary buyouts to certain U.S. employees but won't know until April how many will be approved for it.
In a note to employees, Graf discussed the earnings miss and some of the planned cost-saving moves.
“While elimination of AIC funding, expense controls, and other measures are difficult in the near term, I want to be clear that we remain undeterred in the investments we are making in innovation, network infrastructure, and automation that will increase our competitiveness and drive our long-term growth and success,” Graf said.
“While the impact of these investments cannot always be measured or experienced from quarter to quarter or in one fiscal year, the amount of innovation we are driving and opportunity in front of us is greater than any other time in the history of the company,” Graf said.
“All of our team members will play a role and benefit from our success in the years ahead. Thank you for your ongoing commitment as we work together to transform the business and maximize the opportunity ahead,” Graf said.
The latest moves are in stark contrast to what was happening this time last year. FedEx was planning to raise employee pay and performance-based bonuses, sharing some of the company’s tax savings from the federal Tax Cut and Jobs Act of late 2017.
The company later said about one-third of more than $200 million in pay-related upgrades was attributable to performance-based incentive plans for salaried personnel.
Annual incentive bonuses vary according to the classification of FedEx employee, from a single-digit percentage for professionals to much higher for vice presidents. However, employees typically don’t receive the full percentage bonus because of the way incentive compensation is calculated, based on the company’s financial results.
An employee making $80,000 a year who receives a bonus based on 7 percent of salary would be in line to receive $5,600, for example.
Upper-level employees, vice presidents and higher, are also expected to go without annual incentive bonuses under the measure announced by Graf.
It did not address another type of bonus, long-term incentive pay, which higher-ranking employees receive based on aggregate earnings per share goals over a three fiscal year period.
Out of $16.6 million in total compensation in the 2018 fiscal year, company chairman and chief executive Frederick W. Smith received an annual incentive compensation payout of $1,656,161 and a long-term incentive compensation of $6 million, for example.
