Cryptocurrency has gone to an important asset class and means of payment across the globe. New businesses have been created to revolutionize financial activities and transactions. These market disruptions may suggest it is time to start thinking about how and why cryptocurrency might fit into your compensation and rewards programs. While some employers may see using cryptocurrency as a way to differentiate themselves in attracting next-generation talent, there is also a case for caution in seeking creative ways to reward employees.
While cryptocurrency headlines are now becoming commonplace, we’ve rarely seen digital currencies themselves be used as an attraction and retention tool for employees. That could certainly change as adoption of cryptocurrency increases and changing demographics fuel demand for unique compensation packages.
According to Willis Tower Watson Insights, the emergence of cryptocurrency as an asset class started with Bitcoin, which was created in 2009 and then used to make the first purchase a year later. In 2021, El Salvador became the first country to adopt Bitcoin as legal tender. Despite recent valuation drop, Bitcoin’s market cap of $400 billion remains comparable to a top-10 company in the S&P 500 and the overall cryptocurrency market is valued at about $1 trillion as of August 2022.
Meanwhile, mainstream U.S. retailers began to accept cryptocurrencies for payment. Similarly, the states of Ohio and Colorado will begin accepting cryptocurrency for tax payments in 2022.
Forward-thinking employers are considering if there are significant implications to human capital management. This can range from how organizations are structured to how they acquire talent, and from how employees are rewarded, to how total rewards programs are administered.
Some of the companies already adopting cryptocurrency in their compensation and rewards programs are fintech businesses, especially those heavily invested in cryptocurrency. These market trends may bring disruption to your reward strategy, but also may offer some insights, as improbable as it may sound, into why and how you might consider cryptocurrency as a compensation vehicle in the long term.
Compensation and reward programs
Compensation and reward programs are seen as an integral part of business success. Carefully crafted reward and compensation programs go a long way among other things to motivate employees.
When an employee is assured that the company has his/her best interest at heart they encouraged to go the extra mile in their work performance. Moreso, the motivation breeds commitment that assures the employer of total employee trust and input at all times.
Compensation eventually involves an individual evaluation and determination of value or worth in exchange for work effort, whereas rewards and incentives may be provided based on realizing organizational or team performance goals, but they must appeal to the individual and be deemed to be of value to have an impact.
Nonetheless, careless developing of this compensation and reward programs can cause an employees’ morale to decline due to high employee turnover and dysfunctional performance, which ultimately leads to loss in business revenue.
The main purpose of the compensation and reward programs is workforce management. This involves selectively attracting, retaining and motivating employees; however, there are a number of challenges that affect companies when implementing these programs.
Cryptocurrency as an instrument of reward
While you may not currently have a compelling business case to compensate most employees using cryptocurrency, there are growing examples of cryptocurrency as a reward for work under unique circumstances including:
- Music royalties to creators
- Salaries to athletes
- Retainers to board members
- Salary and benefits to employees working in fintech and a new generation of talent
Some state and local entities also see the opportunity to brand themselves as superior destinations for cryptocurrency businesses, as the mayors of Miami and New York both announced that they would receive their paychecks in cryptocurrency. And as noted earlier, some states are accepting cryptocurrency for payment.
Companies heavily invested in cryptocurrency have a strong business case to reinforce that commitment and to attract talent who share a similar vision and are more tolerant of its boom-bust cycle.
Workers at these companies are self-selected to have greater interest in receiving some portion of compensation in cryptocurrencies, potentially reflecting a new model in the risk-reward tolerance. Like most emerging areas, compensation benchmarking with a high degree of precision will be challenging, requiring the use of intrinsic factors such as productivity and value creation to determine compensation. It may also lead to pay practices that are aligned to high-risk, high-reward mechanisms.
Potential applications of cryptocurrency in the war for talent
There are several ideas about integrating cryptocurrency into the employee compensation and benefits space – though unfortunately none of these come without risk or complexity. We outline three potential applications of cryptocurrency in the war for talent with a focus on talent attraction, retention and pay – all of which may be impacted by cryptocurrency.
Paying employees in cryptocurrency
Recently, several NFL players made headlines as they converted their salaries to Bitcoin. The question now becomes, “Who’s next”?
While employees can certainly use their compensation to buy cryptocurrency themselves, facilitation by one’s employer – through salary, bonus, short-term incentives, and the like – makes it easy for the employee, who could also add custody and storage, cybersecurity and storage insurance to the “deal.”
Consideration of custodian services and cryptographic key storage managed by the employer would provide an interesting value proposition. However, regulatory and tax hurdles still exist. In the U.S., cryptocurrency is currently considered property, not currency, and could therefore not only make taxes a challenge for employees but also create problems for employers, such as minimum wage requirements.
Cryptocurrency exposure in 401(k) plans
Employers could also facilitate cryptocurrency investments for employees through their 401(k) plans. In fact, the Wall Street Journal reported, that workers at participating companies could invest up to 5% of their account balances in cryptocurrency.
There are risks inherent in this application, given that the assets can be extremely volatile and the fundamentals of cryptocurrency are under debate. Some consider cryptocurrency a return-seeking asset, while others argue that it’s a diversifier against equity investments or offers inflation protection, among other things.
Whatever the rationale, an estimated 14% of Americans, roughly 21 million people, own cryptocurrency (almost exclusively outside of 401(k) plans), according to a report from Gemini, a cryptocurrency exchange.
Again, cryptocurrency investments present risks – including the potential for high volatility, and therefore facilitating cryptocurrency investments could open the 401(k) plan up to litigation risk if they underperform. The current litigious environment in the U.S. around 401(k) plans only underscores the rigorous fiduciary process needed to vet any investment considered for inclusion in such plans.
Finally, a company could enhance its employer brand by adding cryptocurrency to the balance sheet like Tesla did earlier this year. Potential or current employees who see the value in cryptocurrency could be inspired by these moves. Environmental, social and governance concerns are a major hurdle, though, and can result in cryptocurrency investments working against brand instead of for it. Bitcoin mining, or the minting of new bitcoin into circulation, requires a vast amount of energy consumption; therefore, businesses that champion climate change and sustainability can face difficulty in endorsing Bitcoin. Some bitcoin mining companies are trying to find ways to avoid this negative reference by adopting less energy-intensive methods of bitcoin mining, as well as increasing their use of renewable sources of energy.
The cryptocurrency industry is not all the same
While some employers may see using cryptocurrency as a way to differentiate themselves in attracting next-generation talent, there is also a case for caution in seeking creative ways to reward employees. For example, a gaming company’s recent attempt of an “in-game company swag” in the form of a non-fungible token (NFT) was met with some skepticism. Reward programs are most effective when aligned to the company’s purpose and values.
There is a wide range of business models in the blockchain and cryptocurrency space, so it’s important to stay away from common stereotypes of opportunism and volatility.
While some businesses invest heavily in trading and providing a trading platform for cryptocurrency, others are exploring using blockchain for data transactions, cybersecurity and smart contracts. The economic models of these businesses, and hence employees’ individual wealth, differ significantly (see NFT Market Review).
Therefore, reward models require a high degree of customization to each cohort or segment of talent. Not all companies or individuals working in blockchain or cryptocurrency are aggressive risk takers. Developing the optimal employee value proposition by understanding your talent market and listening to employees are critical to building your organization’s ideal rewards strategy.
In a world where people are spending a significant amount of time infront of their screens, the ability to verify scarcity of digital assets for the very first time has the potential to spearhead a generational shift from physical to digital ownership.
According to Crypto Market Review, NFT sales recorded approximately $17.7B in first-half 2022, which is similar to sales recorded in second-half 2021. This is also a nearly 10x growth on a year-on-year basis when compared to first-half 2021.
The bulk of the trading volume was front-loaded, with most sales being logged between January and May. Trading volume in June was approximately US$678M, a sharp drop of over 80% compared to the average monthly trading volume of US$3.4B.
Disruption to broader compensation practices
For most of you, cryptocurrency is probably a long way from being an effective reward instrument.
Opponents are right to point out potential challenges such as:
- The risks associated with volatility
- The requirement for the company to convert assets
- Minimum wage laws
- Tax exposure to employees depending on jurisdiction
You may mitigate some of these risks by using crypto-based payroll management vendors. Additional mitigation could come from stablecoins (value pegged to fiat money or other more stable asset classes) pending potential regulations to enhance consumer protection and capital requirements, which may help avoid collapses like TerraUSD that could result in significant risks in the global financial system (see Agility Time for Blockchain in Insurance). The Financial Stability Board, an international body represented by leading monetary policy officials and international financial institutions, has also recently issued a statement of the regulation and supervision of crypto-asset activities.
Yet things may change as more companies modernize work strategy and more individuals take freelance work as a career. For example, if you are shifting to a more distributed talent model (i.e., reducing the reliance on full-time workers and increasing the use of contractors and freelancers), then cryptocurrency may offer an appealing option to access and pay your remote workers, especially in places where the company may not have a presence or locations experiencing high inflation rates.
Perhaps the most important detail of all is employee choice – some companies began paying some portion of compensation in cryptocurrency because that is what the employees want. It also highlights the delicate balance for employers between giving employees a choice and the responsibility to support employees’ financial wellbeing and resilience, especially in light of the volatility of cryptocurrency value in recent months.
In addition to preparing for these disruptions, you should consider the following trends, some of which may have significant implications to your approach to rewarding employees:
- Broader application of blockchain technology (e.g., decentralized finance, supply chain data management, carbon credit trading, smart contracts in insurance) means that many of you may soon need to compete for the same talent as fintechs focused on blockchain and cryptocurrency. This may put an upward pressure on compensation across sectors and make high-risk-high-reward compensation philosophies more prevalent.
- The continued development of blockchain technologies and emerging technologies such as Web 3.0 may fundamentally challenge how organizations are structured. For example, blockchain has given rise to decentralized autonomous organizations.
- Use of cryptocurrency offers an easy way for high-growth businesses to quickly expand their geographical footprints by enabling instant and secure cross-border transactions. For larger businesses, it means that market disruptors could quickly close the competitive gap in geographical reach.
- Acceptance of cryptocurrency as an asset class for transactions can be a differentiator in certain businesses, appealing to a customer segment that has large quantities of disposable wealth for consumption and giving businesses access to a wider range of suppliers.
- As hybrid work strategies continue to evolve, there may soon be talent segments that embrace a borderless lifestyle that may not necessarily include the use of a local bank account. In that case, payroll tied to a single jurisdiction may become a barrier for talent attraction and retention. Cryptocurrency as a form of compensation may offer a borderless alternative, so long as tax-related complexities are mitigated.
- Blockchain networks may increase efficiency of talent marketplaces, not only in terms of matching tasks and workers for the right rate, but also in tracking gig workers’ skills and experiences. Cryptocurrency (e.g., native coin of the network other established crypto-assets) may prove to be an effective reward medium on such a platform.
- In hyperinflationary situations, cryptocurrency may provide a long-term hedge to employers and employees.
- A token-based ecosystem, either leveraging existing crypto assets or the creation of a native token within a proprietary blockchain network, could enable innovative pay practices. For instance, a coalition of companies may use a blockchain network to create a collective incentive system that recognizes achievement of climate objectives.
An intercompany blockchain could also facilitate other human capital activities such as a token-based upskilling or freelancing work platform, provided that this does not result in any antitrust concern.
How employers should prepare themselves for the disruption
In the light of the above, you may want to consider the following questions:
- What are our business imperatives and strategy, and do blockchain and/or cryptocurrency play a role in driving value creation?
- How do we think work will get done in the next three to five years? Will there be an increasing use of freelancers and contractors who may reside in locations that we do not currently operate in?
- Do we have any talent market overlap with companies heavily invested in blockchain and cryptocurrency? Are those talent segments that possess critical skills for our business to drive growth?
- What is our employees’ view on blockchain and cryptocurrency? How significantly do these views vary by cohort?
- How important is providing choice to employees in total rewards?
- How does the potential use of crypto assets in employee rewards align with our organizational culture and values?
While the future of cryptocurrency as an asset class (and a derivative industry built around the asset class) may be uncertain, many of you will see and feel the disruptions to how your workforce is rewarded.
In some isolated cases, there are merits in considering cryptocurrency as a compensation vehicle if the cost to overcome its barriers (e.g., tax, regulation) is still lower than other alternatives. Finance, HR and compensation leaders should stay current on its development and be prepared to act if it becomes a viable compensation strategy.
Choosing the right compensation strategy
Successfully executing an appropriate total rewards strategy can increase a company’s market premium. Selecting and implementing the right compensation strategy has perennially become a challenge for most companies. Instead of implementing the reward and compensation programs that augment the overall business strategy and its associated goals and objectives, companies tend to be swayed into employing the most popular or trendy compensation approach.
One company decided to change its compensation approach to that of earnings per share as the core financial measure of performance in both the short and long term incentive plans.
However, this effort turned into a big challenge since the current accounting processes were not friendly to operate. This was particularly difficult because they could not match their colleagues whose operations were smooth. The company was able to invigorate itself when each business unit had its own operating performance pointers in place under the interim incentive plan.
Nevertheless the above challenge can easily be solved by critically determining what a given employee can control and what impact their performance has on overall company success.
By establishing what an employee can manage best, the compensation expert comes up with several promising targets and goals to be appreciated by offering incentives. In order to determine the type of incentive to give to the individual employee, the compensation expert should first establish the value of the employee within the company.
There are many ways that employers can use cryptocurrency to attract and retain talent, but none is without risk and complexity. Time will tell, if, and when, these – or other options – will garner institutional adoption and become part of traditional compensation and benefit offerings.
AUTHORS: Kenneth Kuk – Senior Director, Work and Rewards WTW (Washington, D.C.), Shankar Raman – Senior Director, Health, Wealth & Career WTW, Michiel Klompen – Global Product Lead, SkillsVue WTW, Nate Ryon – Associate, Executive Compensation and Board Advisory WTW, Lauren Hoeck, FSA, EA – Senior Director, Retirement WTW, Beth Jolles – Senior Director, Client Management WTW