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How developments in cryptocurrency may disrupt your compensation strategies

Compensation Strategy & Design|Employee Engagement |Executive Compensation|Future of Work|Talent|Total Rewards
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By Kenneth Kuk , Shankar Raman , Michiel Klompen and Nate Ryon | August 4, 2022

As cryptocurrency adoption grows worldwide, it could change your compensation and rewards programs.

Cryptocurrency has gone from a niche curiosity among programmers 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.

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 July 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.

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:

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.

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.

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.

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. 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.

Additional considerations

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. These new organizational structures will require completely different approaches to rewarding work.
  • 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 (with suppliers, contractors, employees and customers). 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. In fact, some non-tech employers have begun to accept cryptocurrency as a form of payment.
  • As hybrid work strategies continue to evolve, there may soon be talent segments (especially digital talent) 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 (ironically) 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:

  1. What are our business imperatives and strategy, and do blockchain and/or cryptocurrency play a role in driving value creation?
  2. 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?
  3. 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?
  4. What is our employees’ view on blockchain and cryptocurrency? How significantly do these views vary by cohort?
  5. How important is providing choice to employees in total rewards?
  6. 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.

Authors

Senior Director, Work and Rewards (Washington, D.C.)

Senior Director, Health, Wealth & Career

Global Product Lead, SkillsVue

Associate, Executive Compensation and Board Advisory

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