May 18, 2022
Restructuring Executive Pay to Mitigate Stakeholder Outrage During the Pandemic
During the early months of 2020, there was a ton of coverage about CEO & employee pay cuts – with some CEOs giving up their 2020 salaries to help dampen the pandemic’s effects on worker salaries & layoffs. But a recent academic paper found that while many CEO base salaries did go down in 2020, powerful CEOs weren’t really worse off because of the increase in their total compensation that year. The average annual decrease in base salary for 330 CEOs that accepted salary cuts in 2020 was 18.6% – but the total compensation wasn’t significantly lower on average, nor was the total compensation different from those of CEOs who didn’t take salary cuts.
The paper draws on the managerial power theory of executive compensation, where “powerful CEOs exert influence over boards to extract rent through higher but unwarranted pay. Stakeholder outrage acts as a constraint on CEO pay because a CEO can suffer reputational damage if their compensation package is perceived to be egregiously out of line with stakeholder or wider societal expectations.” The managerial power theory predicts that powerful CEOs would respond to higher stakeholder outrage by restructuring their compensation to be more opaque.
During 2020, there was lots of stakeholder outrage to go around, with widespread furloughs & worker safety concerns consuming a lot of media attention. The paper argues that, “increased outrage costs [from the pay disparity during the pandemic] bit harder on powerful CEOs and triggered an adjustment to the structure, but not the size, of their compensation.” They found that the “Other compensation” category increased by 131% from 2019 to 2020 for CEOs who took a salary cut, with all else equal. The paper also noted that CEOs of companies with weaker corporate governance, low board independence and busy boards also seemed to restructure their pay structure & avoided a significant loss in income.
At the end of the day, governance is at the crux of these issues, and there’s a lot more scrutiny by a wider group of stakeholders, ranging from institutional investors to a company’s employee and customer base. With your board and compensation committee increasingly in the hot seat, you’ll want to register for our upcoming “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually October 12-14. Among other critical topics, our agenda includes a session on “The Evolving Compensation Committee” – with Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, Pay Governance’s Tara Tays and American Water Works’ Jeffrey Taylor.
– Emily Sacks-Wilner