In April, I published a post, The Coronavirus pandemic: Executive pay cuts a sign of the times, highlighting companies across multiple industries that were making downward adjustments to the compensation of their executives and board members to help stay afloat in response to the crisis.
The burning question is how will companies approach executive pay after the crisis? This question is quite apropos in light of the controversy that has surrounded the topic for years, with CEOs of major US companies going from earning 21 times as much as the typical worker in 1965 to earning 320 times as much in 2019. It remains to be seen how things will unfold, especially since certain observations hint at the return of the executive pay status quo in a year or two, while others suggest the beginning of a downward shift in executive pay that just might become part of the new norm.
The pandemic doesn’t appear to be a pivot point for executive pay yet
1) Duration of cuts
Executive pay cuts during these pandemic-ridden times are intended to show solidarity with employees, but their sincerity comes into question when we see how short-lived they are at some companies, especially since we have front-row seats to the havoc that the pandemic continues to wreak on the economy, including countless layoffs and furloughs as companies struggle to stay afloat.
In late April 2020, for example, manufacturer of recreational vehicles and equipment LCI Industries shared on Form 8-K its decision to cut the base salary of President and CEO Jason Lippert by 25% as part of a series of actions in response to the pandemic (this Form 8-K and other filings referenced herein available on Thomson Reuters Checkpoint). But less than two months later, LCI’s Compensation Committee approved a full reinstatement of Mr. Lippert’s base salary, effective June 15, 2020, “based on developments … since the effective date of the salary reduction.”
LCI isn’t alone. In late May 2020, Darden Restaurants, Inc., whose brands include Olive Garden, The Capital Grille and Seasons 52, to name a few, announced on Form 8-K its Board’s approval of new compensation arrangements on par with pre-pandemic levels for President and CEO Eugene Lee, Jr. and the other named executive officers (NEOs), as well as for non-employee directors. To that end, effective June 1, 2020, Mr. Lee’s base salary was restored to $1 million after less than three months of reduced pay, the other NEOs’ base salaries were restored after less than two months of reduced pay, and all elements of cash compensation payable to non-employee directors were restored less than two months following the reduction.
Similarly, in late June 2020, Ascena Retail Group, Inc., whose brands include Ann Taylor, LOFT and Lane Bryant, among others, reported on Form 8-K its determination to “restore … base salaries to their pre-reduction rates for all those who were subject to a temporary base salary reduction as a result of the COVID-19 pandemic,” effective June 21, 2020, after the Compensation and Stock Incentive Committee decided that reinstating the pre-pandemic salary levels would go a long way towards enabling the company “to retain and continue to motivate its NEOs and other officers and employees.” This all comes less than three months after the company reduced the base salaries for Interim Executive Chair Carrie Teffner and CEO Gary Muto by 50% and those of certain other executives and corporate associates by between 10% and 45% (see SECPlus Filings Highlight, Ascena Retail Group and Others Reverse Pandemic-Driven Executive Pay Cuts, for more discussion of the foregoing).
2) Nature of cuts
While salary reductions for executives may be a likely and welcomed target for cost-cutting during the pandemic, the meaningfulness of the cuts is undermined by the fact that executive compensation packages consist primarily of bonuses and equity awards, not base salary. So regardless of whether an executive foregoes some or all of his/her base salary, the amount represents just a fraction of his/her total compensation.
Delta Airlines CEO Edward Bastian, for example, agreed to do without his entire base salary for six months, effective April 1, 2020, but, as reflected in the company’s proxy materials, he received his 2019 cash and stock awards in early 2020 totaling $16 million. To help put things in perspective, Mr. Bastian’s base salary in 2019 represented just 5% of his total pay. As another example, Hilton Worldwide Holdings Inc.’s President and CEO Christopher Nassetta agreed in late March 2020 to forego his entire base salary for the remainder of 2020, and to once again help put things in perspective, Mr. Nassetta’s base salary in 2019 made up a mere 6% of his total pay.
To add fuel to the fire, when companies cut pay and their workforce, and are successful in reducing labor costs in the process, their share price usually increases. So, the amount that an executive may lose on account of a salary reduction can be a drop in the bucket compared to the amount received on account of his/her stock shares rising, which doesn’t necessarily scream a major sacrifice.
But there are signs of a break from the executive pay status quo
1) Suspension of bonus payouts
As companies figure out their strategies around executive pay in light of the pandemic and the economic threat that it poses, some are suspending bonus payouts, which, as mentioned earlier, is a key component of executive compensation packages.
In fact, Redfin Corporation filed an 8-K in late March 2020, sharing that its management team is foregoing cash bonuses for 2020 and that all employees at its headquarters have agreed to forego cash bonuses for the first half of 2020—a move that the company says is demonstrative of its most important asset: its “culture … of service.”
Also, Banco Bilbao Vizcaya Argentaria, S.A. announced in a 6-K in late April 2020 that its team of about 300 people running the bank on a global level is foregoing variable compensation for 2020—all in an effort “to be a part of the solution to this crisis and … to support those bearing the brunt of it.”
Similarly, Lloyds Banking Group plc reported in a 6-K in late May 2020 that its Group Executive Committee will do without its 2020 annual bonus, a decision that the company said was made “in solidarity with the communities in which we operate and in recognition of the priorities of our stakeholders.”
And then ION Geophysical Corporation went a step further when it disclosed in its April 2020 proxy filing its decision to cancel bonuses for all employees, including executives, not just for 2020, but also for 2019 (see SECPlus Filings Highlight, Redfin and Others Scrap Executive Bonuses in Response to COVID-19, for more discussion of the foregoing).
2) Activist investors
Shareholders are expressing concern around say-on-pay during these troubling times, with activists frowning upon increases to companies’ executive compensation packages or companies’ failure to roll back already substantial packages, especially if done at the expense of employees, as was the case in the Uber and McDonald’s scenarios discussed in an earlier post, What will shareholder activism look like in the COVID-19 era? Though the activist’s efforts failed in both cases, with the executives walking away with millions as their companies continued to struggle, the activist tried to bring executive pay in line with company performance.
That same activist investor was successful, however, in campaigning against the say-on-pay proposal put forth by gaming company Electronic Arts Inc. at its August 6, 2020 Annual Meeting of Stockholders. The activist took issue with the company’s grant of a special equity award to some of its executives before the performance period for a prior special award had even finished, on top of already high annual equity pay. It also frowned upon the company’s issuance of multi-million-dollar bonuses following worker layoffs and, in general, found the compensation to be excessive and not tied to the creation of long-term shareholder value. Ultimately, shareholders agreed, with nearly 60 million voting in favor of the say-on-pay proposal and nearly three times as many objecting.
If this sort of increased scrutiny around executive pay becomes more prevalent, we just may witness an overhaul of the executive pay status quo.
Executive pay has been under the spotlight for years, with the pay gap between CEOs and workers continuing to widen. COVID-19 is shaking things up such that there are even more eyes on executive pay. Though we won’t know the full extent of the impact for some time, we expect companies to continue scrutinizing and reconsidering their executive compensation practices in advance of the upcoming proxy season and as the pandemic continues to unfold.