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Why voluntary CEO pay cuts, while largely symbolic, matter in ESG context


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Why voluntary CEO pay cuts, while largely symbolic, matter in ESG context

CEOs and management teams at dozens of companies around the world are taking voluntary pay cuts as their companies lay off workers to cope with the revenue hit from the coronavirus pandemic. Experts say cutting executive pay, while largely a symbolic gesture, could help companies manage reputational damage and enhance their ability to attract and retain workers in the long term.

"CEO pay this season has significant implications for a company's reputation," said Corey Klemmer, director of engagement at investment adviser Domini Impact Investments LLC. Klemmer said the optics of large CEO bonuses paid out based on a company's 2019 performance as thousands of employees lose their income "could do significant reputational harm."

"It risks making that company into a poster child for inequality and indifference in this moment when the world is searching for ethical and compassionate leaders," she said.

Domini, along with the Interfaith Center for Corporate Responsibility and the office of New York City Comptroller Scott Stringer, in March organized a statement on how companies should respond to the coronavirus including by potentially suspending share buybacks and limiting executive and senior management compensation during the crisis. As of April 15 the letter was backed by 286 signatories including institutional investors with more than $8.2 trillion in assets under management, Klemmer said.

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As the environmental, social and governance movement gained momentum in recent years, corporate America has shifted its tone. In 2019, the CEOs of many major companies signed a Business Roundtable declaration that corporations should concentrate on providing benefits to all stakeholders rather than primarily on deriving profits for shareholders. The coronavirus crisis will put that pledge to the test.

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To prevent the spread of the coronavirus, governments around the world are ordering nonessential workers to stay home and banning large gatherings. As a result, companies in sectors like retail, travel and hospitality are losing money and laying off or furloughing workers.

Executives and board members for at least 90 companies have announced pay cuts ranging from forgoing their salary for the remainder of the year to giving up bonuses or reducing compensation over the coming months, an S&P Global Market Intelligence analysis found. This list includes The Gap Inc., Boeing Co., Marriott International Inc., Macy's Inc., Occidental Petroleum Corp., Yelp Inc., The Walt Disney Co., General Electric Co. and Halliburton Co.

Of the announcements, 25 came from consumer companies; 22 from financial institutions; 13 were in the technology, media and telecommunications sector; and 12 were in real estate. Companies in the energy, industrials and healthcare sectors also announced pay cuts. The majority involved reductions for multiple people at each company with the CEO taking the biggest hit.

At radio company iHeartMedia Inc. for example, the chairman and CEO will give up his salary for the rest of the year while other senior managers take salary cuts ranging from 30% to 70%. The CEO of healthcare equipment company Boston Scientific Corp. is forgoing all but 1% of his salary in order to retain his benefits, while other executives are taking a 50% reduction to their base salaries and board members cut their annual cash retainers in half. The chairman and CEO of automaker Renault SA took a 25% cut to his compensation and the company's board members reduced their fees for the fiscal year by 25%. At Spanish financial institution Banco Bilbao Vizcaya Argentaria SA, more commonly known as BBVA, the global management team will forgo bonus payouts for 2020 in solidarity with those affected by the coronavirus pandemic.

Other officials have pledged to dedicate a portion of their compensation to charities. For example, British banking group Barclays PLC launched The Barclays Foundation, a community aid package initially with £100 million for charities working with victims of the pandemic. Barclays' chairman, CEO and finance director plan to donate 33% of their fixed pay for six months to those charities. Similarly, five of Comcast Corp.'s executives will donate their full pay to COVID-19 charities.

"We hope in some small way we can make this time easier on our employees, our local communities and our customers," Comcast Chairman and CEO Brian Roberts said in a memo to staff.

Benefits of executive pay cuts

Executive pay cuts are more a signal to the public and employees than a cost-saving move to prevent worker layoffs, said Robin Ferracone, CEO of Farient Advisors LLC, a corporate governance and executive compensation consultancy. Ferracone noted that a CEO's salary often accounts for only 10% to 15% of his or her direct compensation with the rest made up of an annual bonus and stock-based long-term incentives.

"It's not as though one person's salary is going to achieve a lot here," Ferracone said. But the gesture shows those companies are taking more of a "stakeholder" viewpoint like the one expressed by Business Roundtable members, she added.

Ferracone said that companies are viewing the coronavirus crisis differently than prior economic crashes in that they know the pandemic will end eventually. The 2008 financial crisis, on the other hand, prompted companies to take more permanent steps to restructure their operations, workforces and businesses.

Companies are generally assuming that demand for their products is deferred on a temporary basis, she said. As such, Farient is advising many of its clients that they "don't have to make decisions right now on how the incentive plan is going to play out." Rather, companies can wait until they need to make that decision, she said. "We think there's a cadence to this that companies should pay attention to and not get ahead of themselves."

For her part, Domini's Klemmer said that while the case for managing talent attraction and retention is harder to make in the current labor market, "corporate boards and management teams that show ethical, compassionate and forward-thinking leadership in this moment are likely to have a dedicated and motivated workforce for years to come."