The CEO’s coronavirus conundrum: how much pay to sacrifice?
As companies suspend operations, scrap dividends and send employees home, their top executives are facing demands to make sacrifices of their own.
Some have acted in advance of the pitchforks, with a list of voluntary pay cuts spanning sectors and time zones and including both companies hard hit by the virus and those that expect to ride it out.
Marriott chief Arne Sorenson will donate his salary to charities supporting Covid-19 relief efforts “for the duration” of a crisis in which the hotelier has put tens of thousands of staff on unpaid leave. Fiat Chrysler’s John Elkann, who has suspended much of the carmaker’s production, will forgo his annual pay. At Qantas, which has halted all international flights, chief executive Alan Joyce will not take any salary for the remainder of the 2020 financial year. BT chief Philip Jansen — who was himself taken ill with coronavirus — said on Monday that half his annual salary would go to the UK’s National Health Service.
“I don’t think we have ever seen [this level] before and it is only going to pick up,” said Amit Batish of pay consultancy Equilar, noting that more than 70 US companies had announced their executives would take full or partial salary cuts this year.
In the UK more than three dozen companies have cut their top executives’ wages so far, according to research by the Financial Times and Minerva, the investment adviser.
Executives who profited from booming markets thanks to their stock-heavy pay packages are now faced with plunging share prices and the prospect of a painful recession that will shine a harsher spotlight on the highly paid.
Boards’ pay discussions with shareholders will be more “sensitive than ever” this year, predicted Hans-Christoph Hirt, head of Hermes EOS, which advises investors on stewardship issues. Companies making lay-offs or cutting staff salaries “would be very well advised to ensure that pain will be shared across the board and C-suite”, he said.
Remuneration has become particularly sensitive in sectors such as retail and hospitality, where companies around the world have suspended payouts to shareholders and begun to furlough — put on unpaid temporary leave — hundreds of thousands of workers.
In the US, the salary-sacrificing announcements began with executives from the likes of Delta Air Lines and United Airlines, whose companies were among the first and hardest hit, and who knew early on that they would need to appeal for government support.
The lessons of the 2008 financial crisis are fresh in US CEOs’ minds, when bailout recipients such as insurance group AIG were forced to cut their leaders’ pay after a fierce public backlash. The politics of executive pay have only sharpened since then as left-leaning Democrats such as Elizabeth Warren have risen in prominence.
Financial regulators in the UK have already leaned on banks to curtail bonuses, and Andrea Enria, chairman of the European Central Bank’s supervisory board, has called on the sector to exercise “extreme moderation on variable remuneration”.
To date, according to Matteo Tonello, author of The Conference Board’s benchmarking research on US boardroom pay, liquidity concerns have played the biggest role.
Glenn Fogel, chief executive of Booking Holdings and who has tested positive for Covid-19, said he would take no salary for the rest of the year as part of a drive to conserve cash, telling employees of the online travel company: “Every single dollar, euro, baht, etc counts in this effort.”
But Mr Tonello forecast that “peer pressure” would play more of a role if a prolonged crisis saw unemployment continue to rise. Companies proposing slashing employees’ pay through furloughs “would not be able to justify their implementation without applying those same measures to themselves too”, he said.
Even those companies that are not yet seeing a drastic impact from the virus, such as supermarkets, are concerned about standing out from the pack, say advisers, in particular if they are in sectors that have benefited from state support.
“One factor for boards to consider in pay decisions will be whether the company has received taxpayer support,” said Tom Gosling, partner at PwC. “But with the level of government intervention in the economy being so wide-ranging, its going to be tough to untangle who has and has not materially benefited.”
Executives face scrutiny from investors about how meaningful their sacrifices will be. Advisers warn about bosses making only “token” cuts to their salaries while retaining lucrative bonus, stock and pension payments.
Many companies in the UK have trimmed employees’ pay by 20 per cent, for example, to reflect a government offer to cover four-fifths of the wages of laid-off workers. But the £2,500-a-month cap on this support means their bosses will suffer far less through the coronavirus crisis.
Bonuses, which often account for the lion’s share of executive pay, are less likely to have been cut so far and companies whose financial year ends in December have already paid them. Companies with March year-ends, including some UK retailers, are facing pressure now to cut bonuses before they are paid.
The political and investor backlash has already begun, with Schroders, the UK’s second-largest listed asset manager, writing to British companies last week urging chief executives to “share the pain”.
Michael Herskovich, head of corporate governance at BNP Paribas Asset Management, said the French asset manager would be looking carefully at remuneration globally this year.
He said many of the pay awards being made now related to 2019, which was a strong year for many companies. But, he added: “I expect there will be huge attention to pay next year. There will be a lot of companies that will be making lay-offs. A lot of companies will suffer.”
Investors are concerned that companies are granting options or long-term incentive packages during the market crash — which are often a multiple of basic salary converted into shares. If directors are granted shares during the crash — and the market rebounds — then there could be a considerable windfall.
Some companies have attempted to head off future criticism. In its annual report published in late March, Rolls-Royce noted it had experienced a “recent significant fall in our share price due to Covid-19” and the board would ensure that the final payout included “consideration of any potential for windfall gains”.
Sébastien Thevoux-Chabuel, a portfolio manager at Comgest, the French asset manager, said he had been speaking about pay in recent weeks to companies in which the group invests.
“In these particularly harsh times, leadership is a lot about leading by example. Even if some remuneration packages were validated by past AGMs, we would expect some CEOs to willingly take a cut or give to a charity [some] of money they are owed,” he said.
But investors are also mindful that companies need strong leadership during the crisis, which means that scrutiny on pay during a period of unprecedented challenges is not every investor’s first priority.
“I don’t think we should be telling companies what they should be doing [on pay],” said Sacha Sadan, director of investment stewardship at Legal & General Investment Management. “They have a lot on their plate. We do need leadership at the moment. We need good people. The best leaders could end up saving their companies a lot more.”
Additional reporting by Patrick Temple-West, Antonia Cundy and Alistair Gray