The Problem with CEO “Pay Cuts”

Fred WhittleseyConscious Compensation: The Impact Compensation Blog, Pay and Performance: The Compensation Blog

CEO “pay cuts” are in vogue, from 100% salary reductions at companies including Alaska Airlines, Marriott, and Dick’s Sporting Goods to meaningless cosmetic actions like the CEO of Southwest Airlines taking a 10% salary reduction.  These actions are concentrated in the industries most affected by the COVID-19 crisis:  Airlines, hotels, movie theaters, restaurants, and the like.

These range from 100% salary reductions for the CEO to pay reductions for 700 executives (Fox Corporation). Unlike the $1,000 all-employee bonus fad stemming from the tax cuts in 2017, companies are using a wide range of reductions in terms of percentages, number of executives affected (from 1 through 700), and the time period for the reduction (2 months to yearend). Some are reducing or eliminating compensation for the members of the Board of Directors as well, like Wyndam Hotels.

The problem is that none of these are real.  They are real in the sense that I believe that these CEOs and executives really are foregoing some or all of their base salary. But as I have always told my clients, there is no such thing as a reduction in compensation.

What is going to happen is that the Compensation Committees that made or approved these actions will be taken separate actions to “make them whole” but those actions will not be linked to the pay reductions. We’ve seen this movie before. There will be extra-large bonuses in early 2021 – because the CEO did such a “great job” in “navigating the uncharted waters of COVID-19” (is there anyone else tired of reading that phrase in every corporate press release?). Or, there will be a “special retention grant” of stock options or restricted stock units out of fear that these executive will get mad and leave due to the salary reduction. Or, it will be a special cash “retention grant.” There are many tactics like these available which will be buried in proxy statements and 8-Ks.  The cleverest companies can even hide them in the 10-K.

It sounds cynical, I know. But having observed executive compensation during the early 1990s recession, the 2001 dot-com bust, the post 9/11 period, and the financial crisis of 2008 – all of which occurred during my career as a compensation expert – mark my words.

Most journalists are not business-savvy enough to catch these things, instead focusing on the total compensation figures from the Summary Compensation Table. Many of the articles I’ve read recently also get the pay cut story wrong.  But it makes for juicy headlines. I’m waiting to see “CEO Pay Cuts: Here’s What You Need to Know” or “CEOs are taking pay cuts – here’s why” (just to illustrate the two mindless journalistic trends).

It’s just compensation geeks like me that will dig through the SEC filings and find that 2 plus 2 always equals 4, and never 3. But it will look more like 2 plus 2 equals 3 plus zero plus 1.