We all remember the pledges from companies during the pandemic to freeze or even cut chief executive pay in solidarity with staff furloughed or laid off. We also recall warnings from investors that boards should ensure their corporate leaders shared the pay pain alongside frontline workers. But did they?
One study concludes many did not. According to research that examines regulatory filings with the US Securities and Exchange Commission, many companies engaged in“fake cuts”as payments were allocated away from salary to more obscure elements of their pay arrangements.
The end result was that CEOs on the New York Stock Exchange (NYSE) and Nasdaq who took salary cuts in 2020 actually saw no overall reduction in compensation once other elements were taken into account.
The academics behind the probe write: “We uncover a widespread fake cuts phenomenon where CEOs who ostensibly accepted reductions to their base salary ultimately received total compensation in 2020 that was no lower than their remuneration for 2019.”
Extras and other compensation
These conclusions will shock. Many companies decided that their lead executives should also shoulder some of the pandemic burden as Covid-19 caused lockdowns across the world, and in the spring of 2020 a number of money managers, concluding EOS Hermes and Schroders, urged boards to exercise restraint over pay levels.
However, the results demonstrate that some CEOs may have shouldered less burden than others.
Attila Balogh, Danika Wright and Jason Zein lift the lid on actual CEO pay during the pandemic, after many studies concluded that pay levels were reduced. They looked closely at 330 firms on NYSE and Nasdaq which made regulatory filings saying their CEOs’ salaries had been reduced.
First they found that average total CEO compensation for the 1,196 companies in NYSE and Nasdaq in 2020 was $8.33m, up 39.6% on 2019. Then they looked at the salary-cut CEOs to find their average decrease was $157,179, or 26.2%. So the researchers then looked at the non-salary elements of pay for the 330 and uncovered a 131% increase in “other” compensation.
“Other” pay elements are poorly disclosed, but the writers say they include extras as mundane as club membership fees and healthcare and insurance benefits, or elements as elevated as corporate-owned property, cars and private jets. What some CEOs lost in base salary they seem to have made up for in a wide array of expensive perks.
‘Powerful CEOs’
But how did CEOs manage to squeeze their boards for these bonus benefits ? The researchers conclude they are mostly explained by chief executives being “powerful CEOs”—those with the influence to extract “rents” from their boards.
“Powerful CEOs” are identified by using a widely used proxy: “CEO pay slice”, or CEO pay compared to the aggregate of a company’s top five executives. It turns out that CEOs that could be deemed “powerful” were those who saw no overall reduction in their compensation during 2020.
Companies with low governance scores also correlate with CEOs that saw their salaries reduced while experiencing no overall shrinkage in their compensation.
The researchers draw a damning conclusion. “This suggests that the salary cuts taken by CEOs during the pandemic were purely window dressing,” they write.
“While many employees suffered irreversible income losses precipitated by lockdowns, neither salary-cut CEOs nor no-cut CEOs ended up shouldering the same burden.”
There is evidence that pay is back on the agendas of both US and UK investors as companies enter the AGM season. The “fake cuts” research may give investors more pause for thought.