While some industry executives are taking pay cuts to appear to retain employees and share their pain, most are well compensated through other means like stock options. With stock prices as low as they are during this pandemic that would equate to significant share allocations to executives that when the pandemic ends would be extremely sizeable. Are executives compensation plans really rewarding their performance.
Here are some interesting highlights/excerpts from:
https://www.marketplace.org/2020/07/10/how-meaningful-are-ceo-pay-cuts/
The COVID-19 crisis has led to unprecedented job losses. Since mid-March, roughly 50 million Americans have filed for unemployment benefits. A recent survey from the firm Challenger, Gray & Christmas found that almost a third of companies cut employee pay, including for those at the executive or senior-level. Of those companies that cut pay, more than half reported the cuts allowed them to avoid layoffs.
But while those in the C-suite are taking salary cuts, you also have to consider other forms of compensation they’re still raking in — like stock shares and bonuses, pointed out David Lewin, professor emeritus of management and organizations at the University of California, Los Angeles.
“These executive pay cuts, I think, are largely symbolic,” Lewin said.
When companies reduce executive and worker pay, and their workforce, they’re trying to reduce overall labor costs and increase the operating margin between revenue and cost, he said. And when they do that, the company’s share price usually rises.
“So if your compensation is heavily based on the stock shares you own in your company, you might cut your pay in half, but your stock shares might rise five times that much,” Lewin explained.
Back in 1965, CEOs of major U.S. companies, based on realized stock options, earned 20 times more than the typical worker, according to the Economic Policy Institute.
CEO compensation grew in the 1980s, and then began to balloon in the 1990s. That’s in part because in 1993, Congress allowed corporations to write off executive pay over $1 million from their taxes if they showed that pay is based on some measure of performance (i.e. share price). This sparked an era in which CEOs were compensated largely through stock options.
In 2016, CEOs at S&P 500 companies earned an average of $13.1 million total compensation, while workers earned an average of $37,632, which makes the CEO-to-worker pay ratio 347 to 1. Meanwhile, worker pay has stagnated. According to the EPI, the hourly compensation of the majority of American workers has not risen in line with productivity since 1973.
CEOs have also had a lot of control over their pay by how they select the committee that sets their pay and the practices of these committees.
That gulf raises questions about why CEOs and executives are making the amount they do during the pandemic, while millions of lower-ranked employees get furloughed or laid off. Why not reduce CEO or executive pay including stock options even more, if it can save some more jobs?