CEOs must turn Covid pay gestures into real executive pay reform

Bosses’ bonus and long-term incentive plans remain mostly intact while staff contemplate lay-offs

As chief executives take tough decisions about the salaries, jobs, and future of their staff, many are recognising that, at the very least, they too should be seen to suffer. Photograph: Neil Hall/EPA

As chief executives take tough decisions about the salaries, jobs, and future of their staff, many are recognising that, at the very least, they too should be seen to suffer. Photograph: Neil Hall/EPA

 

For decades, chief executives seemed to be paid according to two rules of thumb. First, they deserved to earn more than the average business leader. Second, their pay should never go down. Warren Buffett nicknamed the pay consultants who lubricated the remuneration merry-go-round “Ratchet, Ratchet & Bingo”.

Covid-19 could reset these rules permanently. As chief executives take tough decisions about the salaries, jobs, and future of their staff, many are recognising that at the very least they too should be seen to suffer. They are still benchmarking against their peers. But now decisions are based as much on how much they should give back. as on how much they should take out.

Fund

Ana Botín, chairman of Santander, agreed to contribute half her pay to a medical equipment fund created by the Spanish bank. Michael O’Leary, abrasive chief executive of Ryanair, joined the airline’s staff in taking a 50 per cent cut for April and May.

They are outliers. Many chief executives are sacrificing less. They are part of a growing “20 Per Cent Club” of bosses reducing their salaries by a fifth, while staff contemplate weeks in government-backed furlough schemes.

There are other differences. Lop 20 per cent off the median FTSE 100 chief’s salary of £876,000 and he or she still takes home £60,000 a month before tax. Chief executives’ pay-cut pledges are typically time-limited and their bonus and long-term incentive plans are mostly intact.

By contrast, UK furlough payments are capped at £2,500 a month. Workers are crashing down through the layers of Abraham Maslow’s hierarchy of needs towards the lowest level where they have to focus on health and shelter. The UK charity Citizens Advice reported last month that in the first fortnight of the crisis, it fielded many requests for information about flight and hotel cancellations. Then came a wave of concern about sick pay, followed by requests for advice about redundancy and state benefits, and finally about how to cope with spiralling debt.

Another psychologist, Frederick Herzberg, observed that staff were more likely to grumble when they lost “hygiene factors” such as a decent wage and job security, rather than applaud when they were present.

This crisis is a large-scale test of that hypothesis, at a time when, for many workers, good hygiene is more than a mere metaphor.

Minions

It is good to see chief executives acknowledge the plight of staff. It makes a change from hearing them bracket themselves with some professional footballers, who have been slow to waive part of their galactically large wages, even as their clubs are tossing the minions who clean the stars’ boots or cook their meals into furlough.

Xavier Baeten, who studies executive pay at Belgium’s Vlerick Business School, says the trend differentiates this crisis from the financial meltdown of 2008, when only a minority of companies cut chief executives’ pay.

Regulators have already stepped in to warn banks to “exercise extreme moderation” on bonuses. But Prof Baeten notes that even companies that stand to do well during the pandemic have “a bad feeling” about being seen to reward executives too lavishly.

For now, though, I have a sense boards are doing the minimum necessary to shield themselves from reputational damage. The real proof of chief executives’ appetite for sacrifice and solidarity will come as they emerge from the acute phase of the pandemic and consider whether to address the chronic problems with executive pay.

Some will argue they should be rewarded if they successfully lead their companies through the biggest threat to their survival since the second world war. Others will point out that in the same way that lavish remuneration in good times was a mere fraction of the value they could create for shareholders, cutting pay in bad times would not be enough to stave off calamity. There are limits, though.

Remuneration

Remuneration committees will have an important role in curbing unwarranted or unintended windfalls. Pay structures at most companies need simplifying. In a crisis, nobody really cares what the intricate inner workings of a watch look like as long as it tells the correct time.

Incentives themselves need readjusting. Alex Edmans, an advocate for paying executives in restricted stock, argues in his new book that reformers should aim to encourage leaders “to create long-run value for society, rather than reduce the level of pay”.

In the UK at least, chief executives’ pay had already plateaued before this crisis. But afterwards, remuneration will again be a lightning rod for public and political discontent.

My hunch, and hope, is that this time chief executives will recognise how fragile trust in business is. By converting early goodwill gestures into permanent pay reform, they can work to shore it up. – Copyright The Financial Times Limited 2020

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