Business and Markets

CEOs Cutting Their Own Pay Is an Important Move—but It’s Only the First Step

April 2, 2020  • Judy Samuelson

The last time I wrote about CEO pay, it was 2018, and the headlines were about Boeing’s disaster with the 737 Max.  The question we were asking then was, exactly what were the Boeing executives paid to do?

Coping with Covid-19 is a whole new ballgame—in the airline industry, in hospitality, in retail and well beyond, as employees are furloughed, and contractors join the ranks of the unemployed.

And executive pay is again surfacing at a lightning rod for criticism—a lens on business and the social contract.

Will the tsunami of change and a surge in voluntary pay cuts by executives actually open the door to a fundamental rethinking of how we reward executives—of so-called pay for performance?  What would executive compensation look like if it is redesigned to support the organizational health of tomorrow’s corporation—rather than compare one executive with a narrow band of other CEOs?

Pay for what kind of performance?

Never waste a crisis.

The Covid-19 pandemic puts the lens on leaders—and what’s truly important in this moment. By cutting their own pay, these CEOs are voicing appreciation for the workers we depend on when times are good—and who can’t be so easily disposed of when times are bad.  The next step needs to be better pay alignment from the front lines to the boardroom.  Benchmarking CEO-to-CEO does the opposite.

Today, the posture towards workers—i.e. contractors as well as the ones on the payroll—has become a strategic issue, and a competitive one. The best leaders—we know from experience—view a rising stock price as the payback for a thoughtful, long term strategy. Execution of that strategy depends on productive and engaged workers.

But there is a bigger problem with pay that is hidden behind the announcements of CEOs cutting their own salaries in this moment. Today, public company pay packages are heavily weighted in stock.  The cash salary is a small part of the package, typically around $1MM.  Most of the pay package—60%, 70%, even more, comes in the form of stock grants or equity-based incentives. Boards like to say that by structuring those awards as a long-term pay out ties the executive team to the company’s mission and strategy, but the research on this point is clear.  It doesn’t work all that well in reality.  If you pay the executive mostly in stock, the stock price is the loudest signal in the C-suite—even if you try to make it seriously long term.

The result of almost 40 years of experimentation with “pay for performance” is quite clear:  when we align the executive with the stock price we produce overly complex pay packages, massive inequality, a disenfranchised workforce, gaming of incentives and executives that treat the ecosystem and climate change as a distant cousin who gets invited to the party but has to sit at the kids table.

Thankfully, pay based on stock is now being called into question but a growing number of actors, including the Council of Institutional Investors.

By cutting their cash pay, the executives who are stepping out to reduce their salaries are making a smart move in this moment. They are right to put the long-term health of the organization—culture and values and employee morale—on a par with other strategic moves. As Katherine Dunn and Emma Hinchliffe write in Fortune, employees and other affected parties have long memories and will remember this decision long past the crisis.

But that is only the first step.

Over the next months we will be releasing a set of five principles of pay that will help boards and the C-suite finish the job. Korn Ferry, our partner, brings deep knowledge of how the pay system works under the old benchmarking system, and a vision of change. One of the key principles is rooted in fairness. Covid-19 has moved this question to the heart of our common experience.

As the BRT corporate purpose statement last year made clear, executives are reckoning with a whole new set of demands today—from the increasingly powerful voice of employees and contractors, to sophisticated actors targeting business reputation in remote parts of an extended supply chain. This modern set of pay principles recognizes the game has changed.

Who’s ready to take the next step?