Sharing the Pain: How Did Boards Adjust CEO Pay in Response to COVID-19?

Abstract

Scrutiny of CEO pay increases during times of economic stress, when it is not clear how much pay CEOs should receive when corporate profitability suffers due to an unforeseen decline in the operating environment. On the one hand, the board might want to preserve incentives, recognizing that a decrease in pay punishes executives through no fault on their own. On the other hand, maintaining or supplementing CEO pay while a company is laying off workers looks back.

In this Closer Look, we examine the CEO compensation decisions of large publicly traded companies in the U.S. following the spread of COVID-19 to see how many elected to modify CEO pay and how many left it unchanged. We examine the characteristics of the companies that altered pay, and consider whether those that altered pay did so to “share the pain” or insulate CEOs from lost value.

We ask:
• How much economic pain did the typical CEO really suffer?
• Do outcomes signal the success or failure of compensation program design?
• Should CEOs receive supplemental awards in the future to compensate for lost value?
• Do asymmetries arise if CEOs are sheltered from reversals but do not give back excess value in positive economic environments?
• What do corporate actions tell us about our ability to accurately measure ESG?

Keywords: Corporate governance, CEO pay, compensation, director compensation, executive compensation, COVID, ESG, layoffs, furloughs, salary reductions, supplemental bonuses, downturn, annual bonus, LTIP, restricted stock, lost wealth, dividend suspension, reputation, boards of directors, corporate governance