CEO Pay Up 940% Faces Its Coronavirus Reckoning
(Bloomberg Opinion) -- Large institutions resist change, and nowhere more so than in the way they pay their bosses.
Despite scandals and crises, executive compensation has remained too generous, too opaque and too loosely linked to long-term goals. The upheaval wrought by the Covid-19 pandemic provides the opportunity for a remake: Simpler, smaller packages with a more significant non-financial component would mark a welcome shift.
The figures are stark. Inflation-adjusted pay for chief executives at the largest U.S. companies climbed 940% between 1978 and 2018, the Economic Policy Institute found, using the more conservative of two methodologies, in a report published last year. The S&P rose about 700% over the same period. Worker wages, meanwhile, increased by less than 12%.
The size of pay packages is only the most eye-catching part of the problem: Far more important is how corporate leaders are remunerated, and whether that lines up with long-term goals, financial and otherwise. As a gauge, consider the increase in attention paid to environmental, social and governance, or ESG, targets. This has permeated incentive plans in only a minority of cases. A mere 9% of FTSE All World companies link executive pay to ESG criteria, mostly occupational health and safety concerns, according to Sustainalytics. Even for those, only a tiny proportion of total remuneration is affected.
The good news is that the current cataclysm is prompting better behavior than we saw during the 2008 financial crisis, with at least some leaders moving swiftly to share the pain of employees. Qantas Airways Ltd. Chief Executive Officer Alan Joyce, whose airline has furloughed most of its workforce, won’t take any salary until the end of the financial year in June. Elsewhere in aviation, Ryanair Holdings Plc CEO Michael O’Leary has taken a steep pay cut, along with staff. General Electric Co.’s Larry Culp will forgo his full wage for the rest of 2020.
Granted, they have better cushions than most employees and there is self-interest here, given the outsize importance to corporate valuations of intangible assets like reputation. Yet these are welcome gestures, not least when compared to those who have rushed to cut costs and take government help without trimming at the top. They aren’t markers of real change, though. It will be far more significant to see how boards manage short- and long-term incentive decisions for 2020. Shareholder advisers are already warning against excesses in variable pay.
There is one bigger reason to anticipate substantial change: timing.
The coronavirus has hit at a critical moment for shareholder capitalism. It’s been two years since BlackRock Inc. co-founder Larry Fink told CEOs to contribute to society. The Business Roundtable last year had executives pledge to build companies that serve “all Americans.” ESG demands are louder, as seen at last month’s annual general meeting of Australian oil and gas outfit Santos Ltd. It was happening already; now it’s happening faster.
Xavier Baeten, professor in reward and sustainability at Vlerick Business School in Belgium, says companies are likely to see pressure from at least two quarters. First, shareholders may well balk at remuneration that rises when dividends dissipate. Second, governments could make aid dependent on firms not paying bonuses. Society may also find hefty bonuses more unpalatable after months of clapping to support underpaid nurses and carers.
So what are the changes to aim for? Pay is inherently complex, and investors can make multiple and often competing demands of one board. It’s also true that despite plentiful research demonstrating that pay isn’t a significant motivating factor for chief executives, the quantum is unlikely to change dramatically. There is, though, plenty of scope to improve structure.
Most obviously, a post-pandemic world could do with a stronger push from board members (and investors) for increased transparency and simplicity, with fewer, more individually tailored goals.
Then, we need share allocations that encourage executives to think over longer time-frames, and don't just result in colossal pay awards in boom years. This could mean more restricted stock that has to be held for a period even once employment has ceased. It could mean extending ownership requirements. There are plenty of pitfalls: Proxy advisers will need convincing, and long holding periods can mean executives discount the perk. The advantages are significant, though.
A third step could be to increase the non-financial portion of targets to as much as half of the total. Again, these aren’t popular with advisers who dismiss what they see as soft goals. Still, as compensation consultant Seymour Burchman of Semler Brossy argues, they reinforce strategy if tailored, specific and measurable. Dutch bank ING Groep NV, for example, uses retail customer growth as one measure. Others might use customer satisfaction, investment targets, total recordable injury frequency rate or, as Semler Brossy’s Kathryn Neel points out, corporate reputation, as gauged by a third party.
ESG would be part of this, in a testable and appropriate form that measures opportunity as well as risk. For resources companies, that could be a multiplier that nullifies all bonus in the event of an accident. For a drinks company, it might be water management, or reducing plastic. Combined with the obligation to hold shares for longer, the incentives align.
Shareholders’ meetings globally have been delayed or moved online because of the coronavirus, but there is plenty more disruption to come. Boards, the ultimate arbiters, will find decisions this year have lasting consequences. In a crisis, underestimate pay at your peril.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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