We are all in this together, corporate bosses told us last year as they promised to forgo parts of their salaries or bonuses in recognition of the havoc wreaked by Covid-19.
By the end of last June, 502 US listed companies, 17 per cent of the Russell 3000, had announced “adjustments” to the pay of their chief executives. Retailers, travel groups and manufacturers were most likely to trumpet their leaders’ willingness to share the pain.
It’s part of a larger shift in corporate culture that has seen US chiefs speak out on important issues ranging from voting rights and racial inequality to climate change. Last year, nearly 19 per cent of large public companies worldwide included some sort of environmental or social target in their executive pay plan, double the share in 2017, says ISS ESG, the proxy adviser’s data arm.
While some adherents of “stakeholder capitalism” may be true believers, others are using the doctrine as a marketing ploy and a way to avoid investor pressure for results.
Taking personal salary cuts during the pandemic last year allowed corporate leaders to literally put their money where their mouths were. But, executives being executives, the bottom line on CEO pay turns out to be rather different than the early headlines suggested.
Rather than shrinking, the median CEO pay package for Russell 3000 companies rose by 6 per cent last year, according to ISS ESG. At the largest businesses, the median pay pot of S&P 500 CEOs, including bonuses and long-term shares, hit $13.3m in 2020, marking the 11th straight annual increase. Top executives also used corporate jets more extensively for personal travel, corporate disclosures show.
By contrast, median employee pay at S&P 500 companies dropped 17 per cent last year, so the ratio of CEO pay to employee pay shot up from 182 to 227.
This was largely a US phenomenon. Most European and UK chiefs took Covid pay cuts alongside their workers: the median pay package for Stoxx 600 and FTSE 100 chiefs each fell 18 per cent to about $3m.
US pay plans have always depended more on shares, and stocks there have been on a tear, thanks to central bank support and rapid vaccine rollout. The S&P firmly returned to pre-pandemic levels in November and has since hit new a series of new highs. The Euro Stoxx and FTSE 100 finally recovered their Covid losses last week.
But that is not the whole story. Some companies have been playing fast and loose with pay rules to reward top executives when targets were missed. Fast food group Chipotle, for example, excluded three months of lockdown (March, April and May) from its calculation of key metrics as well as some Covid-related expenses, ISS says, adding that the changes boosted CEO Brian Niccol’s total pay by $23.6m to $38m.
Others have shifted from absolute targets to performance relative to peers, a measure that can still pay out in years with losses. “It’s a challenge for compensation committees,” says Courtney Yu, director of research at pay data group Equilar. “How do you incentivise executives to see this thing through and pull your company out?”
Investors, quite rightly, are taking a rather dim view of such changes. Most executive pay plans still sail through annual general meetings, as at Intuit, which won praise for capping payouts and not resetting targets. But a growing number are running into stiff opposition over size, vague targets or a sense that management has been given a free pass.
So far, 86 big US companies have held AGMs, and almost 9 per cent of pay plans have failed or received less than 60 per cent support, up from 5 per cent this time last year, Equilar says. Investors voted down pay plans at Walgreens Boots Alliance, which said it would be “unfair and unwise to penalise” the executive team for Covid, and Starbucks, where the issue was a $50m retention bonus for chief Kevin Johnson.
Rebellions are also brewing at companies such as General Electric, AT&T and Wells Fargo. Johnson & Johnson shareholders will vote on Thursday on rewarding Alex Gorsky with $29.6m for “strategic performance” even though the drugmaker missed most financial targets and shelled out billions over opioids and talcum powder asbestos claims.
The UK is not immune: National Express, Glencore and AstraZeneca will vote shortly on pay plans that proxy adviser Glass Lewis considers excessive or disconnected from Covid reality.
CEOs can talk until the cows come home about corporate responsibility. Until companies and shareholders put a stop to “heads I win, tails I still win” pay plans, we should not believe them.
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