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CEOs pledged to take COVID pay cuts


The convergence of executive pay and corporate social responsibility

Published 30 September 2021 in Sustainability • 7 min read

CEOs pledged to take COVID pay cuts but many didn’t go through with it. Now their investors are rebelling, and amplifying calls to reform executive compensation.

At the onset of the pandemic many chief executives pledged to lead by example and take pay cuts to reflect the economic dislocation and human suffering taking place. Some CEOs in sectors ravaged by coronavirus, such as leisure and hospitality, gave up their whole salary for the rest of 2020 — including Hilton’s Christopher Nassetta and Mariott’s Arne Sorenson.

Skeptics saw such moves as greenwashing, but the COVID pay cuts reflect a wider shift in corporate culture; environmental, social, and governance (ESG) factors are top of mind for many executives. Yet, more than 18 months into the coronavirus crisis the pledges on pay have not translated into concrete action in many cases. Shareholder revolts over executive pay have increased, and amplified calls to reform executive compensation.

According to governance corporation Diligent, 647 companies in the Russell 3000 index announced executive pay cuts last year, but only 79% went through with it. And just 15% hit the salary reduction target, owing largely to a stock market rebound that boosted the value of shares issued as compensation.

647 companies in the Russell 3000 index announced executive pay cuts last year, but only 79% went through with it. The median base salary for Russell 3000 CEOs increased by 6.4% in 2020.

But in some cases companies have made changes to pay rules that rewarded executives who missed performance targets. The food group Chipotle stripped out poor results from three months of lockdown, which ultimately boosted pay for its CEO Brian Niccol last year by $23.6 million to $38 million, even as the company raised consumer prices.

Instead of falling, the median base salary for Russell 3000 CEOs increased by 6.4% in 2020, according to a new report. Median CEO total compensation in 2020 was between $2.3 and $3.3 million, depending on company size.

At the same time, one estimate found median employee pay was down 10% to $58,000, meaning the CEO to employee pay ratio increased from 191 to 227. Although comparisons between companies are challenging, the figure is a flashpoint for discussions around executive pay.

The picture is very different in the UK and Europe. Data published last week by advisory firm PwC revealed CEO pay at the UK’s FTSE 250 companies fell by 19% from 2019, from an average of £1.6 million to £1.3 million ($1.8 million). The median pay for Europe’s Stoxx 600 CEOs fell 18% to about $3 million.

While a slight reduction in chief executive compensation may not have a material impact on the company’s bottom line, it sends a message to employees. The transatlantic divergence on CEO pay can be explained mostly by the fact that shares account for a bigger portion of overall pay among CEOs of US companies, and US equities have been soaring.

More than 100 S&P 500 companies have rewritten bonus plans for executives due to the pandemic. The average vote result is below 90% for the first time since 2016.

Shareholder rebellions over executive pay are rising

Some companies have waived financial targets in light of COVID, as the Chipotle example illustrates, while investors are taking a dim view of moves to reward top executives at a time of global suffering. Compensation committees argue that generous bonuses are necessary to retain executives, and CEO transitions can damage a company’s share price, but the optics look bad.

Companies now face a reckoning on executive pay in a post-COVID world. PwC reports an increase in significant votes against pay plans in the 2021 AGM season, compared with last year. This was mostly in cases where CEO pay increased above the wider workforce level, or when companies underperformed, or were seen to have behaved irresponsibly.

In the US, more than 100 S&P 500 companies have rewritten bonus plans for executives due to the pandemic, according to data analytics firm Esgauge. The average vote result is below 90% for the first time since 2016, noted executive search firm Semler Brossy.

The vast majority of pay plans still receive majority support. But investors have been highly critical of special awards and long-term incentive programs (LTIPs). Shareholders voted against pay plans at Walgreens Boots Alliance, which initially said it was “unfair and unwise” to penalize leaders for COVID, and Starbucks, over a $50 million retention bonus for CEO Kevin Johnson.

Other companies have suffered rebellions, including General Electric, AT&T, and IBM. Although the pay votes are advisory instead of binding, they can still cause reputational harm for companies and cast doubt over the quality of the governance, hitting market valuations. Morgan Stanley found that, between 2017 and 2019, most companies that did not pass pay plans underperformed the S&P 500.

The median base salary for Russell 3000 CEOs increased by 6.4% in 2020, according to a new report. Median CEO total compensation in 2020 was between $2.3 and $3.3 million, depending on company size.

We believe the time is ripe for a fundamental rethinking of the variables that should be included in compensation plans, anchored around longer-term incentives linked to the underlying performance of the organization, along with the inclusion of non-financial metrics such as social and environmental targets.

This is not corporate altruism; helping society is in executives’ long-term self-interest. A growing body of research has linked higher value creation with better ESG performance through top-line growth, cost reductions, productivity gains, asset optimization and deregulation. Investors know this, and they are taking action.


Use of restricted or deferred share models is growing

First and foremost, companies must ensure pay and incentive plans are aligned closely with business performance. Amid the economic dislocation of COVID, we believe that chief executives should be sharing the pain experienced by wider society, especially those in sectors hit hard by the pandemic, such as hospitality and travel.

Yet, some companies have thrived during COVID, and the initial sharp economic downturn has been followed by a rapid recovery in many developed countries. Some organizations have provided a valuable public service during COVID, and have supported their local communities.

If a bonus is warranted, companies may prefer to defer awards for executives until the pandemic is over, especially with investors rebelling over generous payouts. BT’s top executives, for instance, offered to voluntarily waive their cash bonuses for two years after the British telecoms group disappointed investors when it scrapped its dividend during COVID.

Deferred bonuses better align risk with performance, and link pay to the longer-term financial health of the organization: since the financial crisis, banks have been forced to award senior executives over several years, for instance.

More recently, companies have been urged by their investors to adopt restricted or deferred share models, where part of an annual bonus is paid only when performance conditions are met over a longer period, or even after an executive’s retirement. These models can help to provide greater simplicity and save time on target-setting and executive pay, while ensuring long-term alignment and behavior.

Morgan Stanley found that between 2017 and 2019, most companies that did not pass pay plans underperformed the S&P 500.

Non-financial metrics are increasingly included

Beyond that, companies must ensure that CEO pay reflects the conditions of wider stakeholders, including the workforce, customers, and the communities in which the organization operates.

Traditionally, executive compensation has been focused on financial metrics such as earnings per share, or revenue growth. But, increasingly, non-traditional metrics are being included in pay plans as investors, politicians, and wider society heap pressure on companies to become better corporate citizens.

Since 2018, the number of companies around the globe that include environmental or social metrics in executive awards has doubled, according to the responsible investment branch of Institutional Shareholder Services, the proxy advisory group.

An important catalyst for the convergence of executive pay and corporate social responsibility has been pressure from institutional investors such as BlackRock, the world’s biggest asset management. BlackRock, which is a leading shareholder in most of the world’s largest public companies, has focused on sustainable investing and championed ESG standards.

Many companies are incorporating ESG factors into executive pay awards; Microsoft includes diversity as one metric, while food group Nestle incorporates staff health and safety in pay targets. Mining company BHP includes climate change and energy use.

The increase in significance of environmental metrics was illustrated by the oil supermajor ExxonMobil’s shareholders voting to support an activist campaign to change its board to reflect climate concerns. Other companies will be under pressure to adopt non-financial goals in the upcoming earnings season.

These metrics should be significant, measurable, and transparent if they are to create value for all stakeholders and shareholders. Boards already have the tools at their disposal to ensure CEOs walk in the direction that they think is meaningful. They just need to use them.


Robert Hooijberg

Professor of Organizational Behaviour at IMD

Robert Hooijberg is Professor of Organizational Behavior at IMD. His areas of special interest are leadership, negotiations, team building, digital transformation, and organizational culture. Before joining IMD in September 2000, Professor Hooijberg taught at Rutgers University in their MBA and Executive MBA programs in New Jersey, Singapore, and Beijing. He is Program Director of the Breakthrough Program for Senior Executives and the Negotiating for Value Creation course.

Ric Roi

Richard Roi

Professor of Leadership and Organization at IMD

Ric Roi is Professor of Leadership and Organization at IMD. He is a senior business psychologist and advises boards and CEOs on matters related to board renewal, CEO succession, top team effectiveness and leadership transitions.


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