Companies know excessive executive compensation has moved beyond a governance consideration to become a big contributor to inequality. But are they ready to act?

by David Rutherford

Last March, when dozens of CEOs announced pay cuts in solidarity with workers impacted by the COVID-related economic shutdown, there was much applause. In fact, as Just Capital has reported, 70% of people surveyed felt that CEO pay cuts could actually be a “significant means of cutting costs and preventing layoffs.”

At NEI, we didn’t entirely share their optimism. We saw these salary cuts as largely symbolic because most executive compensation is paid in the form of equity-based rewards. Plus, none of these cuts changed the fact that a significant number of companies pay their executives and CEOs excessively — in many cases, extremely excessively. So excessively, in fact, that executive pay has transcended corporate governance and emerged as a significant contributor to social inequality.

Start by asking the right question

When we unveiled our research on the impact of excessive executive pay in the fall of 2020, we were at the leading edge of this burgeoning ESG issue. We shone a light on the contribution of excessive pay to social inequality — a much more significant and disruptive risk than simply bad governance, as investors have traditionally viewed excessive compensation. We don’t ask, “Is your CEO really worth it?” We think the more important question is this one: “Is your executive compensation contributing to social inequality?”

Our point is that companies can’t simply cut executive pay, redistribute those dollars to employees, and expect to solve this problem. That’s pre-pandemic thinking, and we’ve proved it. We calculated that a 15% pay cut for Walmart executives would translate to a measly six extra dollars annually in the pocket of every Walmart employee. These days, companies need to think differently about their role in contributing to inequality, and to solving it.

Assessing financial wellness

Our friends at Just Capital see it the way we do. They’ve just launched the Worker Financial Wellness Initiative, which will help companies “make workers’ financial security and health a C-suite and investor priority.” This includes an assessment guide to help companies establish the financial wellness of their workers. While many companies will focus on paying their employees fairly, it needs to go beyond simply increasing the minimum wage. That’s the easy part.

The hard part — the necessary part for addressing inequality — is for companies to support and fund initiatives like enhancements to employee benefits, funding of employee trust funds, workforce education and training, paid internships and scholarships, and financing community initiatives with clear benefits to everyone.

Helping companies think differently

The key is to help companies truly understand what’s really at stake. Companies that care to think differently about their current levels of executive compensation can start by looking at three distinct factors:

  1. Decreasing compensation below excessive levels (or deciding to maintain it at existing levels) to reduce reputational risk
  2. Setting an example for other companies to do the same to build momentum towards reducing inequality
  3. Inspiring organizations to develop innovative ways to address inequality. For instance, could this thinking inspire banks to create programs for underserved customers and communities?

It all starts with changing how organizations view the compensation paid to their executives: how much, how it’s structured, and what role it plays. On that third consideration, tying executive compensation to company performance against ESG factors is a natural, and an approach many companies already adopt.

The good news is that companies are increasingly understanding this. They recognize that inequality is something that needs to be addressed and that changing how their leaders are paid can help address it. Executive compensation is something every corporate board has control over. And if our recent conversations with a number of companies are any indication, it’s also something organizations view as a change that needs to be made.

They get it. The will is there. We just need companies to take the next step and act.