Why executive compensation is a bigger issue during COVID times
October 2, 2020
We’ve heard it said – repeatedly – that the COVID-19 crisis will lead to fundamental shifts in how companies operate. And indeed, at the beginning of the crisis, hundreds of North American executives announced temporary pay cuts to show solidarity with their employees and citizens negatively impacted by the pandemic. This action looks admirable at first glance. But when you dig deeper into how executive compensation is structured, these cuts are not quite the noble gesture they appear to be.
At the onset of the pandemic, executives at hundreds of publicly traded corporations in Canada and the U.S. voluntarily cut their salaries. Great news, right? Well, not so fast. These pay cuts were largely symbolic. Why? Because the cuts were taken at the base salary level – while the bulk of executive pay is in the form of equity-based awards. In fact, some executives, including the CEO of Facebook, only earned one dollar in salary in 2019 but took home millions in total compensation.
Executive compensation is a structural problem
Investors pushed for greater equity-based compensation in the 1990s to motivate executives to lead their companies to increasingly higher valuations. The strategy has worked incredibly well, keeping the train of higher valuations rolling for decades. It has become standard practice for companies to focus on delivering strong short-term results that boost stock prices and, not coincidentally, executive compensation as well.
In fact, this approach has been so successful in meeting its original objectives that today the majority of Canadian CEO compensation packages exceed 70% in equity-based compensation. In the U.S. it’s even higher: for almost every CEO, the equity component of executive pay exceeds 80%. Clearly, executive compensation is a structural problem that needs to be addressed.
Yet the executive pay train just keeps rolling. In 2019, this pay structure produced total compensation packages that would shock the average worker. NEI’s research found that, in Canada, the highest CEO pay package topped out at $24 million annually, while in the U.S. the maximum package was an eye-popping US$280 million! These amounts aren’t just excessive against any common-sense measure, but when compared specifically to the median wage paid to other workers (not to mention the financial uncertainties of living in COVID-19 times), they must be considered extremely excessive.
It’s time to recognize the social inequities of executive pay
For this reason, executive compensation has become much more than a governance issue; it’s a social issue rooted in income inequality. And when you look beyond the topline numbers you can really see just how big that issue is. The companies whose executives are compensated to the degree that NEI categorizes as ‘excessive’ or ‘extremely excessive’ significantly influence our economy and society, employing nearly 8.5 million people – most of whom do not get a sniff of equity-based pay. These companies also represent about a fifth of total S&P/TSX market capitalization and more than one-third of the S&P 500.
This is not an issue isolated to just a few companies or a handful of impacted employees. Yet equity-based compensation structures remain stubbornly intact. And during the 2020 proxy voting season, NEI research found that the overwhelming majority of investors approved executive compensation packages without hesitation.
To get companies to address the social inequity and corporate sustainability challenges tied to excessive executive compensation, all investors will need to provide a bigger push on this issue. And we need to offer solutions as creative as equity-based compensation was in the first place – only with better outcomes for all stakeholders, not just shareholders and executives.