CEOs are taking pay cuts as furloughs and layoffs mount. Is it actually helping?
Disney. Dick’s Sporting Goods. Lyft. Marriott. Vice.
Chief executives across industries are cutting their pay—often to zero—as part of their strategy to mitigate the impact of the coronavirus crisis. Such moves are good optics, certainly, but what do they actually achieve in terms of helping their businesses?
According to Charles O’Reilly, a professor of organizational behavior at the Stanford Graduate School of Business, one reason top executives are giving up their pay is to attempt to create a feeling of unity. “It sends a signal [to employees]: We care about you, we’re in this together, and we’re going to share the burden,” he says.
Indeed, the first CEOs to reduce their paychecks were in industries like hospitality and retail, which were most quickly forced to furlough or lay off workers because of the public health crisis. Marriott CEO Arne Sorenson suspended his salary—last reported at $1.3 million—for the rest of the year, and Dick’s Sporting Goods CEO Ed Stack will no longer receive his base salary of $1.1 million. Others were in industries whose workers are putting themselves at risk during the crisis; Lyft cofounders John Zimmer and Logan Green, for instance, said they would contribute their salaries to efforts to help drivers through the end of June. The early movers were quickly followed by execs in the media and entertainment industries, including Disney executive chairman Bob Iger slashing his salary to zero and CEO Bob Chapek taking a 50% pay cut to the $2.5 million he earns as his base salary. BuzzFeed, Canada Goose, Delta, Macy’s, United, and Yum Brands are more companies that have made the move.
Executives at companies with strong brand power in consumer-facing industries may be more likely to cut their pay during a crisis, according to Michael Useem, a professor of management at the Wharton School. Companies in labor-intensive industries, too, with more at risk in the case of layoffs, have more reason for executives to take swift action regarding their own salaries.
But the gesture is often symbolic; executive pay is largely made up of stock options, rather than the salary CEOs pull biweekly. Cutting pay doesn’t always have a significant impact on a company’s bottom line, although it can help if firms are severely cash-constrained. And if the pay cuts are also accompanied by layoffs—like Macy’s nationwide furloughs—any morale-boosting benefits can be “lost in the noise,” according to Jason Schloetzer, an associate professor of accounting at Georgetown University’s McDonough School of Business.
During this particular crisis, some companies—like airlines—may have less altruistic motives for reducing executive compensation. “If we’re talking about a CEO in an industry qualifying for government stimulus, it puts a third motive in there. It’s window-dressing so they may look more acceptable in receiving stimulus aid,” Schloetzer says.
And Fortune 500 companies may be backed into a corner when it comes to this sort of conscious capitalism, after the unveiling of the Business Roundtable’s new priorities in August. In a highly publicized announcement, the CEOs of almost 200 of the country’s most prominent companies stated their commitment to their communities, customers, and employees, and to diversity and inclusion and the environment, instead of the traditional sole duty to stockholders. “Because of the Business Roundtable statement, there’s a greater effort to look like the soul of good citizenship,” Useem says.
Whether or not slashing executive pay—if not total executive compensation—ultimately helps firms weather this crisis, their actions may have long-term consequences. “People have long memories when it comes to what you did in a crisis,” Useem says. “Did you step forward, or did you refuse to help out?”
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