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Why boards should reassess executive compensation as CEO pay flourishes

February 11, 2022, 12:46 PM UTC

Nearly two years after the COVID-19 pandemic first upended corporate America, shuttering businesses and prompting mass layoffs and hiring freezes, executives seem to be compensating themselves handsomely for surviving the ordeal.

Half of Russell 3000 companies increased the pay of their CEO in 2020, according to a recent report from governance software provider Diligent. The report also stated that while 647 Russell 3000 companies announced reductions in CEO pay, just 15% reduced pay by the pledged amount.

Corporate employees and hourly workers alike have struggled and made sacrifices during this time. Balancing personal responsibilities, including their own family’s pandemic response, and navigating the collective sorrow of a global public health crisis understandably pushed many people to the brink. 

For employees who experienced layoffs in recent years, the sting is all the more painful. A Washington Post analysis found that while 45 of the country’s 50 largest companies had turned a profit since March 2020, at least 27 of them had laid off more than 100,000 employees. 

After enduring these challenges, the average worker’s pay has not increased by much. U.S. households are still struggling, with nearly a third in a recent Harvard survey saying they are worse off financially.

Meanwhile, several prominent CEOs saw considerable pay bumps last year, despite grappling with pandemic-related crises, employee blowback, and other performance-related issues. The ratio of CEO pay to that of the median worker at companies like CVS, Walt Disney, and Comcast are over 300 to 1, according to data from PayScale. A review of pay disclosures by consulting firm Deloitte found the median ratio of the S&P 500 to be 163 to 1. 

The CEO of Starbucks, which is dealing with a growing unionization wave, received a 39% pay increase in 2021, bolstering his total compensation from $14.67 million in 2020 to slightly over $20 million. Meanwhile, board members at several banks, including Bank of America, approved hefty compensation packages for their CEO.

Some could argue that these pay packages are justified. After all, CEOs are tasked with spearheading sprawling organizations, and their compensation historically has primarily been tied to financial performance. Today, leaders from Blackstone to Ben & Jerry’s, and every type of company in between, recognize the need to incorporate a new set of incentives to guide executive performance.

Economists say that executive pay can “demotivate employees or harm the firm’s customer reputation.” They advocate for “relative performance evaluation” and lengthening of short-term incentives.

Executive compensation consultant Seymour Burchman, writing in the Harvard Business Review, suggests adding metrics measuring customer engagement (net promoter scores and churn) and employee engagement (turnover and satisfaction) to executive comp plans while incorporating financial measures relative to industry and other competitors. This prevents the financially focused, short-term thinking that has hurt customers, communities, and employees.

How boards design CEO and executive compensation packages will likely require a major restructuring in coming years. Who will lead the way?

I want to hear from you. How is your company updating executive compensation plans to reflect a wider set of goals and values? How would you like to see them do it? My email is below.

Aman Kidwai
aman.kidwai@fortune.com

Headlines

The Spotify-Joe Rogan saga continues

Spotify’s handling of the Joe Rogan debacle reached new heights this week. The streaming platform removed more than 100 episodes of his podcast last week, citing its moderation policy. But in subsequent internal meetings and memos, covered by The Verge and Axios, Spotify CEO Daniel Ek stated that the company will not “silence” Rogan and plans to continue their relationship with him. Ek also announced a $100 million effort—the same amount as Rogan’s contract—to support music and audio content creators from underrepresented groups. Employees reportedly pushed back on Ek’s response and reasoning in a tense townhall.

Spotify still has many questions to answer. Did it know about Rogan’s use of racial slurs before acquiring the exclusive rights to his podcast? And if not, why didn’t Spotify perform better due diligence on a $100 million investment?

 

Peloton CEO out, 2,800 laid off

Just weeks after activist investors called for Peloton CEO John Foley to resign, the exercise platform announced that it is replacing its chief executive and slashing 20% of its corporate workforce.

“The Peloton case makes clear that the entrepreneurial skills needed to launch and transform a startup into a corporate behemoth are not necessarily the same as those needed to run and scale a large company that faces unique challenges and growing pains,” Fortune’s Phil Wahba writes.

 

Amazon raises corporate salaries by a lot

The retail giant raised its maximum corporate salary from $160,000 to $350,000 this week. A lot to unpack here, but this is the escalation of the war on talent as Amazon struggles to hire and retain employees. It’s to be determined whether others will follow suit but several banks, including Goldman Sachs and Morgan Stanley, have announced significant pay increases for staffers over the last year.

 

CEOs on the changing nature of consumer behavior

I have used some version of the phrase "massive changes in consumer behavior” in multiple articles and newsletters. In a recent edition of Fortune’s CEO Daily, we hear from the chiefs of Walmart, Stitch Fix, Michaels on the ways consumer behavior has changed.

Standout statement: Rite Aid’s CEO said the drugstore has changed more than 75% of its merchandise over the last two years.

 

The Great Resignation is Payback for Companies Treating Employees Badly

Many themes, anecdotes, and data here support the assertion from last week’s Modern Board newsletter that corporate leaders created the conditions that led to “The Great Resignation.”

 

Activision Blizzard was their dream job. The workplace was a nightmare

This must-read Fortune investigation chronicles the reportedly toxic culture at the multi-billion dollar gaming company that Microsoft plans to acquire.

 

State of California suing Tesla for discrimination

Tesla has faced numerous complaints and lawsuits from former workers at its Fremont plant about racial discrimination and sexual harassment in recent years. Many complaints never make it to court because Tesla’s full-time employees sign agreements requiring workplace disputes to be handled in closed-door arbitration.

Numbers that matter

71%

According to a recent Boston Consulting Group survey of knowledge workers, 57% are open to looking for a new job. The number goes up to 71% for employees who are not satisfied with the flexibility of their current role. Despite a clear desire for flexibility from employees, 75% of surveyed executives want to return to the office at least three days a week. Only 34% of employees want the same.

BCG writes: “The pandemic has taught us that workers don’t need to be under a manager’s thumb to get work done. The pandemic has also given workers an appetite for flexibility, self-determination, and self-navigation. There’s an opportunity now to reconstitute the future of work. Organizations that seize that opportunity can create new work models that make them employers of choice, able to attract, retain—and sustain—the best talent.”

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