Posted: February 22, 2022
2020 was a time of extraordinary circumstances for most publicly traded companies. With no warning, many brick-and-mortar businesses were forced to close their doors for months with no end in sight. Expenses continued as usual, but revenues were cut off. To compensate, many companies sprung into cost-saving mode. Since they didn’t know how long the pandemic would last, they had to stretch their cash on hand for as long as they could. Since the average CEO earns over $24.2 million in total compensation, this seems like an easy starting point for reducing costs. The average corporation could cut this compensation figure in half and instantly save $12 million. Even after a 50% reduction, the CEO is still taking home a nice, multi-million dollar, yearly income. Interestingly, this scenario didn't play out during the height of the COVID pandemic. According to the Harvard Law School Forum on Corporate Governance, S&P 500 CEOs actually saw a 2.3% increase in total compensation during 2020. Let’s examine why executive pay continued to rise despite pandemic woes. Refresher on executive compensation Most CEOs are paid using a variety of different financial vehicles. Usually, they earn money in the form of a salary, stock options, and bonuses. Of these three, their salary is usually the smallest. Instead, the bulk of their income comes in the form of stock options and bonuses. During the pandemic, many executives gave up their salaries to appear like they were sharing in the sacrifice of their workers. In reality, their salary is only a fraction of their total income. They were still able to earn millions in the form of stock options and bonuses. On top of that, many Boards of Directors decided that the pandemic was an “extraordinary and unanticipated event” that justified extenuating circumstances and solutions. So, what exactly does this mean? An “Extraordinary and unanticipated event” Compensation packages are typically determined at the beginning of the fiscal year. At this point, financial goals are established. Meeting these financial goals is how most executives unlock the majority of their income. However, the coronavirus pandemic drastically altered what “realistic” expectations for a company might be due to unprecedented effects on business revenue, supply chain and other economic considerations. For example, a company might have started 2020 hoping to grow revenue by 5%. After the pandemic emerged, they were suddenly hoping to lose less than 30%. It’s true that the pandemic didn’t create a fair playing field for top executives to meet their goals. The global economic climate at the height of the COVID pandemic was not one that was reminiscent of any time in recent memory. Luckily for these executives, most Boards agreed. They declared that the pandemic was an “extraordinary and unanticipated event”. Due to this, they decided to shift the goals for top executives an entire quarter into the year. They essentially curved the grading scale so that executives could still pass. Instead of needing an A+ to get their bonus, they just had to get above an F. A few examples of companies that felt this way were Carnival Cruises, Advance Auto Parts, and Foot Locker. Each company had a slightly different way of handling the virus. However, the end result was generally the same. Top executives got to keep their bonuses while lower-level employees were furloughed or laid off altogether. This move was largely justified by the value added by competent and exceptional employees serving in the executive suite. Sarah Anderson of the Institute for Policy Studies stated, “This should have been a year for shared sacrifice. Instead, it became a year of shielding CEOs from risk while it was the frontline employees who paid the price." Whether or not this is justified, and how history will look back on these decisions, are matters for future debate. The fact of the matter remains that a ship needs a captain to sail effectively, and similarly, a company needs it's top executives to achieve the same end. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at firstname.lastname@example.org or by phone at 415-618-6060.