Why CEOs are giving up their salaries during the coronavirus crisis

Executive pay cuts alone aren’t likely to have a significant impact on companies’ bottom lines or provide a boost to lower-paid employees further down the org chart. But they send an important message.

“A lot of it is symbolic,” Itay Goldstein, professor of finance University of Pennsylvania’s Wharton School, said. “When we come into a crisis like the one we have right now — where it’s a difficult time for the economy, for workers, people are losing their jobs, people don’t know what to expect — I think for CEOs to come out and say, ‘We are going to give up our pay,’ it’s a signal that they are sharing the pain.”

Airlines and travel companies, one of the industries hit hardest by the outbreak early on, were among the first to take such a step, including Delta (DAL), Alaska (ALK), United Airlines (UAL) and others, which all announced CEO pay cuts, and other executive compensation reductions.
Marriott (MAR), the world’s largest hotel chain, said last week that CEO Arne Sorenson will not take home any salary for the rest of the year, and the rest of the executive team will take a 50% pay cut. The announcement came at the same time that the company said it would begin furloughing what could be tens of thousands of hotel workers, from housekeepers to general managers.
Online travel company Booking Holdings (BKNG) said Monday that CEO Glen Fogel, as well as the CEOs of the company’s three brand divisions, would forgo his salary. Booking’s board directors also volunteered to give up their cash retainers.
On Wednesday, Dick’s Sporting Goods (DKS) also announced its CEO Ed Stack and President Lauren Hobart will forgo their salaries, except for an amount covering company-provided benefits. The company’s other named executive officers will take a 50% reduction in base salary.
Other companies, including Ford (F), GE (GESLX) and Lyft (LYFT) have taken similar steps.

“Every single dollar, euro, bhat, etc., counts in this effort to ensure we can continue to be the leader in online travel on the other side of this crisis, said Booking’s Fogel said in a letter to employees Monday. “Every employee has a responsibility to contribute to our cost-saving efforts and be as efficient as possible.”

A symbolic gesture

But at companies of that size, while CEOs and other top executives generally bring home millions of dollars, their salaries are insignificant relative to the company’s overall revenue — certainly not enough to keep a distressed operation’s finances afloat, Goldstein said. Many of the companies are taking other steps, too, such as changing their operating schedules and cutting unnecessary capital expenditures.

However, the pressure on top executives to take some sort of action may be particularly high at the moment.

The amount of money that top executives at big corporations make relative to other workers has been a growing conservation since the 2008 recession, when federal officials mandated that companies publicly disclose that ratio. And the gap has continued to expand in recent years. Even Abigail Disney, granddaughter of company co-founder Roy Disney, called out the Disney CEO for his massive pay package.
Delta CEO Ed Bastian’s total pay in 2018, for example, makes 184 times the median of the total compensation of all employees, according to the company’s most recent proxy statement.

Coronavirus also hit at the same time most companies are calculating yearly bonuses for executives and other staff from the prior year, making it a particularly awkward time to lay off employees, said Eric Talley, professor of law and faculty director of the Millstein Center at Columbia University.

Although a CEO foregoing their salary typically won’t mean game- changing savings for their company, it’s still a move workers likely want to see.

“It’s about having an appropriate tone at the top,” Talley said. “There might be companies that did really well in 2019 and suddenly your company has hit a brick wall. So at the same time you’re laying off a bunch of rank and file employees, you’re awarding yourself (millions in bonus pay). It just doesn’t look very good.”

How it’s done matters

But the effect of the gesture may also depend on the details of executives’ pay reductions. Some companies have said their executives will forgo their base salaries, while others have indicated that execs will give up virtually all of their pay. Base salaries typically make up a small part of named executive officers’ total compensation, which is often largely comprised of performance based compensation such as stocks, options and bonuses.

United Airlines, for instance, said its CEO Oscar Munoz and President Scott Kirby are “foregoing 100% of their respective base salaries through at least June 30,” according to a March 10 filing with the SEC. But in 2018, per United’s most recent proxy statement, Munoz’s base salary made up just 9% of his total compensation — or $1.25 million of the nearly $10.5 million total he earned that year. Kirby’s base salary comprised 16% of his total compensation.

Executives’ performance-based compensation will also suffer at a time when companies are bleeding money and stocks are down because of the disruption coronavirus has caused to their business and to financial markets.

Even if giving up their pay won’t be enough cost savings to let companies avoid laying off workers amid the crisis, sending a strong message of solidarity to employees may prove important for executives when companies start to recover, Talley said.

“It’s a message I think many employees want to hear,” Talley said. “Some of these employees are reliable, skilled, good employees, so these companies are anticipating, thinking, ‘We want to be in a position to have these employees to come back, and we want to hire them back, when the economy starts turning around.'”

Correction: An earlier version of this story misstated Abigail Disney’s relationship to the Walt Disney Company’s co-founders.

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