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.”
“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.
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.
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.