But salary is often just a minor piece of a CEO’s total compensation, which is derived from notoriously complex formulas. Each year, companies fill pages of their proxy statements with charts and footnotes showing how the bulk of their CEO’s pay rises and falls with corporate performance. It’s here, in the nuanced area, where many companies adjusted levers that ultimately helped CEOs get more in compensation.
A SUDDEN CHANGE
Boards typically stick with the formulas set for CEO pay early each year, but the global economy's sudden crash forced a reconsideration. What made things even cloudier was that they had few historical guides for how to proceed.
“Many committees asked us this very question: Does this compare to the financial crisis? What did people do then?” said Melissa Burek, partner at Compensation Advisory Partners, a consulting firm that works with boards.
But the pandemic was very different than the 2008 economic collapse, mainly because this crisis was caused by a virus, rather than by CEOs taking on too much debt and risk. As boards adjusted targets to make CEOs’ incentive pay less difficult to get, many also limited the size of the possible payouts.
“I think there is a recognition, when unemployment is so high, of: Do we feel good about paying our CEO at this level?” said Kelly Malafis, also a partner at Compensation Advisory Partners, of the thinking by boards of directors. “The answer is: ‘We’re doing this for performance. When performance is not good, we don’t pay. When performance is good, we do pay.’”
At Carnival, for example, the company says that much of its CEO’s compensation is tied to the company’s financial and operational performance. The company said Donald received no cash bonus tied to 2020. And to preserve cash in the pandemic, the company gave him grants of restricted stock instead of salary from April through June. Then from July through November, it cut Donald’s salary by half.
RATTLING AT THE GATES
Progressives in Washington are pushing for rules changes to narrow the gap between CEOs and workers.
Companies have to show how much more their CEO makes than their typical worker, and the median in this year’s survey was 172 times. That’s up from 167 times for those same CEOs last year, and it means employees must work lifetimes to make what their CEO does in just a year.
One bill in Congress proposes to raise taxes on corporations where the CEO makes 50 times or more than the median worker at the company.
At some companies, shareholders are pushing back on compensation packages approved by the board.
At the annual meeting of Chipotle Mexican Grill’s shareholders earlier this month, just 51% of voting shares gave a thumb’s up to its executives' pay packages, compared with 95% a year earlier. Across the S&P 500, such “Say-on-pay” votes routinely get more than 90% approval.
Chipotle’s board excluded three months of sales results from the worst of the pandemic, along with several other items, while calculating pay for its CEO, Brian Niccol. That allowed him to get bigger compensation than he would have otherwise.
Chipotle called the move a one-time modification that’s not reflective of Niccol's ongoing pay package. Chipotle was one of the relative winners of the pandemic, with revenue rising 7.1% and its stock soaring 65.7%.
While they’re nonbinding, “Say-on-pay” votes are getting increasing attention from Wall Street. Between 2017 and 2019, stocks of companies that failed their votes lagged sharply behind the S&P 500 in the following 12 months, according to Morgan Stanley.
The trend didn’t hold last year, when the pandemic may have unsettled everything, but Morgan Stanley strategists say they still see failed “Say-on-pay” votes as a red flag that a stock may struggle.
And if there’s anything that investors on Wall Street care about, it’s how well they’re getting compensated.
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