Corporate America has started to cut executive pay in record numbers, in the face of fierce shareholder dismay and a rapidly rising need to preserve cash.
At least 71 public companies have announced pay reductions for one or more top officers since last June, according to compensation research firm Equilar. That number is only a drop in the bucket of the thousands of public companies in the United States, but any decline in CEO compensation is impressive, considering how it has moved steadily (and stubbornly) upwards over the years.
A handful of companies announced pay cuts last summer, but the vast majority was announced after the stock market crashed in October. Companies have disclosed cutbacks ranging from 3 to 100 percent of base salary. In most cases, however, executives are taking a haircut of 10 to 15 percent, Equilar says.
Godycki
“The rate at which companies are reducing executive salaries is accelerating very quickly,” Equilar Research Manager Alexander Cwirko-Godycki notes.
The data shows even large companies are feeling the pinch. Twenty-six companies with revenues over $1 billion have announced cuts to executive salaries in the last six months, including Federal Express, Western Digital, Motorola, Continental Airlines, Cummins, and Seagate.
Most companies are only cutting their executives’ base salary. That’s usually just a small fraction of a CEO’s total possible compensation, but Cwirko-Godycki says cutbacks to incentive-based compensation “probably aren’t necessary” since this economy means the value of most bonuses and equity compensation is falling anyway.
The exception is the financial sector, Cwirko-Godycki says, where most leading CEOs have agreed to forfeit bonuses (sometimes for the second year in a row). That trend is not spreading to other industries, he adds.
“The rate at which companies are reducing executive salaries is accelerating very quickly.”
— Alexander Cwirko-Godycki,
Research Manager,
Equilar
Of the 71 companies that have trimmed executive pay, 20 have cut the CEO’s salary only; another 35 have cut the salary of multiple named executive officers. The remainder cut the salaries of top executives and other employees.
Cwirko-Godycki says it’s not surprising that CEOs are feeling the full force of this trend. “Chief executives are like quarterbacks,” he says. “They probably receive too much credit when things go well, and too much criticism when the overall economy heads south.”
At FedEx, for example, CEO Fred Smith had his 2009 salary clipped 20 percent. Other senior executives took cuts of 7.5 to 10 percent, and all other salaried workers will take 5 percent cuts, according to an 8-K filing the company disclosed on Dec. 18.
FedEx also disclosed the elimination of calendar 2009 merit-based salary increases for U.S. salaried exempt personnel and the suspension of 401(k) company matching contributions for at least a year, effective Feb. 1. In addition, its filing says FedEx’s operating units are “evaluating other measures should business conditions further deteriorate.”
And on Dec. 17, Western Digital Corp.’s board approved salary cuts for CEO John Coyne (33 percent), the chief financial officer (25 percent), and several other named executive officers (15 percent), according to a regulatory filing. Western Digital’s management had proposed the cuts.
Feeling the Pain
Observers say pay cuts are often implemented after other measures have been taken, such as lowering bonuses and freezing salaries.
“Cutting salaries or equity grants is a last resort,” says Vicki Williams, a principal at compensation consultancy Towers Perrin. “So far, it’s been a minority group of companies that have taken that step—companies that are in a dire situation and have exhausted other avenues.”
SALARY CUTBACKS CLIMB
Salary reduction announcements at public companies by month—June 2008 to Jan. 16, 2009:
Month
Amount
June
2
July
4
August
3
September
1
October
2
November
11
December
20
January
28 (of of Jan. 16)
Source
Equilar Data on Salary Cutbacks (Jan. 16, 2009).
Indeed, salary freezes are on the table at hundreds of companies, according to the results of a November survey conducted by compensation consulting firm Pearl Meyer & Partners. Among 410 board members and executives who responded, roughly 20 percent anticipated freezing executive base salaries in 2009.
Heim
“If we conducted the same survey now, I suspect it would be closer to one in four firms contemplating salary freezes,” says Jim Heim, a managing director in Pearl Meyer & Partners’ Boston office.
Moreover, 36 percent of respondents to the survey said they plan to pay a bonus that’s “below formula”—that is, less than what executives would have earned based on achievement against the plan’s stated objectives.
“Compensation committees aren’t just relying on poor performance to produce lower results,” Heim says. “In some cases, they’re giving executives a haircut on top of an already small bonus based on performance.”
He says compensation committees are looking at “bonuses, long-term incentives, stock options, and restricted shares, and asking questions in all of those areas.”
That suggests further pain may be yet to come for most CEOs. Most compensation committees don’t meet until February or later to set performance goals for 2009; that means the committees might lower their expectations given the poor economy, but they could also trim the payouts CEOs would receive.
Fackler
“Anecdotally, we’re hearing that objectives will be more modest than 2008, and that, even if performance goals are achieved, bonuses will be smaller,” says Stephen Fackler, a partner at the law firm of Gibson, Dunn & Crutcher who specializes in compensation issues.
While the massive hits to the financial sector have been making headlines, Heim and other observers say the cuts are affecting nearly every industry. The typically staid energy and utilities sectors do seem to be “more insulated,” he admits, but overall, “Everyone is feeling the pain.”
James Reda, managing director of compensation consultancy Reda & Associates, says all companies “are being cautious and are pulling back until they get to firmer ground.”
Reda
Reda says industries such as retail, business services, construction, technology, telecommunications, and aviation have been hurting the most, while defense and life sciences companies haven’t been hit as hard by the downturn.
Heim, however, expects to see more pay cuts announced in the coming weeks.
“I expect more companies will announce their plans on pay when they release year-end results in the coming weeks, and others will wait until their proxy filings,” he says. “2009 is not going to be a business-as-usual year, so I’d expect to see more announcements about pay cuts.”
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