Andrew G. Gordon is partner at Equilar, Inc.; David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; and Courtney Yu is Director of Research at Equilar, Inc. This post is based on a joint study by Equilar and Stanford University. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).
We recently published a paper on SSRN, Sharing the Pain: How Did Boards Adjust CEO Pay in Response to COVID-19?, that examines how companies altered CEO compensation contracts and the payment of director fees in response to the COVD-19 pandemic.
CEO pay is routinely scrutinized for its size, structure, and relation to performance. Stakeholders want to know that CEOs are paid the correct amount, the structure of pay awards encourages the achievement of corporate objectives, and the amount ultimately realized is correlated with performance. Scrutiny is heightened during times of economic distress resulting from unexpected or exogenous forces. It is not clear how much pay CEOs should receive when corporate profitability suffers or how incentives should change to reflect an unforeseen decline in the operating environment. The issue of appropriate pay can gain extraordinary public attention when companies engage in cost-cutting actions, leading to layoffs, furloughs, or pay reductions for average employees who—like their bosses—did not cause the downturn.
In such times, the board must decide the correct course of action from an economic and societal perspective. On the one hand, the board might want to preserve the incentives offered to the CEO, recognizing that a decrease in pay punishes talented executives through no fault of their own and who have alternative career options with competitive firms. This viewpoint argues in favor of maintaining targeted compensation levels to the extent possible. The board might also award discretionary bonuses to make executives whole for missed bonus targets that have become unattainable, reprice or grant supplemental equity awards to compensate for lost value due to a declining stock price, or ease performance targets to preserve the value of outstanding long-term incentive programs (LTIPs).
