June 11, 2020

Companies Cut Executive Pay in Changing COVID-19 Landscape

Over a month has passed since we published our initial piece on pay changes due to the novel coronavirus, The Optics of Executive Pay in the Time of COVID-19. Throughout May, Farient has continued to keep a close eye on compensation trends, particularly as to what actions, if any, S&P 500 companies are taking in regard to their compensation plans as a result of COVID-19. In this brief, we update the overall trends and dive deeper into two examples of companies that have made decisions that are outside of the mainstream, MGM Resorts and Automatic Data Processing, Inc.

Please note that some companies may have made changes to compensation plans in response to COVID-19 without specifically reporting them in an 8-K or proxy filing, and therefore may not be accounted for in Farient’s research.

The Era of Coronavirus: Who’s Cutting Pay?

As of June 1, 2020, approximately 16% of S&P 500 companies—up from 10.8% in early May—have disclosed changes to CEO pay in response to COVID-19.  Of those companies, 40% opted to forego CEO salary entirely, with the rest tending to cut CEO salary by 20-50%.  Very few companies have done anything other than reduce or eliminate cash compensation.

The adjustments continue to be focused in certain sectors. Consumer discretionary companies have been the most likely to take action, with 48% of companies in the sector reporting a CEO salary cut; at the other end are utility companies, none of which have reported a cut. CEOs and other executives aren’t the only groups to have their compensation reduced. Just under 10% of S&P 500 companies have disclosed changes to director annual retainers; these cuts were similar in distribution to CEO pay cuts both by magnitude and across sectors.  

% of Companies Changing CEO Compensation by Sector

MGM Resorts: What Happens in Vegas…

There are some exceptions to the “eliminate CEO pay” standard that most companies have followed.  MGM Resorts (NYSE:MGM) announced recently that, effective April 1, 2020, the Company’s Acting CEO, William Hornbuckle, volunteered to take 100% of his remaining 2020 salary in the form of restricted stock, vesting in full on December 31, 2020.  As a side note, his salary had been reduced from $1.4MM when he was in the COO and president role to $1.1MM. Although MGM’s stock price fell sharply at the beginning of the health crisis (dropping from $30.83 on January 31 to $11.877 on April 1), the Company has since recovered much of that value, climbing back to $23.72 on June 8.  While Mr. Hornbuckle certainly could have taken his salary and purchased shares on the open market, he has seen the stock value double after agreeing to trade his salary for stock. Though likely coincidental, MGM’s actions have significantly advantaged Mr. Hornbuckle to date.

MGM Stock Price – 1/1/2020 to Present

Automatic Data Processing: For the People

Automatic Data Processing (Nasdaq:ADP), an American provider of human resources management software and services, has not as of yet announced any changes to executive pay in response to COVID-19.  However, the Company did announce on March 23 a one-time payment of $1,000 to all associates, excluding corporate officers, intended to “help our associates globally with the unexpected hardships they are facing due to the COVID-19 pandemic.”  The payments were issued in April and added approximately $51 million pre-tax to the Company’s 2020 expenses.  According to CEO Carlos Rodriguez, 98% of the Company’s workforce is now remote and working securely.

Farient’s Takeaway

Company responses to the COVID-19 pandemic have varied sector-to-sector and company-to-company, ranging from the most typical – salary reductions for the CEO – to reductions to board member retainers and pay reductions and furloughs further down in the organization.

As performance periods end for both short-term and long-term plans early next year, it will be important to assess the pay outcomes and ensure that they are aligned with the overall stakeholder experience.  For some companies, the crisis may shed light on deficiencies in governance or compensation systems that do need to be addressed. For those companies, this will be an opportunity to make lasting changes that will better serve all stakeholders in the next downturn or crisis. Otherwise, Farient believes that – even in crisis – good governance should prevail, and advises companies to lean on the systems they have in place, which were built to stand the test of time.

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