CEOs promised to cut their pay during the pandemic. Here’s how they wound up earning more
As the financial blow of the pandemic became a reality in the spring of 2020, Hilton Worldwide Holdings Inc. furloughed thousands of workers and eliminated 2,100 corporate positions.
The cuts also appeared to hit the C-suite: Chief Executive Christopher Nassetta opted to forgo his entire base salary for the rest of the year, and five other top executives cut their base salaries by 50% for four months.
Despite the salary cut, Nassetta’s compensation package more than doubled to $55.9 million in 2020, compared with $21.4 million in 2019, according to a report filed by Hilton with the Securities and Exchange Commission. His five top executives also took in higher earnings in 2020 — as much as double — compared with the previous year, the SEC filings show.
Why? The base salary that Nassetta waived represented only 6.5% of his total 2020 compensation, while most of his earnings were paid in stock and option awards, among other compensation, such as a 401(k) match and personal use of company aircraft. For the company’s other executives, base salaries represented about 19% of their total compensation.
This was not an isolated case. The financial crisis created by the pandemic prompted executives at hundreds of America’s largest publicly traded companies to voluntarily lower their own base salaries. They made a point of announcing these cuts in news releases and earnings calls with analysts.
But this did little to save their companies’ money or boost employee salaries, financial experts say.
Most of the base salary cuts made by executives in 2020 were “a public relations gimmick” and “almost inconsequential,” said Lawrence Mishel, a distinguished fellow at the Economic Policy Institute who has studied executive compensation.
The announced cuts, experts say, could have been made to show shareholders, board members and employees that they were sharing the pain or to send a message to lawmakers who were being lobbied to approve federal grants and loans to airlines, hotels and other struggling businesses.
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David Larcker, an accounting professor and executive compensation expert at Stanford University, described salary cuts by executives as “a good gesture” but added that it “doesn’t mean that at the end of the day these guys are earning less compensation.”
For many years, the compensation of CEOs and other top corporate officers has been climbing annually by double-digit rates, primarily because such pay is tied to the performance of the company’s stock, according to studies by private pay research firms and nonprofit think tanks.
Executive pay is rarely scrutinized during rosy financial times, but during an economic upheaval — such as a global pandemic that puts the brakes on a thriving economy — it gets more attention. That is especially true when executives who earn multimillion-dollar compensation packages call for cost-cutting layoffs and furloughs of low-wage workers.
The Los Angeles Times examined 13 publicly traded companies whose executives cut or eliminated their base salaries in response to the pandemic. At eight of those companies, the total compensation packages for at least one of their executives rose in 2020, regardless of the salary cuts. In the five other companies, the total pay dropped for all executives.
Hilton representatives defend the company’s compensation decisions, saying most of Nassetta’s earnings came in the form of stock and options, some of which he could not cash out in 2020. Hilton officials also pointed out that stock awarded to Nassetta in the previous two years was expected to have no value in 2020 because the company did not meet specific financial goals.
To offset that loss, the company’s board of directors modified the compensation rules to pay Nassetta an additional $35.8 million in stock, according to SEC filings. That move, Hilton officials said, inflated his 2020 package.
“For context, 93.5% of Chris’ pay is directly tied to company performance and is in no way guaranteed,” company spokesperson Megan Ryan said.
As for Hilton workers, they experienced a 13% drop in their median annual salary to $37,798 in 2020, according to Hilton’s SEC filings.
“It is unconscionable that hotel CEOs, who promised to share the pain during this crisis, doubled their pay while room attendants, cooks and servers lost their jobs and health insurance and face a tsunami of evictions,” said Kurt Petersen, co-president of Unite Here Local 11, whose members include Hilton workers.
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Studies on executive compensation during the pandemic reached varied conclusions.
Larcker and several colleagues at Stanford University studied 502 companies that adjusted CEO compensation in 2020. They found that 84% of the companies merely reduced base salaries, while the rest deferred, cut annual bonuses or cut long-term incentives. The total compensation of the CEOs at the 502 companies dropped 35%, the study concluded.
Other studies of executive compensation showed an increase in executive pay in 2020.
The Economic Policy Institute, a Washington think tank, studied 281 large firms and found that total CEO compensation rose 16% from 2019 to 2020 while the annual pay for the average worker in those companies rose only 1.8% in that same period. The study attributed the executive compensation growth to a rebound of the stock market in 2020 after the initial pandemic slump.
An analysis by the Wall Street Journal in April concluded that the median pay for the CEOs of more than 300 of the largest U.S. public companies rose to $13.7 million in 2020, up from $12.8 million a year earlier.
All three studies agreed on one point: The base salaries cut by executives represented a small portion of the overall compensation packages. The Economic Policy Institute study called such cuts “largely symbolic.”
Calculating an executive’s total compensation is not simple because most of the pay comes in the form of stock and options that only come into play if the company meets certain financial milestones over several years. This creates an added incentive for the executives to increase the value of the company’s stock — and thus increase their own compensation. The stocks and options are reported to the SEC based on the value on the day they are awarded, not on the value they may achieve when they are vested in the future.
Still, Mishel said “the compensation number reported to the SEC is a legitimate description of the compensation of that executive.”
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Representatives for several executives whose compensation packages increased in 2020 despite announced reductions in pay defended the company leaders, saying they had no role in causing the financial crisis but volunteered to cut their base salaries to demonstrate leadership amid layoffs or furloughs.
They also say that the stocks and options awarded to the executives in 2020 may drop in value in the future, depending on stock market conditions and whether their companies meet specific financial milestones.
But the Los Angeles Times analysis found three companies — including Hilton — that modified payout rules or adopted new awards in 2020 to offset the loss in compensation that their executives faced because the companies failed to meet milestones. These changes were made to retain executives or reward them for leading the company through the difficult pandemic, the companies said.
At Choice Hotels International, one of the nation’s largest hotel chains, President and CEO Patrick Pacious took a 20% cut to his base salary from April 30 to the end of the year and imposed a 10% cut on the base salaries of his top executives for the same period. In an April 8 news release, the company said the cuts were among several “steps to adjust the company’s cost structure and increase its financial flexibility.”
But an SEC filing shows that the company’s compensation committee realized Choice Hotels would not meet certain financial goals in 2020 that would trigger a boost in executive earnings, so the committee awarded all of its executives “COVID-Response Performance Awards,” which were valued at $1.5 million for Pacious.
Pacious’ total compensation package for 2020 was $11.1 million, compared with $6.8 million the previous year, according to SEC filings. The company said the reported compensation did not accurately reflect the executives’ real pay because they won’t be able to access some of their stock because of the effect of the pandemic on the company’s performance and some shares may or may not pay out in future years.
At Alaska Air Group, the parent company of Alaska Airlines, all four top executives reduced their base salaries last year, cuts that the Seattle-based carrier described in a news release as an effort to “reduce spending and improve liquidity.”
Still, all four top executives reported higher compensation packages in 2020 than in the previous year, including CEO Bradley Tilden, whose compensation rose to $6.1 million in 2020 from $5.5 million the previous year, according to SEC filings.
In a statement, the airline said the reported compensation for Tilden was inflated because his stock awards were valued at the time they were given but were designed to be paid out only if the airline met certain financial goals that are unachievable because of the pandemic.
But the company’s SEC filing notes that its top executives were also awarded in November 2020 “Executive Retention Grants,” which were valued at $1 million for Tilden. In deciding the value of the grants, the company’s compensation committee “observed that executives had their realizable total compensation drop significantly below target.”
Capt. Will McQuillen, who represents Alaska Airlines pilots in the Air Line Pilots Assn., said he was disappointed to see that his airline’s executives were awarded higher compensation packages in 2020 “while airline workers sacrificed to keep the industry afloat.”
A few companies went beyond simply cutting base salaries in 2020.
Texas-based Independence Contract Drilling not only reduced the salaries and fees of its executives and directors to conserve cash but also cut the size of its executive team by eliminating two members.
At Booking Holdings, which owns travel sites such as Kayak.com and Priceline.com, CEO Glenn Fogel voluntarily declined his base salary from March through the end of 2020 and waived a bonus that could have been as much as $1.3 million. For 2020, Fogel’s total compensation package dropped to $7.1 million from $14.8 million in 2019.
But other Booking executives who cut their base pay didn’t waive the bonus and saw their overall compensation packages rise in 2020.
Booking Chief Financial Officer David Goulden reduced his base salary by 20% from June through the end of 2020. Goulden was awarded a bonus of $882,000, plus nearly $22.6 million in stock awards, which pushed his total compensation package to $24 million for 2020, more than four times the $5.1-million compensation package he earned in 2019, according to SEC filings.
Booking spokesperson Kim Soward noted that the shares of stock awarded to the company’s executives “can only be potentially sold in years to come, depending on the performance of the company and ability to meet certain targets if the recovery continues.”
Southwest Airlines announced salary cuts for its executives last spring that the airline called a “swift action to significantly reduce cash burn.”
Despite the cuts, SEC filings show that all five top executives at Southwest reported higher compensation packages in 2020 than in the previous year. Chairman and CEO Gary Kelly reported a $9.2-million package in 2020, up from $8.8 million the previous year. A Southwest spokesperson said the vast majority of Kelly’s earnings were at-risk or performance-based compensation.
The median salary for a Southwest employee dropped 34% to $66,269 in 2020 from 2019, according to SEC filings.
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