History has a way of repeating itself, particularly in finance.
In the last financial crisis a dozen years ago, banks received taxpayer-backed bailouts and paid hefty bonuses to their executives. The uproar was loud and lasting.
Now Wall Street seems poised for a repeat, after a massive federal coronavirus stimulus and a liquidity jolt from the Fed fattened the banks’ bottom lines and their bonus reserves. Three big banks – Goldman Sachs, JP Morgan and Morgan Stanley – boosted compensation expense by a third, according to their earnings reports last week.
One big difference between this crisis and the last is that federal coronavirus relief has been spread across many industries, not just banking. The outrage is likely to be more widespread, too.
The issue will get even more heated if the economy weakens further and companies lay off scores of workers. Setting CEO pay at a time of worsening unemployment (and perhaps a lower share price) is the nightmare scenario for a board compensation committee.
Sensing that risk, boards were quick to adjust pay in the first weeks of the pandemic, and many companies froze or reduced CEO salaries. But the bulk of CEO pay is in stock grants, and so far there’s been little indication that equity-based pay will be trimmed. In fact, some companies are protecting CEO pay by resetting stock awards. Sonic Automotive, for example, saw its share price cut in half by the pandemic, prompting its board to cancel the performance share plan and replace it with a stock option program without performance hurdles. So much for pay-for-performance.
Proxy advisory firms are watching boards’ compensation behavior closely. ISS, one of the largest advisors, published guidance earlier this year on governance issues related to COVID-19. It said it would take a dim view of changes to long-term pay performance targets and the repricing of stock options.
Institutional investors – the folks who cast the votes on proxy matters – will be paying closer attention to CEO pay, too. Vanguard warned that companies shouldn’t use the pandemic to create easier performance targets.
Even before the pandemic, investors started to take a more critical look at CEO pay. Large public pension funds are voting against a growing number of say-on-pay resolutions; CalPERS, one of the largest, opposed them at more than half the companies in its portfolio.
The pandemic and the economic uncertainty it creates show no sign of easing, so boards will face a very challenging proxy season. Actions they take on compensation – and how they communicate them – will be watched closely.