Gaming the System: How 51 Corporations Boosted CEO Pay amid COVID-19

It’s hard out there for a boss—particularly if by “boss” we mean the CEO of a large publicly listed US corporation.

Last year, an Economic Policy Institute (EPI) study of CEO pay at the 350 largest US firms found average annual compensation in 2019 totaled $21.3 million. But as a recent report from the nonprofit Institute of Policy Studies (IPS) reminds readers, most of that compensation is variable, as direct salary makes up on average “only 10 percent of executive compensation.” The other 90 percent is mainly in the form of stock options or other forms of bonuses.

This payment structure means that should a crisis occur—say, a global pandemic like COVID-19—CEOs might find their compensation in a down year falling through no fault of their own from eight-digit to seven-digit territory.

Today, we know most companies’ stock values went up during the pandemic. But corporate boards did not know this would be the case. And so, in 51 of 100 corporations analyzed by IPS researchers, based on the public filings of leading corporations with the US Securities and Exchange Commission (SEC), corporate boards altered their compensation policies during COVID-19 to shield leading executives from the potentially negative impact of the pandemic on their 2020 earnings.

Meanwhile, protecting frontline workers generated considerably less corporate board attention. As it happens, for the 100 companies the IPS report analyzed, average worker pay fell two percent, while CEO pay increased 29 percent.

Back during the nation’s first Gilded Age, the author F. Scott Fitzgerald famously wrote, “Let me tell you about the very rich. They are different from you and me.” The IPS report is a reminder that the same thing is true today in our second Gilded Age.

The IPS report, with the catchy title Pandemic Pay Plunder, is authored by Sarah Anderson and Sam Pizzigati and is the 27^th of an annual series of the nonprofit’s “Executive Excess” reports. Back in 1994, the first year the report was issued, CEO compensation reportedly averaged $1.9 million—less than one tenth of today’s figure. Ironically, a law advocated by President Bill Clinton in 1993, which capped the amount of executive salary that can be deducted from corporate income tax at $1 million, helped push up compensation by encouraging outsized stock option awards in lieu of direct salary. Anderson and Pizzigati note that today the ratio of CEO pay to worker pay in the US is 15 times greater than what prevailed in the 1960s.

These days, in fact, it is not exactly news that corporate CEOs take home hundreds of times—or even thousands of times—more than the median worker does at their companies. To cite some numbers quickly: in 2020, Walmart’s CEO earned 1,078 times median worker wages at that firm. At Amazon in 2020, the company’s “worldwide consumer” CEO David Clark took home $46.3 million, 1,596 times what the median Amazon employee earned.

Amazon, of course, at least was flush, having enormously benefitted from the pandemic as many consumers shifted their purchasing from brick-and-mortar stores to online. More newsworthy, however, is how many companies that did not benefit from the pandemic twisted their own internal rules to protect executive compensation.

For their report, the IPS research team reviewed the annual SEC filings made by publicly listed companies in the US. They focused on 100 firms with the lowest median wages that fall within the Standard & Poor’s index of the nation’s 500 largest companies (by market value). The firms include many household names, including Under Armour, Gap, Kohl’s, Nike, AutoZone, Estée Lauder, and many others.

Among the highlights—or lowlights—offered in the report, are the following:

• Carnival: Due to the pandemic, cruise lines shut down, and industry-wide tens of thousands of workers were stranded on ships for months. Carnival’s board, however, saw fit to award company CEO Arnold Donald with pandemic “retention and incentive stock grants” of over $5 million, which lifted his 2020 compensation to $13.3 million. By contrast, the median salary at Carnival is $27,151.
• Tyson Foods: Because of the pandemic, Tyson executives failed to meet their cash bonus targets. Recognizing the unfairness of this situation, the company board waived those targets and CEO Noel White earned $10.99 million. Tyson’s workers fared far worse. Meatpacking jobs carried a high risk of contracting COVID-19. According to a federal estimate issued on February 1, 2021, over 12,000 workers had contracted the virus and 38 had died from it.
• Hilton Hotels: The pandemic, of course, caused hotel room occupancy rates to plummet. But fortunately for Hilton CEO Christopher Nassetta, the board had his back and restructured its stock awards. To fail to do so, the board noted, would have “impaired the awards’ ability to retain key talent and align our management team with the actions needs to drive long-term performance.” Nassetta, as a result, earned $55.9 million, even as the firm slashed its global workforce by 32,000. If Nassetta had personally offered each laid-off worker $1,000, that still would have left him with $23.9 million. In the US, Anderson and Pizzigati note, 88 percent of Hilton’s workers are women and over two-thirds of its housekeeping workers are people of color.

Another favored tactic was for company CEOs to voluntarily give up their salaries—recall that salary is typically about 10 percent of total CEO earnings—and then be compensated by offsetting bonuses that exceeded the amount of the salary foregone.

Such was the case with Yum! Brands CEO David Gibbs. Yum!, for the uninitiated, owns Kentucky Fried Chicken, Taco Bell, and Pizza Hut. Gibbs gave away his $900,000 base salary, but the board dutifully changed bonus rules, which netted him a $1.4 million cash bonus and a stock grant valued at a little over $882,000.

A similar story can be told at Darden, owner of the Olive Garden chain. Darden CEO Eugene Lee, Jr. gave up $170,240 in base salary, but, fortunately for him, the board modified his bonus metrics to guarantee him a $1.9 million payout, enabling Lee to earn $8.7 million.

At Johnson Controls, CEO George Oliver cut his base salary by over $150,000, but bonus metrics were tweaked to allow him take home a cash bonus of more than $2 million and his total compensation in 2020 totaled $13.7 million. Meanwhile, median worker wages at the firm fell from $41,987 in 2019 to $38,462 in 2020.

The four other firms featured in the report’s “top ten” listing are Aptiv (formerly Delphi Automotive), Chipotle, Coca-Cola, and Dollar Tree. Coca-Cola paid CEO James Quincey a $960,000 COVID-19 bonus—chump change in comparison to his $18 million total compensation in 2020. Meanwhile, Coca-Cola profits fell 13 percent and the firm laid off 17 percent of its workers, including 1,200 in the US.

For its part, Aptiv removed 2020 financial data from its three-year formula to calculate bonuses and otherwise tweaked the rules to spare its CEO Kevin Clark from the ignominy of “only” earning $13.5 million. With the adjustments, his compensation went up to $31.3 million.

Chipotle CEO Brian Niccol took home an even larger $38 million. Chipotle’s board, to calculate Niccol’s bonus­, excluded the shutdown period and deducted added costs related to COVID-19 (like personal protective equipment)—only “fair,” of course, to reflect actual executive performance. As a result, Nichol earned 136 percent more than in 2019.

Dollar Tree CEO Michael Witynski didn’t assume his post until July, but he got a $1.5 million bonus payment and $11.3 million in total compensation in 2020. Apparently, the report notes, his board put a lot of energy into executive compensation. According to the firm’s filing with the SEC, the board spent eight meetings examining “how COVID-19 would financially impact the company’s performance and executive compensation.”

Whither Corporate Social Responsibility?

Out of curiosity, it seemed appropriate to look at whether any of these CEOs had been signatories of that Business Roundtable statement on the future of the corporation.  You know, the one released way back in August 2019 with the grandiose title of “Statement on the Purpose of the Corporation.” In the preamble to that statement, the Business Roundtable noted that the statement is “only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” Here at NPQ, we were skeptical at the time as to whether the declaration would prove very meaningful.

Alas, our skepticism would appear to have been well founded. Of the IPS top ten, three of the companies’ CEOs were in fact signatories to that letter. Niccol, who saw his compensation climb at Chipotle by more than $20 million in 2020, is among those CEOs who signed on. Quincey at Coca-Cola and Oliver at Johnson Controls were also among the signatories.

An obvious point is that expecting voluntary corporate self-policing to work is a fool’s errand. The IPS report advocates adoption of elevated corporate income tax rates on corporations that pay their executives hundreds of times what their median worker pay level is, a bill floating in Congress that NPQ covered in March, and also includes an appendix that lists over 30 separate legislative efforts to rein in corporate executive pay in one form or another.

A broader question concerns the fiduciary responsibility of corporate trustees—and here there seems to be some confusion between the welfare of CEOs and the welfare of the companies, particularly if Board trustees are supposed to be acting as fiduciaries of companies that “share a fundamental commitment to all of our stakeholders” (emphasis in the original).

Will there be consequences? At the time its statement was released, the Business Roundtable warned members that there might well be. As the group explained in the preamble introducing its statement, “If companies fail to recognize that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.”