Executive and board director compensation practices have come under more scrutiny as a result of the pandemic. BDO USA, LLP has released two separate reports, one on CEO and CFO compensation and one on board compensation, which explore how compensation levels and practices changed in 2019 and the extent to which the global health crisis has altered compensation practices.
2020 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies
Executive compensation has not been spared by the global pandemic. The CEOs and CFOs of middle market companies who disclosed their salary reductions indicated reductions in base pay of between 20% to 50%, according to The BDO 600: 2020 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies, which analyzed the BDO 600 companies' 8K SEC filings filed between March and June of 2020.
For some companies experiencing reduced cash flow, reductions in pay, staff or both have been necessary to remain financially viable. In addition to these measures, companies have also modified goals, changed payout schedules or implemented deferral arrangements in order to manage cash flow more effectively.
Percent disclosing salary reductions:
- CEO -- 19%
- CFO -- 17%
- NEO* -- 17%
Median decrease:
- CEO -- (33%)
- CFO -- (20%)
- *NEO -- (20%)
Median number of months:
- CEO -- 6
- CFO -- 5.75
- *NEO -- 6
*NEO = named executive officer
These reductions came after increases in total direct compensation (TDC) for CEOs and CFOs of 4.7% and 4.4%, respectively, in 2019. This represents a greater increase in TDC than 2018, when CEOs saw a 3.6% and CFOs a 3.7% increase.
“Reductions in executive pay have been necessary across sectors and industries in order for companies with pinched cash flow to keep financially viable but also to reinforce a sense of solidarity with employees outside the C-suite,” Judy Canavan, Managing Director of BDO’s Global Employer Services, said. “With ever more scrutiny on executive pay, companies that have eschewed making compensation changes at the C-level may face blowback from stakeholders and employees during what is an already volatile and unstable time.”
The onset of the global pandemic has magnified a growing trend of scrutinizing executive pay levels, further challenging compensation committees to align the interests of executives with shareholders and other stakeholders. While incentives pay, including both short-term incentives (STI) and LTIs, is generally considered an effective approach for linking the financial interests of the top executives to that of the company and other stakeholders, developing metrics and setting goals can be incredibly challenging.
“Greater incentive compensation, which is more common among larger companies, underscores that compensation committees increasingly are looking to link compensation to company performance,” Terry Adamson, BDO’s Managing Director and Compensation Consulting Services Leader, said. “In a COVID-19 climate, that becomes more challenging as company performance may be out of sync given the financial turbulence so many have experienced in the last six months. The question then becomes: which metrics are appropriate and how can we set goals with reasonable rigor?”
As addendums to the BDO 600 CEO and CFO survey, BDO categorized performance metrics into five dimensions and examined executive pay and company performance alignment among the 600 companies surveyed for the BDO 600 report. A significant relationship between the portion of CEOs’ total compensation delivered through incentives and a change in at least one measure of company performance was evident in seven of the eight industry groups assessed.
Other items of note:
- Healthcare CEOs see largest YOY increase while technology CEOs are highest paid: CEOs in the healthcare industry experienced the largest year-over-year increase, 8.4%, in average TDC. Technology company CEOs ranked as the most highly compensated among all industry groups, earning on average about $5.7 million per year.
- Larger companies put more pay at risk: Approximately 80% of CEO pay was tied to incentive compensation. Variable compensation increased in tandem with company size for both CEOs and CFOs.
- Should the idea of the peloton be applied to executive compensation? Translating the formation of a peloton, or the body of cyclists in a race, into corporate leadership, BDO arrived at three tiers of compensation that could be applied to major public companies. Click here to read more.
For more in-depth data and insights download The BDO 600: 2020 Study of CEO and CFO Compensation Practices of 600 Mid-Market Public Companies.
To read the 2020 Study of Board Compensation Practices of 600 Mid-Market Public Companies, click here.