Law360 (April 24, 2020, 6:08 PM EDT) -- The trend toward cutting top brass's pay in light of the coronavirus pandemic likely won't stick around long-term, but experts say COVID-19 will have one lasting impact on executive compensation: Companies will adopt strategies for adjusting higher-ups' pay during crises.
Whether that strategy will come in the form of a "hard" plan, like a force majeure clause in an executive pay agreement, or a "soft" plan, like having a conversation with the C-suite about compensation expectations during disasters, depends on the company, attorneys said.
In any case, once companies exit survival mode, executives will probably create some form of game plan for approaching long-term international crises that includes an executive compensation strategy, attorneys said.
"I don't think any company is going to forget this," said Gretchen Harders, a member of Epstein Becker Green's employee benefits and executive compensation practice. "I think it's going to be something that's considered in every compensation decision going forward."
Here, Law360 speaks with experts about what those decisions might look like and why coronavirus isn't likely to have a long-term impact on executive pay levels.
Exec Comp Dips in a Crisis
At least 381 U.S. corporations have announced changes to executives' pay since the pandemic started, according to the data company Equilar Inc.
Those companies include FedEx Corp., Marriott International Inc. and General Electric Co., whose CEOs have temporarily forgone 91% to 100% of their base salaries, according to statements filed with the U.S. Securities and Exchange Commission as of Thursday.
Executives are taking these salary cuts with an eye toward their relationship with employees and their company's reputation, which could be damaged if managers were taking home big bucks while workers faced large-scale layoffs, attorneys said.
But salaries, of course, are only one part of an executive's compensation package, and often a small one at that. Executives also receive bonuses, stock options and various forms of deferred and incentive compensation.
Some companies are modifying those for executives or watching this compensation package's value dip as the company's value does, but many are not touching them, according to SEC filings.
When companies do cut executives' pay in a crisis, attorneys said, they have to make sure they're not running afoul of legally binding compensation agreements.
"Almost every executive agreement will say something like, 'I will get $500,000 in base salary, and it can never be reduced, but only increased,'" Harders said. "So if the company wants to impose an across-the-board 20% decrease in salary, the executive has that contract."
Harders said that in a time like the coronavirus, executives often understand that even though they have a contract, they should go ahead and apply the 20% across-the-board cut to their own salary, "because that's fair, and it's a messaging thing."
But in the future, companies might want to consider placing a force majeure clause in executives' contracts, which would allow companies to alter compensation during unforeseeable catastrophic circumstances.
"The force majeure clause may give the company the ability to do that without there being a negotiation," Harders said.
Executives may bristle at this, though, said Andrew Oringer, the co-chair of Dechert LLP's Employee Retirement Income Security Act and executive compensation group. But he didn't rule out the possibility that these clauses could be included, as long as they were "appropriate and not overbroad."
"One of the things employment contracts and compensation arrangements do is provide some level of expectation and certainty," Oringer said. "[Selecting] the words you'd have to use to narrow that kind of permissible pay decrease without putting the executive at risk would be challenging to say the least."
For employers who don't go the force majeure route, Oringer recommends having conversations with executives about pay expectations in a crisis.
"Maybe what will start to happen is a soft discussion, where it's like, 'Look, our executives are protected with the following contractual arrangements, [but] if at the end of the day we need help, we're going to come to you and hope you're going to be cooperative,'" Oringer said. "Maybe that sounds like platitudes, but I think it's going to be somewhat hard to do much more in advance."
But 'Compensation Rebounds' Over Time
Executive compensation experts acknowledge that it's important for CEOs to dock their own pay when docking workers' pay or laying off workers in a crisis, because to do otherwise would be unfair.
But whether those temporary pay cuts will lead to any structural change in the way companies view compensation levels is another question. Experts say it probably won't happen.
Carola Frydman, a finance professor at Northwestern University's Kellogg School of Management, has studied long-term trends in American executive compensation, including what happens to higher-ups' pay during and after crises.
She said not once since the Great Depression — the era when executives' compensation began being publicly reported — has temporary, crisis-related pay cuts led to permanent pay cuts.
"Executive pay did decline during these crises, but over time, it's rebounded as the economic problems get resolved and as the firms start doing better," Frydman said. "None of [the crises] have led to a drastic decline in executive pay that lasted. It didn't transform the way compensation was being set."
This was the case after World War II, the Great Recession and the early '00s recession, Frydman said. There's no reason to believe it will be different after the coronavirus, she said.
Even if inequality becomes more visible during the pandemic — with the public hearing reports about essential workers dying for low wages at companies helmed by billionaire CEOs — once the crisis passes, any mass outrage that occurred likely will too, and compensation will readjust accordingly, Frydman said.
"It's extremely tough for CEOs to be getting high paychecks [during a crisis]. It's not palatable — for the employees, for the public opinion, even for the shareholders, who are seeing their dividends being cut," Frydman said. "There's an ethical and moral component — the pressure we get from social pressures. My expectation is that will tend to go away once the event ends, and [executives] don't need to show solidarity with workers. Compensation rebounds."
Asked if he thought coronavirus-related economic changes will be long-term or short-term, Oringer said he anticipates they'll likely be short-term. He thinks some industries might start at least having conversations about compensation amid visible signs of inequality — like "the star players getting paid and the line workers not" in professional sports. But those conversations likely won't lead to large-scale change unless every company in the industry is on board, he said.
"I think there will be discussions about this," Oringer said. "But at the end of the day, people are worth what the market is willing to pay. While the discussion will be out there, if you have a key executive who's at Company X and people are trying to change the way things are done there, and Company Y isn't trying to change the things that are done, that's where the executive's going to go."
--Editing by Brian Baresch and Kelly Duncan.
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