It’s not uncommon for CEOs to cut their own salaries when companies are struggling. As the pandemic wreaks havoc on the economy, many executives are choosing to take lower salaries. Whether this will help the company in the long run or portend more trouble is not entirely clear.
That’s playing out at AMC Entertainment, whose CEO Adam Aron swear Forgo any increases in base salary, maximum incentive bonus and stock awards at Twitter.
AMC suffered heavy losses as the pandemic closed theaters and stalled movie production, but its stock got a boost in 2021 when social media chatter increased retail investor visibility amid a stock meme rally. AMC used the cash from the stock’s upside for various acquisitions. Despite these efforts, shares have continued to fall, currently hovering around $4 (2022 high around $18).
As Aron explained, “I don’t want ‘more’ when our shareholders are hurting.” He also said that only AMC executives, not employees, should forego a raise.
AMC Entertainment Chairman and CEO Adam Aron calls for a wage freeze (Photo: … [+]
Salary sacrifice helps
employees work harder
According to research from the Vienna University of Economics and Business, employees are especially likely to invest extra time and energy when forgone wages from their bosses are used to subsidize their own raises.
Former Gravity Payment CEO Dan Price is a prime example. In 2015, he cut wages to pay for staff raises. Six years later, turnover had dropped by 50 percent and revenue had increased by 300 percent, according to the Executive Forum report. (Price resigned last year amid sexual assault allegations.)
In a series of experiments, researchers found that employees also worked harder when their bosses sacrificed their salaries to help others.
Profitability increases, shareholders benefit
Financial performance tends to bounce back after CEOs take significant pay cuts. According to a study by researchers at Nanyang Technological University, the University of Washington and the University of British Columbia, the median profitability of US companies increased from -8% to 10% in the 3 years following the deep cuts.
According to the authors’ analysis, firms that cut CEO pay improved profitability more than comparable firms that did not cut boss pay. In other words, the post-CEO pay cut improved not just because the industry was recovering, according to the authors. Companies appear to be operating more efficiently after CEO pay cuts.
According to the study’s authors, cutting pay can bring about as much improvement as changing the CEO. This is especially likely when boards combine pay cuts with strong incentives to turn around declining company performance.
Nike CEO Mark Parker slashed 71% in 2017 when the stock traded below $60. When he resigned the following year, the stock price was over $70. By the end of 2020, they reached $141.
Shareholders like a CEO who shares their pain, even if they are not responsible for the company’s losses. This is documented according to a study documenting shareholder responses to voluntary executive pay cuts following COVID-related losses.
director looks good
In analyzing how Australian companies respond to poor corporate performance, a research team from the University of Technology Sydney found that shareholders responded to CEO pay cuts by voting more in favor of the next CEO pay package. This has good implications for directors, because it shows that the board has persuaded the CEO to share in the sacrifice. (For directors, asking executives to take pay cuts is also less embarrassing than resigning.)
Research from Nanyang Technological University, the University of Washington, and the University of British Columbia suggests that CEOs may be able to make up for pay cuts when incentives to turn around firm performance are particularly generous and restore firm performance.
Publicity stunts can backfire
Despite appearances, CEO pay cuts don’t always involve self-sacrifice. Executives can manipulate their compensation packages so that their posted salary freezes or reductions are offset by generous and easy-to-achieve incentive pay or cash bonuses.
To change employee behavior, boss sacrifices must not only be voluntary and personally costly, but also not just symbolic, according to a review of 57 individual studies to be published soon in Applied Psychology.
Shareholders will not be fooled by mere token sacrifices, either. Shareholders are likely to express their anger by voting against a board-proposed pay package when they believe the chief executive’s pay cut is a stunt, the University of Technology Sydney team found.
That’s bad news for the director. When shareholders continually sound the alarm about how the board is compensating the CEO, its directors come across as deaf, which can damage their reputations. In the UK and Australia, if shareholders disapprove of executive pay for two consecutive years, they automatically vote on whether a director should remain on the board.
A majority of AMC shareholders opposed the executive compensation package proposed by the board at its annual meeting last spring. So last week the CEO called for a pay freeze, which could be a good move for shareholders and the board, and might help retain and motivate employees.
If Aron wants AMC to truly benefit from the wage freeze he caused himself, movie theater execs will need to convince his legion of audiences that he’s not just playing the role, but taking real losses and making operational improvements for their benefit company.