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Exec salaries: Will a cut boost morale?

Exec skills will be critical in coming months, but the work of millions of front-line workers will be essential – and dangerous.
Edcon’s Grant Pattison has undertaken not to draw a salary ‘until the business is open and stable’. Image: Moneyweb

The past months and the coming months will be the toughest experienced by most South Africans in living memory.

For corporate executives this period represents an enormous challenge to their leadership skills. Most are meeting that challenge commendably. The Ruperts, Motsepes, Oppenheimers and Naspers are among the powerful entities that moved promptly to make a difference.

Executives of companies on the frontline, such as retailers, have been doing a remarkable job – one that likely stretches most of the 24 hours of the day.

So now may not seem like an appropriate time to raise the issue of cuts in executive pay.

But it is being raised. Significantly, it is being raised loudest in the US, the home of stratospheric executive pay. The latest to announce self-imposed coronavirus-induced pay cuts are Disney’s top two executives: executive chair Bob Iger and chief executive Bob Chapek.

Execs to emulate

Inevitably the list of executives taking cuts is dominated by companies hardest hit by the pandemic – many executives at numerous airlines, hotels and gyms in the US have announced they are taking partial or full pay cuts. Delta CEO Ed Bastian said in a memo to staff that he has cut his own salary by “100% through the next six months”. Delta directors have also elected to forgo compensation for six months. South Western, United and Alaska Air have announced similar moves.

In a video message to his thousands of “associates” across the globe, Marriott CEO Arne Sorenson said he’s giving up his salary for the remainder of the year and cutting the pay of senior management in half. The Hyatt CEO and chair are forgoing their salaries until the end of May. Lyft cofounders John Zimmer and Logan Green are donating their salaries to their company’s efforts to support drivers during the crisis. The CEO of US health chain Life Time has taken an indefinite pay freeze and the CEO of Columbia Sportswear is reducing his pay to $10 000 – down from $3 million.

It is commendable stuff, but as US-based executive recruiter Jack Kelly points out, while it’s a good start it’s no indication the leopards are changing their spots. “They earn the lion’s share of their pay in stocks, options, bonuses and other remuneration.”

In the world of executive pay, salaries are just a small portion of the total.

It’s also likely the cuts are being taken with an eye to requests for government assistance to cope with the crisis. Already by mid-March the US airline industry had reported that it was looking for a $50 billion bailout from government.

A big past mistake to avoid

In the UK, where so far there has been no sign of self-imposed pay cuts, independent think tank the High Pay Centre (HPC) warned against government repeating the same mistakes it made in response to the 2008 financial crisis, when taxpayers’ money was used to bail out banks that went on to make obscenely generous remuneration rewards to their executives. While it acknowledges the significant differences this time around, HPC urges the UK government to consider pay conditions when applying future bailouts.

The authors of a recent article in Harvard Business Review here reckon the decision on whether or not to cut executive pay goes beyond short-term politics and could be necessary to ensure sustained commitment from employees. They urge executives to lead by example and make cuts that impact their own lives.

“If you don’t, there is a danger that your staff will feel like saps, doing sacrifices while the C-suite continues unaffected.

“Get a commitment for a pay cut from your senior leaders. As CEO, you should take the largest salary cut yourself,” they write.

The real heroes in this picture

The reality is that while executive skills will be critical over the coming months, the work of millions of front-line workers will be not only essential but dangerous.

More than ever the efforts of nurses, doctors, truck drivers delivering essential goods, staff on check-out tills, shelf packers, security personnel, NGO volunteers and refuse collectors will determine the quality of our lives while Covid-19 imprisons us.

Apart from Grant Pattison, who has placed Edcon at the front of the government bailout list, and who has undertaken not to draw a salary “until the business is open and stable”, there has been little sign of local executives considering pay cuts. And even less sign of them wanting to talk about the issue.

No comment, limited comment …

Ninety One (formerly Investec Asset Management) told Moneyweb it couldn’t comment. “Our financial year-end is March 31 and as of yesterday we’re therefore in a closed period, so cannot comment on either our trading or related plans.”

Similarly, although not in a closed period, Coronation declined to comment on the issue. Absa, which has just released its 2019 remuneration report, told Moneyweb the report contains executive pay decisions taken before the pandemic broke out. “Decisions with regard to 2020 pay will be taken at the appropriate time, having regard to all facts and circumstances at the time.”

Nedbank says it will continue to review executive pay to ensure “it is appropriate for performance and the environment”. The bank paid no salary increases to executive committee members in 2020, after a disappointing 2019.

Members of Old Mutual’s executive committee, who were granted annual increases effective January 1, have agreed to forego their increases by taking a pay reduction from April, said the life insurer.

“And Old Mutual’s board has also agreed to forego any increase in board fees.”

At Sasol, a decision has already been taken not to pay short-term incentives for 2020 and the long-term incentives issued in 2017 and vesting in 2020 have lost most of their value. “These two components form approximately 65% of our executive’s target remuneration, which will not be received over the course of the next 12 months,” Sasol spokesperson Alex Anderson told Moneyweb.

More encouraging was Woolworths’s response: “This is an option, among many other initiatives, that we are currently considering and will advise all our stakeholders in due course,” said spokesperson Kirsten Hewett.

Still time to catch the ‘missed opportunity’ … 

Tracey Davies, director of shareholder activist NGO Just Share, described this as a missed opportunity to demonstrate some solidarity with those most affected by the crisis and hopes there will be some action in the coming weeks.

Davies said Just Share will be looking particularly closely at executive remuneration in the aftermath of the crisis, including the use of crisis-level share prices to award options.

“With Covid-19 putting huge pressure on low earners, scrutiny of these pay packages, and whether they are fair and justifiable, is even more critical,” she told Moneyweb.

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Your headline: Will a cut boost moral? Does no one check this stuff? The word is morale.

Zok:

When it comes to the wealth dished out to the hired help in companies, immoral is apt.

With few exceptions the impressive execs are founders or very longterm. How many current CEO have ever started a business or would be able to? I am not sure why or when we managed to go so wrong. Poster Child Foschini is threatening landlords and suppliers because of a two week shutdown. It paid one exec around R50m last year.

What will happen next? The hired help have a nice game going among their buddies on Pay committees and at headhunters. A quick round of job swapping and voila:
1. The new exec is appointed 99.99% of the time at a higher salary than the old one.
2. The new exec starts with lekker cheap share options, having shed those underwater ones from the old job. And the new guy at the old place also restarts with cheap options. Bygones..

Most are so ignorant they actually try and justify how a manager – which is what nearly all execs are – is worth R10m, R30m, R50m, whatever. Apparently they are all in very high demand globally – yet they have not worked outside Sandton and Cape CBD in their entire lives :/

Anyway, shareholders get what they are willing to take

Boo Hoo! many of the executives of big public companies would not suffer too much if they never got a salary again. they are certainly going to be hit hard with their share option packages. But then again so are the shareholders many of whom are invested in the JSE in pension funds and just plain folk in Unit trust portfolios.
When creating wealth has become more about boosting share prices and hence the inverse, a disaster like this was inevitable. The precarious line between socialism and capitalism has never been more profound. Maybe it is time to rethink. Investment should be balanced more about sharing in a company’s profits, it’s ability to produce a product or service, and sell it at a higher price than producing it, and paying a share of that profit to shareholders and yes workers as well in the form of bonuses.

Correct. The current system is just so full of moral hazard it’s unbelievable. Not working.

What will boost morale the most are big cuts in the public sector at all levels.

I always admired the true Leadership of Ketso Gordon, whom was at PPC at that time (2013/14) and he was prepared to reduce his salary so that these proceeds could be shared amongst the workforce. However, sadly the rest of the Excom never follow his que and he was eventually ousted and had to resign from the Board. Since then, PPC’s performance and share price had just sled downhill ever-since.

Where I work there has been a detailed email setting out what staff they are not going to need, what type of contracts they will not renew and on and on … I think a tiny mention that the ‘C-suite’ was prepare to take some pain might help. Anyway, thanks Ann.

Stop the unnecessary PR.

Do the leadership and just cut without the expectation of congratulations.

End of comments.

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