With many CEOs outearning average employees by a factor of hundreds or even thousands, executive compensation continues to be a critical issue for some environmental, social, and governance (ESG) investors. Recently, widespread layoffs at companies hit hard by the pandemic and a heightened focus on corporate social responsibility have put new pressures on executive pay packages.

Has the Pandemic Changed CEO Compensation?

Certainly, COVID-19 has impacted views on compensation—and on CEO compensation especially.

The upheaval caused by the pandemic has highlighted the link between companies’ broader social responsibilities and appropriate executive pay. In particular, investors have expressed concerns about giving overly generous packages to CEOs of companies that have received government funding, cut dividends, or laid off employees.

Still, most companies have not rushed to reduce CEO compensation significantly. The most widespread approach has been to cut the CEO’s base salary, especially among businesses severely affected by the pandemic. According to a study of pay disclosures made by companies in the Russell 3000 between January 1 and June 30, 2020, 449 companies adjusted CEO salaries. Because that portion of CEO compensation typically comprises the smallest element, however, the impact is comparatively negligible. As for other forms of pay, only 92 companies adjusted bonuses via other methods such as reducing or deferring payments. Just 33 changed their long-term incentive plans through such steps as decreasing the target value.

This upcoming proxy season, companies may face investor scrutiny over proxy statements outlining how they changed executive compensation in response to the pandemic.

Proxy Season Predictions for Executive Pay

Still, the CEO compensation conversation is not over yet. Investors are looking to companies to continue evaluating their executive compensation packages as annual shareholder meetings approach. This upcoming proxy season, companies may face investor scrutiny over proxy statements outlining how they changed executive compensation in response to the pandemic.

Already, proxy advisory firms Institutional Shareholder Services and Glass Lewis have adopted guidelines for examining executive pay in the current environment. For example, they expect to look closely at areas including:

  • Midyear adjustments to 2020 annual incentive plan performance metrics, measurement periods, and payment thresholds.
  • Cases of bonus payments made at the same time that extensive layoffs or furloughs took place.
  • Whether certain benefits provided during the pandemic should be treated as perks.

One area likely to attract more attention is say on pay. Companies are required to hold say-on-pay votes, which allow investors to weigh in on executive compensation in an advisory capacity. The outcome of these votes is typically to approve pay packages. However, in the last proxy season one activist investor objected to gaming company Electronic Arts’ grant of an equity award to some executives before the performance period for a prior special award had finished, as Reuters reports. The investor also noted the company’s issuance of sizeable bonuses following worker layoffs. A substantial majority of shareholders voted against the plan.

“If this sort of increased scrutiny around executive pay becomes more prevalent, we just may witness an overhaul of the executive pay status quo,” suggests Reuters.

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