When CEOs Take A Pay Cut, What Difference Does It Make?


When firms are in trouble, it’s not unusual for CEOs to cut their own salaries. As the pandemic wreaked havoc on the economy, many executives opted to receive smaller wages. Whether this helps the company in the long run, or heralds more trouble, is not entirely clear.

This is playing out now at AMC Entertainment, whose chief executive officer, Adam Aron, vowed on Twitter to forego any increase in base salary, maximum incentive bonus, and stock awards.

AMC suffered major losses as the pandemic shut theatres and stalled movie production, but its stock got a boost in 2021 when social media discussion increased its popularity among retail investors in a meme stock rally. AMC invested the cash from the stock rally into various acquisitions. Despite these efforts, the share price has kept falling, now hovering around $4 (compared to about $18 at its highest in 2022).

As Aron explains it, “I do not want “more” when our shareholders are hurting.” He also indicated that only AMC executives, not employees, should forego raises.

Sacrificing Pay Helps

Employees Work Harder

Employees are especially likely to put in the extra time and effort when the boss’ foregone salary is used to subsidize raises for the employees themselves, according to research out of Vienna University of Economics and Business.

Dan Price, former CEO of Gravity Payment is a prime example. In 2015, he cut his salary to cover employee raises. Six years later, turnover had dropped by 50% and revenue increased by 300%, according to an executive forum report. (Price resigned last year, in response to sexual assault allegations.)

Employees also work harder when their boss sacrifices salary to help others, the researchers found in a series of experiments.

Profitability Increases And Shareholders Benefit

After a large CEO pay cut, financial performance tends to rebound. Among US firms, the median profitability increases from -8% to 10% in the 3 years following a large cut, according to a study by researchers from Nanyang Technological University, University of Washington, and University of British Columbia.

The profitability improvements in CEO pay-cutting firms are larger than in comparable firms that did not cut the boss’ salary, according to the authors’ analyses. In other words, improvements after a CEO pay cut are not just because the industry is recovering, according to the authors. Firms seem to operate more effectively after a CEO pay cut.

Cutting pay can produce almost as much improvement as replacing the CEO, according to the authors of the study. This tends to be especially likely when the board pairs the pay cut with strong incentives for reversing declining firm performance.

Nike’s chief executive, Mark Parker, took a 71% cut in 2017, when shares were trading below $60. When he quit the following year, shares were already above $70. By the end of 2020, they reached $141.

Shareholders like it when CEOs share their pain, even when they are not responsible for the firm’s losses. This is according to research that documents shareholder reactions to voluntary executive pay cuts following COVID-related losses.

Directors Look Good

Shareholders respond to CEO pay cuts by voting more favorably on the next CEO compensation package, a University of Technology Sydney research team found in an analysis of how Australian companies respond to poor firm performance. This reflects well on the directors because it shows that the board persuaded the CEO to share the sacrifice. (It is also less embarrassing for directors to ask the top executive to take a pay cut than to resign.)

When the incentives for turning around a firm’s performance are especially generous, and they can restore a firm’s performance, CEOs may be able to make up their pay cut, the Nanyang Technological University, University of Washington, and University of British Columbia study shows.

Publicity Stunts Can Backfire

Despite appearances, CEO pay cuts don’t always involve self-sacrifice. Executives can manipulate their compensation package, so that the salary freeze or reduction they publicize are offset by generous and easily achievable incentive pay or cash bonuses.

For employees’ behaviors to change, not only must the boss’ sacrifice be voluntary and personally costly, it also can’t be just symbolic, according to a review of 57 individual studies, soon to be published in Applied Psychology.

Shareholders are also not duped by merely symbolic sacrifices. When they sense that the CEO’s pay cut is just a stunt, shareholders may express their outrage by voting against the board’s proposed pay package, the University of Technology Sydney research team finds.

And this is bad news for directors. When shareholders keep admonishing a board for how it compensates the CEO, its directors come across as tone-deaf, which can harm their reputation. In the UK and Australia, if shareholders disapprove of executive pay for two years in a row, they automatically get to vote on whether the directors should stay on the board.

Most AMC shareholders objected the executive compensation package proposed by the board at last spring’s annual meeting. So the CEO’s requested pay freeze, last week, could be a good move for shareholders and the board and could help to retain and motivate workers.

If Aron wants AMC to truly reap the potential benefits of his self-inflicted pay freeze, the movie theatre executive will need to convince his many audiences that he is not just acting the part but taking real losses and making operational improvements for the benefit of the company.

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