We all know about Larry Page and Sergey Brin of Google giving themselves $1 salaries, and plenty more CEOs have taken similar measures. It’s a humble, if eccentric, gesture that shows a CEO’s willingness to align their own fate with that of the company, but is it just PR in the end of does it help increase company value?
When Target made the decision to pull the chic-cheap rug out from under the feet of the 17,600 employees running its Canadian operations, they earmarked roughly US$56 million to dole out for 16 weeks of severance compensation. On the other hand, Gregg Steinhafel, the CEO who spearheaded the US$7 billion foray into Canada, was handed a “golden parachute” worth US$61 million in cash and deferred stock options when he was forced to resign by Target’s board.
The discrepancy is yet another example of the deepening divides between employees and the top brass.
In 2012, Canadian chief execs earned around 206 times as much as their employees according to a study of CEO-to-worker wages around the world released by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) in October. For the average US$42,253 salary held down by Canadians, CEOs took home US$8.7 million. In the US, the rift is wider with the c-suite taking home 354 times the pay of the average employee.
We know what you’re thinking – the captain of the ship needs the extra compensation, since after all they’re the one with the most on the line. If the boss is improperly compensated, they might feel less inclined to perform in the shareholder’s best interest. It’s sound logic, we’ll admit.
But other cases show there’s value in CEOs taking voluntary pay cuts.
Nice Guy CEO
In 2009, at the height of the recession when banks and automakers were taking bailouts, slashing jobs, and hiding their bonuses, Japan Airlines CEO Haruka Nishimatsu hacked his own pay to less than the airline’s pilots get and eliminated all his perks, including his office. To further show his loyalty to his employees, he began riding transit to work and eating in the cafeteria with his employees.
But Nishimatsu isn’t unique. Whole Foods head John Mackey cut his wages in 2008 surrounding slipping profits for the grocery store chain, former TV Host Jay Leno took a 50 per cent pay cut when the Tonight show was struggling in 2012 and after huge losses in 2013, top execs at Sony took a 50 per cent pay cut and tossed their bonuses.
The voluntary pay cut is often an exercise in morale boosting, a way to show the employees that the CEO believes in the company enough to share in the losses and burdens of cost cutting. In a sense, it helps to bring the CEOs down to the level of employees and show their commitment to the company through both good times and bad.
It’s also an ownership thing. Execs willing to reduce their salary or toss aside their bonus are sending the message they are willing to own up to the business’ results.
The $1 salary club
Then there’s the $1 salary, a symbolic gesture that gained momentum after the first dot-com boom when filthy rich tech gazillionaires ditched the stacks of zeros behind the $1, in favour of taking their pay in stock options. The idea is that all employees need to be paid but a $1 salary and compensation in stock options incentivizes the top execs to build share value.
Apple’s Steve Jobs is an infamous example, banking only a $1 salary upon his return to the legendary company in 1998. In fact, he didn’t even bother taking stock grants after 2003.
Google’s Larry Page, Sergey Brin and Eric Schmidt, Tesla’s Elon Musk and Oracle’s Larry Ellison all took $1 salaries as well. And it’s not just the tech world. Other heads of public companies like financial company Capital One’s Richard Fairbank, retailer Urban Outfitters’s Richard Hayne and watchmaker Fossil’s Kosta Kartsotis all took $1 salaries.
In fact, after 2005, Kartsotis hasn’t taken a salary at all.
“Our CEO continued to refuse all forms of compensation, expressing his belief that, given his level of stock ownership, his primary compensation is met by continuing to drive stock price growth, thereby aligning his interests with stockholders’ interest,” said a spokesperson for the company in a release (https://www.fossilgroup.com/documents/2014/04/proxy-statement-15.pdf).
But as much as the $1 salary is altruistic there are other benefits to the CEOs. For one, stock compensation at many of these massive tech companies often (http://www.fool.com/how-to-invest/personal-finance/2014/02/01/why-did-steve-jobs-only-make-1-a-year-and-what-you.aspx) amounts to millions if not billions in pay.
Plus, capital gain and stock growth are taxed much more favourably.
But ultimately, the value of pay cuts pays the most dividends at corporate culture level.
In 2013, Toronto-based Wagemark Foundation set up a voluntary standard that certifies employers who level the wage gap, keeping top earners at a maximum of eight times the lowest earners.
“It’s about re-coupling top and bottom earnings, and returning to the traditional pay ratios that powered our economy and built a strong middle class,” founder Peter MacLeod told the Globe and Mail.
What it comes down to is focusing on stakeholders above shareholders, thinking about longer term value, and thinking the growth of your company before the growth of your personal bank account. This shift in attitude can produce profound results.