When firms are in trouble, it’s not unusual for CEOs to cut their pay. As the pandemic wreaked havoc on the economy, many executives opted to take lower wages. Whether this helps the company in the long run, or heralds more trouble, is not entirely clear.
It’s playing now at AMC Entertainment, whose chief executive, Adam Aron, he vowed on Twitter to forego any increase in base pay, maximum incentive bonus and stock awards.
AMC suffered heavy losses as the pandemic closed theaters and stalled movie production, but its stock got a boost in 2021 when social media buzz boosted its popularity among retail investors in a meme stock rally. AMC invested the money from the stock increase in various acquisitions. Despite these efforts, the share price has continued to decline, now hovering around $4 (compared to around $18 at the high in 2022).
As Aron explains, “I don’t want ‘more’ when our shareholders are hurt.” He also indicated that only AMC executives and not employees should give up the hike.
Paying sacrifice helps
Employees work more
According to a study by the Vienna University of Economics and Business, employees are likely to put in extra time and effort when the boss’s unpaid salary is used to subsidize raises for the employees themselves.
Dan Price, former CEO of Gravity Payment is a prime example. In 2015, he took a pay cut to cover staff growth. Six years later, turnover had fallen by 50% and revenue had 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 pay to help others, researchers found in a series of experiments.
Increases Profitability and Shareholder Benefit
After a big cut in CEO pay, financial performance tends to rebound. Among American firms, average profitability increases from -8% to 10% in the 3 years following a major layoff, according to a study by researchers from Nanyang Technological University, the University of Washington and the University of British Columbia.
According to the authors’ analysis, profitability improvements in CEO pay cut firms are greater than in comparable firms that did not cut CEO pay. In other words, the improvements after the CEO pay cuts aren’t just because the industry is recovering, according to the authors. Firms appear to operate more effectively after a cut in CEO pay.
Pay cuts can bring almost as much improvement as replacing the CEO, according to the study’s authors. This tends to be especially likely when the board couples a pay cut with strong incentives to reverse declining firm performance.
Nike CEO Mark Parker took a 71% cut in 2017 when the stock traded below $60. When he left the next year, the stock was already over $70. At the end of 2020, they reached $141.
Shareholders like it when CEOs share their pain, even when they aren’t responsible for the firm’s losses. That’s according to research documenting shareholder reactions to voluntary executive pay cuts following COVID-related losses.
The 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 react to poor firm performance. This reflects well on the directors because it shows that the board convinced the CEO to share the sacrifice. (It’s also less embarrassing for directors to ask the top executive to take a pay cut than to resign.)
When incentives to change a firm’s performance are particularly generous and they can restore a firm’s performance, CEOs may be able to offset their pay cuts, the study by Nanyang Technological University, the University of Washington and the University of British Columbia.
Publicity stunts can fail
Despite appearances, CEO pay cuts don’t always involve self-sacrifice. Executives can manipulate their compensation package so that the pay freeze or cut they publish is offset by generous and easily accessible incentive pay or cash bonuses.
For employee behaviors to change, the boss’s sacrifice not only has to be voluntary and personally costly, but also cannot be merely symbolic, according to a review of 57 individual studies, soon to be published in Applied Psychology.
Shareholders are also not fooled by the purely symbolic sacrifice. When they think the CEO’s pay cut is just a gimmick, shareholders can express their anger by voting against the board’s proposed pay package, the University of Technology Sydney research team finds.
And that’s bad news for filmmakers. When shareholders continue to advise a board about how it compensates the CEO, its directors appear tone-deaf, which can damage their reputation. In the UK and Australia, if shareholders do not approve executive pay for two consecutive years, they automatically have to vote on whether directors should remain on the board.
A majority of AMC shareholders opposed the executive compensation package proposed by the board at last spring’s annual meeting. So the pay freeze requested by the CEO last week could be a good move for shareholders and the board, and could help retain and motivate workers.
If Aron wants AMC to truly reap the potential benefits of his pay freeze, the theater executive will have to convince his massive audience that he’s not just playing the part, but taking real losses and making improvements operational for the benefit of the company.
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