Turning down pay

Posted by Marc Hodak on April 7, 2008 under Executive compensation | Be the First to Comment

Many CEOs over the years have reportedly turned down bonuses or otherwise requested that they get less cash than the Board approved in their pay packages. This act generally invites praise or cynicism of the CEO. As far as I’m concerned, once the board has awarded the money to the CEO, he or she can do whatever they want with it, including return it to the company, pass it along to their colleagues, or donate it to my kid’s education. However, I’m always left wondering about the governance of companies that have somehow accidentally paid their CEO too much.

Generally, the refusal to accept the full board-approved pay is associated with poor company performance. Foregoing pay is generally intended to be a sign that the CEO wishes to “share the pain” of cutbacks being felt by the workforce or declines suffered by the shareholders. This sacrifice is generally well received by the employees when it’s donated to a pool to be divided by employees. It’s often well-received by the shareholders when the CEO simply allows his bonus to revert to the corporate coffers. Sometimes, the CEO gives back cash, but gets more in equity, something the unions refer to as “bait and switch,” and what we at the HV Mechanism Design Center refer to as a poorly implemented incentive plan.

In fact, my problem with CEOs turning down pay has nothing to do with their motivations around what they or others feel they deserve. My reservations are about their boards’ competence in incentive design. A well designed bonus plan should never result in a situation where the CEO doesn’t feel his or her pay is undeserved. A well-functioning board should not find itself in a position to have its incentives ignored and returned. What impact did the incentives have if the CEO didn’t even take it?

A CEO dictating to the board to give them less than the board approved does not inspire confidence in me that the board is in control over one of the few things they should totally control. Whether the CEO does this out of a sense of guilt or showmanship or political correctness does little to salve that concern.