COVID-19-Motivated Changes to Executive Compensation

Abstract

We provide new insights into companies’ decisions to cut CEO pay during the COVID-19 pandemic by comparing 482 firms announcing CEO salary cuts with those that do not. We find that salary cuts are more prevalent in firms with poor pre-pandemic performance, lower cash holdings, employee layoffs, and better governance. Shareholders appear to view these cuts favorably in firms with higher CEO pay ratios and those that are the first among their peer firms to make such an announcement. These findings suggest that pay cuts reflect efforts to adjust pay efficiently in response to changes in contracting environments and to lend legitimacy to other difficult decisions that firms face, alongside governance characteristics. We also find that CEO salary cuts coincide with well-timed equity grants that appreciate in value more than those in noncutting firms and with a shift away from earnings-based metrics in performance-based incentive plans. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G34; M12; M21; M52.