Companies often have to make difficult decisions during uncertain economic times. One such issue is whether or not leaders should accept compensation reductions to avoid employee layoffs. A former vice president of HR at Microsoft clarifies why many leaders are reluctant to make this commitment by providing insights into the complex dynamics at play.
Chris Williams, an executive-level advisor and consultant, was Microsoft’s vice president of human resources. According to him, a common concern raised by the numerous layoffs in the news these days is, “Why don’t the highly paid executives take a pay cut?” Could they not reduce their enormous salary packages and preserve some jobs?
He continues, saying, “I’ve seen more than a few layoffs in my more than 40 years in business, including my time as Microsoft’s vice president of human resources. This is a valid observation. There are a few reasons why the powerful CEOs never seem to suffer the consequences of their actions.
Understanding executive compensation
The topic of executive remuneration is complex and includes a range of benefits such as stock options, bonuses, and wages. The complexities of these packages are intended to reward performance, bring in and keep top people, and align the interests of executives with those of shareholders. The ethical and strategic question of whether leaders should accept compensation reductions to avoid layoffs becomes critical when financial difficulties occur.
It boils down to numbers
For one thing, basic math is one of the reasons executives most frequently use to defend their actions to themselves. It wouldn’t have much of an effect to reduce their pay.
Consider two businesses with extremely comparable math: Google and Microsoft. There are roughly 200,000 workers between these two companies. In the last year or so, both have let go of about 10,000 workers. Furthermore, the yearly wages of both CEOs are comparable, coming in at around $2 million.
These corporations save almost $1 billion in costs annually by eliminating 10,000 employees. Just 0.2% of that would be saved if the CEO’s pay were completely eliminated. Executives like to point out that reducing their income wouldn’t even begin to address the problem because the math is so big.
You might be thinking, “But wait, Sundar Pichai of Google made more than $200 million last year!” And Satya Nadella of Microsoft brought in about $50 million in 2022!
Although that’s what is reported, that’s not actually what’s going on. They received stock grants instead of being paid these sums. awards that eventually vest (get exercisable).
Sundar’s, for instance, has a three-year vesting period. His pay would suffer along with a decline in Google’s stock price. However, it shot up, rising by about 50% in the previous year. Sundar did remarkably well.
Due to the companies’ preferences, these types of awards are frequently seen in CEO compensation. The corporation does not bear this financial burden directly from the stock. These grants are really affordable for the company because of the role accounting magic plays in these types of situations.
More crucially, boards believe it is a good idea to shackle the executive to the stock-price roller coaster. The CEO’s pay suffers greatly if they fail to address the expense issue. Everyone benefits if they take steps to raise the company’s worth and stock price. Alternatively, everyone who owns stock, including the board, investors, many employees, and the executive, benefits.
Similar to the salaries, eliminating these handouts won’t save the necessary amount of money because they don’t impact the present bottom line. When questioned, the CEO, the board, and the corporation will claim that it wouldn’t even scratch the surface of the issue.
It’s about how competitive it could get
The intense rivalry for qualified candidates for these executive roles is another reason.
Like in the world of athletics, not many people can play at this level. Very few CEOs have the background necessary to oversee almost trillion-dollar businesses with hundreds of thousands of workers and international operations.
Those who can achieve at this level look up to their peers, just like elite sportsmen do. They contrast and compare, frequently with jealousy. The Fortune 500’s base salary is quite comparable for a reason. Those who compete at that level realise they are valuable, and the talent pool is small.
The stock price and package, therefore, are what make a difference and exactly what the boards of these corporations desire. Hire a star, stuff them with shares, and tell them, “Make the stock soar, and you’ll be handsomely rewarded.” That’s what they want to be able to do.
Boards of firms under cost pressure want the last thing to happen to them: making their CEOs go looking. That is exactly what would happen if the pay were cut, rendering it non-competitive with their counterparts. They don’t want to take a chance on it.
The image? It’s a lot to do with perception as well
That being said, the whole idea is missed in this strictly economic conversation. It is expected of these CEOs to be leaders. They are expected to be steering the organisation in a new direction and serve as role models for behaviour.
Should the CEOs not bear some of the pain if the company is facing difficulties and things are becoming so bad that individuals are losing their jobs?
Naturally, they ought to.
A few have publicly promised to improve in response to public pressure. Although Sundar Pichai pledged a year ago to reduce his salary, he received over $200 million in compensation overall this past year. At Apple, Tim Cook made a public request to have his stock grant reduced by half to $40 million. His $3 million basic salary and $6 million bonus remained the same.
However, the majority don’t. They will justify it to their boards, investors, and themselves using all of the aforementioned justifications.
Afterwards, they will address the firm and deliver passionate speeches about how difficult everything is, how terrible it is to watch people leave, and how they wish there were other options.
Most importantly, they’ll grin as they cash the checks and sell their stock, all the while saying that we’re all in this together, building a greater company tomorrow.
(Tashia Bernardus)