A new paper studies "the CEO compensation decisions of large publicly traded companies in the U.S. following the spread of COVID-19 to see how many elected to modify CEO pay and how many left it unchanged. " Batish, Amit and Gordon, Andrew and Larcker, David F. and Tayan, Brian and Watts, Edward and Yu, Courtney, Sharing the Pain: How Did Boards Adjust CEO Pay in Response to COVID-19? (September 1, 2020). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-86, Available at SSRN: https://ssrn.com/abstract=3682766.
First, they found that only 502 companies in the Russell 3000 index (17%) adjusted their CEO's pay in the first 6 months of 2020.
Surprisingly, CEO/director pay actions appear to have little relation to ESG (environmental, social, and governance) ratings for our sample of companies. Using ratings from Sustainalytics, we found that the median ESG rating of companies taking CEO/director pay actions was not significantly different from the median rating of companies that left pay unchanged (38 versus 34, respectively, with a rating of 1 indicating low ESG risk and a rating of 100 indicating high ESG risk ...).
To explore this further, we regressed the probability of observing a CEO/director pay action on ESG rating, controlling for stock-price performance and industry. We found that an increase in ESG risk is associated with a higher probability of CEO/directors taking a pay reduction. That is, companies with better ESG scores are less likely to make compensation changes, even when economic performance is held constant. This finding is unexpected. We would expect CEOs and directors of companies that truly value ESG to be more (not less) likely to reduce their pay during times of economic stress, but this is not what we found. This suggests either that firms with better ESG scores are less likely to reduce pay or that ESG scores do not accurately predict compensation actions (an element of social behavior or “S”).
They further explain:
The concept of ESG (environmental, social, and governance) centers on the fact that companies that truly embrace their stakeholders and invest in their needs have lower risk and higher performance. These companies are expected to suffer less economic loss in a downturn, and also to “do the right thing” by their employees.However, we found no observable difference in the ESG scores of companies that voluntarily reduced CEO/director pay and those that did not—despite differences in performance. Nor did we find a difference in ESG scores based on whether or not they chose to lay off employees. What does this say about our ability to accurately measure ESG? Are companies with more favorable ESG scores actually “better” companies from a stakeholder perspective?
