A good story by George Anders, “After Rejecting Pay, Some CEOs Find Less Can Be More,” on how CEOs of troubled companies have taken pay cuts, and sometimes forgone salaries entirely.
It’s remarkable that this story appeared at all, in that the Journal has to explain to its readership (particularly any top managers and board members) why it might be a good idea for a CEO to exercise leadership and put himself on the same footing as his troops. One of the CEOs cited seemed almost surprised at how much credibility his givng up his salary gained him.
Yet the Journal online poll on the question “When a company is struggling, should the CEO take a pay cut?) got a 90% “yes” response. So if it seems this obvious that top management should participate personally in cost reductions, why is it so rare in practice?
Or perhaps the 90% that said yes were the rank and file, and the 10% nay-sayers were the higher-ups.
This asymmetry, that CEOs are generally handsomely paid in good times and bad, while the average worker is much more exposed to the risks of company and economic performance, is fuel for critics of CEO compensation. CEOs argue that they should get entrepreneurial rewards and be paid well for good corporate results, but for the most part, they aren’t willing to take entrepreneurial risk (note that one of the CEOs listed below, John Chambers of Cicso, built the company and thus hews to the entrepreneurial mold).
The author goes to considerable pains to point out this course is fraught with risk. The directors might not like it (gee, wonder why, maybe it suggests they ought to cut their fees too?). And you might not be successful (meaning here you gave up your pay and got thrown out anyhow. Might as well have taken the money rather than trying to do the right thing).
Nevertheless, the more articles like this appear, the more it might not be so odd for top management to do the obvious and share in the pain required to improve performance.
From the Journal:
Is it a publicity stunt or an act of bravery for a chief executive officer to announce that he or she is taking a pay cut?
Steve Appleton has a rare perspective on that question. He’s the CEO of Micron, the Boise, Idaho, semiconductor company. In October 2001, he announced that his annual salary of $800,000 would be dropping to zero, effective immediately. Micron was being hit hard by a downturn in the chip business and needed to make major layoffs. Mr. Appleton figured that in tough times, good leadership called for him to share in the pain.
Only when Micron returned to profitability, he declared, would he resume his regular salary. He didn’t specify a time frame, but most people figured Micron was up against the usual industry slump of six to nine months. They were wrong.
Over the next two years, Micron posted more than $1 billion in losses. Mr. Appleton and his lieutenants were working on a turnaround plan that involved diversifying into a new line of chips. Progress was fitful, as new gains were undercut by continuing red ink from Micron’s traditional product line of DRAM chips.
Mr. Appleton went for more than two years without a salary. He got new stock options, but with Micron’s stock sagging, they had no immediate value. Most of his personal wealth was tied up in Micron stock, and he didn’t want to liquidate any. So he started raising cash the only way he could: He sold his vacation home. He sold several small planes he had bought for recreational flying. And he told family members to cut back on credit-card use.
In December 2003, Micron returned to profitability, and Mr. Appleton began drawing a salary again. Since then, Micron has been in the black. Its stock currently trades at about $11 a share, up from a low of about $7 in early 2003. Mr. Appleton says the struggle to get Micron and his own income back on track made him a better boss. “I was deeply motivated, and people knew it,” he recalls. “We needed to get a new product developed, and there was a lot of resistance. This way, we made change happen at a faster pace.”
Diane Doubleday, an executive-pay specialist at Mercer, says a salary cut by the boss can help achieve a successful turnaround. “Employees are the key audience,” she says. “This is a way of signaling the seriousness of financial challenges and the need to take action. It can help the CEO win extra credibility.”
But CEOs should think about taking such a leap only if directors are on board. Micron’s Mr. Appleton remembers some qualms from his board at first. “I had to assure them that this wasn’t a prelude to me leaving, that I was feeling optimistic, and that I was fully committed to the company,” Mr. Appleton recalls.
The big sacrifice didn’t help Walter Young. The former CEO of Champion Industries decided to take a 20% pay cut after the Auburn Hills, Mich., homebuilder hit a rough patch. As a long-time turnaround specialist, he says, it seemed like the obvious thing to do. He told the board about it only after the fact, rather than seeking approval. Directors weren’t happy that they weren’t consulted, he recalls. The next year, he and Champion parted ways.
A pay cut is never a guaranteed tonic. David Pottruck, the former CEO of Charles Schwab & Co. took a sizable pay cut in 2001 when the company began shrinking its work force after the collapse of the dot-com bubble. Schwab’s fortunes took longer to recover than many people expected, and he was shunted aside in 2004.
For the gesture to succeed, it has to be carefully executed. Some airline executives learned that the hard way. Don Carty, former CEO of American Airlines, won acclaim for going without pay in late 2001. It was part of a bailout of the airline industry. Things soured in early 2003, when financially strapped American negotiated more than $1 billion in pay, benefit and job cuts with its unions. The package unraveled when the company disclosed that it had contributed $41 million to pension plans for top executives, including Mr. Carty. He was criticized for the pension deal and resigned soon afterward.
Yet, some still believe in taking the plunge. Eli Harari, CEO of SanDisk, opted last month for a 20% pay cut until business rebounds for the data-storage company. “It’s very important for all employees to see that senior management is feeling the same pain that they are,” he explains.
Cisco Systems CEO John Chambers went one step further in 2001, not only cutting his salary to $1 but paying for his own air travel and other expenses. Cisco’s fortunes improved enough in 2003 to justify reinstating his salary, but he’s still paying his own bills.