We sometimes hear of top executives receiving large bonuses when they join a new company and generous severance deals are quite normal when they leave. However now the practice of hefty retention bonuses has started to ensure top talents are retained, which is causing trouble with shareholders and the public.
Such rewards during the worldwide Covid crisis do look bad as ordinary employees have faced unprecedented job insecurity and governments have been propping up economies. Companies will “need to explain how such awards do not merely insulate executives from lower pay,” stated the proxy advisor Institutional Shareholder Services.
To be fair, top managers have had to work hard during the pandemic making difficult decisions to protect employee health, reinforce supply chains and strengthen balance sheets. With no end in sight of the pandemic and its far reaching consequences, corporate boards are willing to pay bosses handsomely to ensure they stay and give the company continuity. Even in countries where their economies have rebounded quickly this has given managers leverage in pay talks rather than them seeking opportunities elsewhere.
In some cases the bonuses are understandable, such as the $1 million Moderna Inc. gave Chief Medical Officer Tal Zaks last year to carry on his role overseing Covid vaccine work.
However for companies showing losses its far harder to justify these payouts. For example car rental group Hertz Global Holdings Inc. which filed for bankruptcy still promised executives millions of dollars in bonuses to stick around. Hertz reversed this decision as a bankruptcy judge branded the idea “offensive”.
American movie-theater chain AMC reported a $4.6 billion annual loss in 2020 however managers were allocated $17.5 million of special incentive bonuses for the year. In a year in which thousands of his staff were furloughed, Chief Executive Officer of AMC, Adam Aron, had his pay doubled to $20.9 million. A significant increase in management resignations and a “substantial decrease in the value of stock-related compensation” were among the explanations for these payouts. ISS recommends shareholders reject AMC’s compensation plan at the annual meeting.
Cineworld, the UK pier, awarded two executives tens of millions of pounds of incentives linked to a share-price recovery. This was stated to be because the company’s existing long-term pay plan was “unlikely to deliver any significant value or provide effective retention”, the company said in a January filing. Shareholders approved the new plan despite opponents saying it was excessive.
Norwegian Cruise Line gave Frank Del Rio $8.8 million in inducement bonuses and restricted stock awards to sign on for another three years as CEO despite company losses. He was also paid $10.3 million for the severance benefits which were guaranteed under his previous employment agreement. His $3.6 million annual bonus was changed from an earnings-related target to one that incentivized a reduction in cash burn. Meaning his total annual payout doubled to $36.4 million last year. This figure is quite shocking as the cruise liner group’s full-year loss was $4 billion. “It was critical to maintain our President and Chief Executive Officer’s leadership during this tumultuous time,” the company said in its defence.
Some top executives gave up bonuses in 2020 when the pandemic began however their overall compensation still found a way to be quite excessive.
General Electric Co boss Larry Culp voluntarily forfeited his 2020 annual bonus however it was replaced with a long term share incentive plan to ensure his continuing employment at the company. This means that Culp could eventually receive a stock payout worth of up to $230 million. GEC defended this saying “Securing Larry’s continued leadership was one of the most important steps that we could take during a period of great uncertainty,”
Hilton’s boss Chris Nassetta had to forgo the profit-orientated portion of his annual bonus because targets were not met in 2020 due to the worldwide pandemic. However Hilton’s board amended its long-term share plan to compensate Nassetta to the tune of a staggering $20.1 million. Again the company defended this tactic saying that the projected zero payout of bonuses “impaired the awards’ ability to retain key talent”.