A few days ago, we shared criticism of the latest depressing boardroom trend among energy companies headed to bankruptcy court: the seemingly shameless granting of lucrative bonus packages to top executives, while most of the other ‘stakeholders’ expect to be wiped out. Business writers often reflexively defend these types of bonuses as simply part of the game: companies hitting the financial rocks often throw away tens of millions of dollars on bonuses for key people and expensive advisors and consultants, seemingly hastening their demise.
In theory, these decisions, while optically poor, will benefit the business when it comes out on the other side of restructuring (unless it’s headed the other way, straight to liquidation). On Wednesday, the FT published a report that raises some interesting questions about the recent market rally, while also evoking one of the central ironies of this rebound: As RobinHood traders dump their stimulus checks in the stock market casino, buying up stocks priced under a $1 because, well, they’re cheaper than a dollarand 100 shares only costs, at most $100 (since most of this trading is no-fee now), some of the biggest beneficiaries are the CEOs of major public companies who made a big show about giving up their compensation in solidarity with workers during the coming hard times.
In reality, the liquidity driven market rebound has drawn attention to the fact that CEOs smartly swapped their salaries for ‘performance incentives’ like restricted stock and options. As the market has rallied, are cashing in big time.
As they reap the rewards, shareholders will be the ones asked to tolerate the additional dilution.
During its reporting, the FT examined 554 companies that announced executive pay cuts during the early days of the outbreak, according to data provided by Equilar as of May 29. Of the 122 companies that granted option or stock awards in March, the FT only included the 51 companies in that group which had not changed CEO since February 2019, and/or had extended their current equity awards program.
Equity awards for some companies have, within two months, increased in value by nearly 50%, in some cases.
Michael Marino, managing director and head of the New York office for executive comp consultants FW Cook, told the FT that the companies are doing this for one of two reasons: either the companies insisted on compensating the CEOs with shares and options with a similar dollar value, or executives chose this, fully aware of the optics.
Given that corporate executives have a much more expansive view of the global economy than the average day trader, we imagine they saw which way the wind was blowing, felt the hysteria and panic in the streets, and figured stocks would probably blast back above the ATHs sooner rather than later.
One of the worst offenders, according to the FT report, was Dick’s Sporting Goods. Here’s an illustration showing just how much more they dished out in options in stock this year…
…in comparison with prior years.
When the chief executive of Dick’s Sporting Goods said in March that he would temporarily relinquish his $1.1m salary, Edward Stack became one of hundreds of US executives to signal they would share the pain the coronavirus shutdown was inflicting on employees. But the announcement, which came shortly before the sporting goods chain announced that it would put most of its 40,000 employees on temporary unpaid leave, told only part of the story. Just a day earlier, when market turmoil had sent shares in Dick’s Sporting Goods to their lowest level since the 2008-09 financial crisis, its board granted options to a host of executives. Mr Stack received more than 950,000 stock options, which he can exercise in stages over the next four years. The initial value of the award on paper was calculated based on the depressed share price in March, but by June 9 it had rebounded by 133 per cent, or $21.5m in potential gains — far outstripping the sum he had sacrificed in salary. Not only was the timing of the grant slightly earlier than in previous years, but the number of options was far larger. The number Mr Stack received this year was greater than the total he was granted in the past six years combined. If the price of Dick’s Sporting Goods shares return to their January high and remain there through to 2024, those options would be worth about $31m.
Like Dick’s, which was swept up in the broader hit to retail, companies operating in industries that were badly impacted by the virus often loaded up on the paper money as the possibility of a bankruptcy protection filing loomed heavily on shareholders’ minds.
Large hotel operators including MGM Resorts, Marriott International, Hilton, Wyndham and Hyatt all granted their senior executives restricted stock or options in late February and March. Among the seven hotel group CEOs, the biggest gains would be enjoyed by Mark Hoplamazian from Hyatt. His whose stock appreciation rights and restricted stock would be worth a potential $17m if Hyatt’s stock returns to its February high. Hyatt announced in March that Mr Hoplamazian was forgoing his April and May salary, which was worth about $205,500, based on public filings for 2019. The company further extended the sacrifice scheme from June, coinciding with a large round of layoffs, costing Mr Hoplamazian a total of almost $925,000 in foregone salary.
Here’s an FT illustration of the various companies included in the data, which, again, were provided by Equilar.
So, how have all these shares performed? Well, it varies.
Some essential context: growing stock awards are the biggest drivers of inequality between CEO pay and average employee pay. This is nothing new.
To be sure, not every executive gorged on options packages and restricted stock. Some companies, like Macy’s, also suspended these awards, along with their executives’ standard compensation, refusing to cave to the panic.
Fortunately for these executives, as long as the market stays bid, they’ll continue to look like geniuses.