The Ethics of Executive Compensation amidst the Covid-19 pandemic

As the economy increasingly struggled amidst the COVID19 pandemic, many corporations halted their dividend plans but appeared instead more reticent in sacrificing their executive compensation plans. For instance, the cases of IAG, British Airways owner, and Ryanair Bonus payment to CEO Michael O’Leary bring forth ethical considerations on the legitimacy of these choices.

In response to the Covid-19 pandemic, Janus Henderson reports that during the second financial quarter global dividends suffered the worst fall ever since the 2008 financial crisis, with more than $100bn wiped off their value. Except for North America, where the resilience of Canadian companies somehow softened the impact, all world regions faced these troubles, particularly the UK and Europe.

However, irrespective of the dividend cuts from which shareholders suffered, on the one hand, a growing disparity had emerged with respect to the protection of executive salaries and bonuses on the other.

According to SVI’s senior partner, Daniela Carosio, there is still a strong issue of conflicts of interest in the remuneration policies. “After nearly a century from the publication of the ‘Modern Corporation and Private Property’ by Bearle and Means, we continue to see no incentive alignments of top managers with investors and stakeholders (employees). The principal-agent issue is still there. Institutional Investors are getting aware of it and some like recently M&G, Janus Henderson and Schroeder are becoming quite active on remuneration policies. Traditionally, ICCR members have been active on this and other ESG topics. However, stronger engagement by the biggest asset managers is not yet there and that will make the difference”.

A clear example was the one of British Airways owner IAG, announcing bonuses in March, soon before the full-scale materialization of the Covid-19 disruption, and less than a month later suspending its 2019 dividend as the airline industry faced a huge crisis. More than 20% of investors voted against the remuneration of outgoing Chief Willie Walsh and other executives following the urge of Institutional Shareholder Services (ISS), an influential proxy advisory group already arguing for extensive evidence that the sector was about to face huge distress. Moreover, ISS also underlined that British Airways had benefited from government support measures including the Job Retention Scheme and the Bank of England’s Covid Corporate Financing Facility, the participation to which should have placed certain restrictions on IAG’ ability to pay bonuses to senior executives. The Company also announced plans to cut its employees, global 42,000 employees, by 30%.

Ryanair was recently criticized for paying out a bonus of € 450,000 to CEO Michael O’Leary despite firing employees (about 3,000 amounting to 15% of its global employees) and taking government pandemic support.

These events bring forward renewed attention on ethical matters in the area of executive compensation, not just with respect to the issuance of dividends to investors, but also to the interests at large of a wider set of stakeholders, including employees. According to Peter Reilly, Senior Director of corporate governance at FTI Consulting, “shareholders are using remuneration as a window into whether that [focus on stakeholders] is in fact taking place.”

The Seven Pillars Institute states that both from the perspective of deontological ethics and of fiduciary duty the current structure and levels of executive compensation cannot be justified. Deepening further on the last consideration, even if in principle the compensation incentive scheme should work against the occurrence of conflicts of interest between executives and shareholders in their principal-agent relationship, the recent inflationary trend has become so excessive to be ultimately at the detriment of shareholders. In particular, schemes that are predominantly based on measures linked to short-term profitability may be antithetical to long-term survival and growth as they induce short-termism on the executive side, excessive risk-taking, and potentially unethical behavior.

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