Boards Reset Executive Pay, Equity Grants During Market Rout
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Many companies have cut executive compensation and made equity awards amid economic turmoil
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June 17, 2020 | The Wall Street Journal
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Amid volatile markets and economic contraction, companies have adjusted executive compensation, with salary cuts for top leaders often accompanied by new equity grants.
As companies furloughed or laid off workers and cut other costs, many chief executives have had their base salaries cut for 2020 by anywhere from 50% to 100%. In many cases, they also have received stock or option awards meant to motivate and reward long-term performance—in some instances, as stocks hit recent lows in March. Companies that made March equity awards included Vornado Realty Trust, Gap Inc. and Hess Corp.
Low share prices at grant times offer the prospect of large gains if markets rebound. Generally, companies say awards are set in advance for business reasons, and that any potential upside from making them when share prices are low is coincidental. And as with any equity investment, there are risks, especially in a volatile market amid economic dislocation.
If share prices fall further, stock awards lose value. Option grants made at relatively low share prices can still expire worthless if the share price never rises, or if it rises and then falls again before the options expire or the executive exercises them.
“When the market stumbles, companies have a timely opportunity to award meaningful stock grants to executives because there is built-in potential for appreciation,” says Stewart Reifler, a lawyer specializing in executive pay.
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Many boards review compensation arrangements early in the year. In recent years March has been the second most-common month for S&P 500 companies to make equity awards, after February. This March, 95 companies in the index made awards to 615 executives backed by $2.2 billion in shares, according to a Wall Street Journal analysis of securities filings and data from S&P Global Market Intelligence.
At many of these companies, the equity awards were similar in size and timing to ones made in years past, though at dramatically lower share prices than last year, due to the market downdraft.
Some other companies awarded executives stock packages larger than at similar times last year, or made grants at times they ordinarily haven’t. At 48 companies in the S&P 500, the shares underlying executive equity awards had a total value at least 20% higher than awards made in March 2019, according to the Journal analysis.
The total value of an executive’s award can be higher even when share prices are depressed if the company grants more stock or options at one time.
Before the pandemic hit, real-estate investor Steven Roth stood to gain about $4.9 million on stock options from Vornado Realty Trust, the commercial real-estate giant he runs. He held those options for a decade, and could have exercised them at a profit before March 9, when the company’s share price fell below the options’ exercise price for the first time in more than a year. By March 11, the options had expired worthless.
The company’s share price fell further. Vornado issued Mr. Roth new equity awards on March 30, when the share price closed at $37.60, indicating a potential value of about $4.9 million—a later grant, and a bigger one, than he has typically received in March in recent years. He received similarly valued grants earlier in the year in prior years.
As the market, and Vornado’s shares, have recovered, the value of the shares underlying Mr. Roth’s March 30 award has risen. If Vornado shares return to their February closing high of $67.89, it stands to grow in value by about 80%, to just over $8.8 million.
Regulatory filings show that Mr. Roth and other Vornado executives would take pay cuts, effective April 1, for the remainder of 2020. The filing said Mr. Roth waived 50% of his base salary, which has been $1 million a year since 2001.
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Vornado declined to comment on the equity awards beyond its regulatory filings.
Equity awards have made up the bulk of top executives’ pay for years—nearly two thirds of it since 2015 for the chief executives of S&P 500 companies, Journal analyses of CEO pay have shown.
In general, investors prefer top executives to be paid in stock, reasoning that it aligns their interests with those of shareholders. Awards tend to come in February and March because that’s shortly after many companies close the books on their fiscal years, giving boards the time and information they need to determine the size of the awards.
Gap said on March 30 it would furlough employees and that its top executives would take a temporary pay cut. A week earlier, the company had issued options to six executives at around $6 a share, near a recent low and down about 66% from its February high closing price of $18.68 on Feb. 5. The options vest over four years. The March 23 awards were backed by 56% more shares than awards in all of March 2019.
Gap said the March equity awards were tied to the appointment of a new leadership team, including CEO Sonia Syngal, and preceded the biggest impact of the pandemic on the company’s operations, including store closures. “The timing of these awards is based on our company’s fiscal calendar and our standard annual rewards process that happens at this time each year,” Gap said in a statement.
Some companies have made an effort to avoid making equity awards at lower stock prices.
Mistras Group Inc., which provides asset-protection services to the energy and industrial sectors, said in a regulatory filing on April 6 that it would make equity awards to executives at $9 a share “despite the Company’s stock trading at prices ranging from $3.69 to $5.13 during the relevant period.” The company’s executive team also agreed to salary cuts ranging from 25% to 45% for its CEO, the filing said. Mistras didn’t respond to requests for comment.
John Hess, CEO of Hess Corp., could make up for lost stock options if his company’s shares recover from March lows. Early in the year, he stood to gain about $2 million on options that were set to expire on Feb. 3. Hess shares slipped below the exercise price on those options at the end of January and closed below that level on Feb. 3, rendering them worthless.
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In March, the company made stock and option grants to its top executives backed by $35.5 million in shares, 23% more than the $28.8 million it awarded to executives in March 2019. Of that, awards backed by about $16 million in shares went to Mr. Hess. If Hess shares return to February prices, the options in Mr. Hess’s March 2020 award could yield gains of about $3.5 million. The rest of the award could rise in value by as much as $2.6 million if the company meets various performance goals; if the goals are missed, those shares could prove worthless.
“The equity awards granted in early March were in recognition of our company’s outstanding 2019 performance,” a Hess spokeswoman said in an email.
Some executives’ options are already valued more on paper than when they were issued.
Industrial-electronics maker Ametek Inc. issued options on nearly 220,000 shares to executives on March 20, including 99,080 to CEO David Zapico, vesting over three years. It was the first time the company had issued options in March since at least 2004, according to regulatory filings.
An Ametek spokesman said the company’s board decided in November to shift all equity awards to March. Previously some, including stock option awards, were made in May. “This timing change has nothing to do with current market dynamics,” the spokesman said.
The stock has since rebounded, leading to a paper gain of about $2.4 million on Mr. Zapico’s options as of Friday’s close.
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