Middle market CEOs see base pay reduction in 2020

Middle market CEOs and CFOs saw a reduction in base salary pay in the range of 20% to 50% in 2020, according to BDO USA’s annual study of CEO and CFO compensation. The accounting and consulting firm examined the 8K SEC filings of 600 mid-market public companies between March and June 2020.

For the 17%-19% of companies that disclosed executive pay reductions, CEO salaries saw a median decline of -33% for a median six months, while CFO salaries saw a median decline of -20% for a median 5.75 months. Salary is, however, usually one of the smaller portions of an executive’s total direct compensation – which is often dominated by stock options, bonuses, and incentives.

The pandemic, however, forced some companies to consider the unflattering optics of making executives “whole” while at the same time reducing staff pay, cutting employee headcounts, and struggling to maintain cash flow. As such, some companies also changed payout schedule and implemented deferral arrangements to manage cash flow more effectively.

The reductions came after total direct compensation increases of 4.7% and 4.4% for CEOs and CFOs, respectively, in 2019. Stock, long-term incentives, and bonuses continue to make up the lion’s share of an executive's total compensation. The average total compensation for a mid-market CEO in FY 2019 was nearly $4 million, and approximately $1.5 million for CFOs.

Compensation levels were linked to the size of companies, with CEO compensation ranging from $2.4 million in smaller mid-market firms ($100 million to $500 million in revenues) to $5.29 million for CEOs in the largest company category ($1.25 billion to $3 billion in revenues). CFO compensation ranged from $1 million in the smallest size category to $2.4 million in the largest.

Compensation also varied by industry. Technology chief executives were the highest compensated leaders, earning an average of $5.7 million per year. Healthcare CEOs, meanwhile, saw the largest year-over-year compensation increase in 2019, at 8.4%.

A high proportion of incentive-based compensation continues to be a popular approach for companies – especially larger ones – to link the financial interest of top executives to company performance and other stakeholders. The black swan event of the pandemic, however, has made it more difficult to judge executive performance, especially in free-falling industries such as travel and leisure.

“In a Covid-19 climate, that becomes more challenging as company performance may be out of sync given the financial turbulence so many have experienced in the last six months,” said Terry Adamson, head of compensation consulting at BDO USA. “The question then becomes: which metrics are appropriate and how can we set goals with reasonable rigor?”