New research: fewer than half of large UK companies cut executive pay in response to Covid-19

Fewer than half of Britain’s leading businesses cut executive pay in response to the economic shock of Covid-19, according to research contributed to by The Open University (OU) and published in a report by the High Pay Centre think tank.

It also showed that firms with more female representation at board level on average were more likely to cut executive pay.

The OU worked with the University of Nottingham, Western University, Canada, and the UK’s High Pay Centre to examine the corporate response to Covid-19.

The research also found that firms with more female directors and higher proportions of share ownership by institutional investors were more likely to cut executive pay.

Firms cutting pay on average have more female directors on their boards. Those that cut pay by 25-40% (the most common action) had an average number of 3.5 female directors on their board, compared to just over 2 female directors for those that made no reductions.

After controlling for factors such as firm size, leverage, sector, board size and the level of pre-Covid executive compensation, the analysis found evidence of an association between female board representation, institutional ownership and executive pay cuts in response to Covid.

Many firms announced that cutting pay for their executives during the pandemic was a key way to demonstrate solidarity with lower-earning workers, and/or to control costs at a time of considerable uncertainty.

This report provides important results that show that a substantial minority of large companies in the UK have made substantial, even if brief, cuts to CEO salary and bonus during the Covid-19 pandemic.

“Evidence shows that firms with higher levels of institutional share ownership are also more likely to implement Covid-related executive pay cuts. For a typical large company, top executive pay tends to represent a relatively small percentage of annual net income.

“This means that the direct effect of CEO pay cuts on the firm’s bottom line might not be particularly substantial in most firms. However, cutting CEO pay may be seen by the employees and the shareholders as an important prosocial risk-sharing gesture. 

“While investor enthusiasm about embracing prosocial investing has been growing over the past decade or so, their impact on the way large firms operate is not entirely clear and needs more research. In this respect, it is encouraging to see clear evidence of prosocial actions by firms associated with large institutional shareholders during the Covid-19 pandemic. The more value shareholders place in prosocial actions, the more likely firms will undertake them in future.”

Dr Rodion Skovoroda
Senior Lecturer in Finance, The Open University Business School

Willingness to cut executive pay during the pandemic is potentially a good indicator of socially responsible business decision making more generally. The research suggests that this could be more commonplace at companies with diverse perspectives and life experiences in the boardroom, and with a higher degree of institutional ownership. We hope the findings will stimulate further studies in this area.”

Luke Hildyard
High Pay Centre Director