It was the worst of times (for the world). It was still a pretty good time (for CEO pay).
Ten top media and entertainment CEOs earned a combined $350 million last year, buoyed by hefty stock and option grants during the worst economic disruption since the Great Depression.
Members of compensation committees on boards, who set pay, explicitly altered traditional performance benchmarks at some companies in a year when theme parks, advertising and theatrical revenue tanked and production stalled.
The numbers they looked at were not profit and loss columns but rather leaned heavily on metrics committees called more “qualitative” than “quantitative,” including a pivot to streaming. Everyone got an “A” for effort.
Case in point: Adam Aron, CEO of struggling theater chain AMC Entertainment, saw his package more than double to $20.9 million last year on a $5 million “special incentive bonus.” The stock fell 70%, the company bled cash and furloughed all theater staff.
The bonus recognized “the extraordinary actions taken by the management team during the Covid-19 pandemic to secure the Company’s survival and preserve stockholder value,” the committee said. AMC’s compensation program is usually grounded in “pay-for-performance,” but since poor company performance last year was “unrelated to the performance by our management” it changed benchmarks, at least temporarily.
“While our response to the Covid-19 pandemic warranted uncommon actions with respect to compensation programs, our underlying philosophy has not been permanently altered or abandoned,” the committee said.
“They never make those statements to the upside. When external events lead to windfalls or high pay, you don’t see companies adjusting for that,” said Rosanna Landis-Weaver, a corporate governance and compensation expert with As You Sow, a leading shareholder advocacy nonprofit. “They generally only ever make adjustments in one direction.”
Nell Minow, vice chair of ValueEdge Advisors, which guides shareholders on how to use their rights to preserve portfolio value and diminish risk — including risk posed by excessive CEO pay – said, “Everyone agrees that if a company makes a lot of money, the CEO should make a lot of money. But if it was a tough year, they are supposed to feel the consequences. And if they steered the company through, then that will pay off for them later.” As in now, when business is improving.
Compensation, to be sure, is not only an issue in media. The optics of overall CEO pay last year were so bad that President Biden even referenced in his recent speech before Congress. He slammed lopsided “pay ratios,” which compare the pay of a chief executive to the average of a typical worker.
Pay for 2020 is being widely analyzed and criticized not only because of the broad economic fallout of Covid, but also because CEOs, after the pandemic hit last spring, seemed to want to share the pain by forgoing or reducing base salaries.
Skeptics back then called the cuts a smokescreen, or what’s called virtue signaling, and predicted minimal impact because base pay has become the smallest element of compensation. They were mostly right. Proxy statements filed with the SEC through the end of April, which list the pay of a public company’s top five highest-paid executives, showed the highest-paid media CEOs had packages of, on average, $35 million each. Six were up from 2019, four were down. (See charts below.)
“There’s a real Marie Antionette aspect to it,” Minow said.
Overall GDP fell by 3.5% for 2020, the largest decline in 74 years. At its low point in the second quarter, it was down by 34.3%, or $2.15 trillion. More than 20 million jobs were lost to Covid and over 8 million have not yet returned. “When the stock market took a really bad hit” — which it did briefly last spring — “I immediately got emails from compensation experts asking, ‘How can we prevent the CEOs from suffering?’ ” she said.
Moving goalposts shielded CEOs in ways that shareholders who took a drubbing, or employees who were furloughed or fired, were not. Minow characterized 2020 packages as: “It’s-been-a-tough-year-and-we-don’t-want-to hurt-your-feelings.”
AT&T’s compensation committee explained that it has discretion to adjust pay and did, “given the impact of Covid-19 on the company’s business and the world.” It said “the original assumptions and performance goals for the 2020 awards were no longer relevant in light of the global pandemic.” AT&T stock fell 27% last year.
“The company did have many successes in 2020,” the proxy noted, “including HBO and HBO Max subscribers exceeding their target” after the streamer’s launched in late May of last year.”
WarnerMedia chief Jason Kilar, who joined May 1, made more money last year than anyone at AT&T or on the CEO top 10 list. (He himself is not on the list because he’s a division head.)
Kilar’s debut package totaled $52 million as he presided over a highly controversial decision to release Warner Bros’ entire 2021 movie slate simultaneously on HBO Max and in what theaters were open without forewarning Hollywood. It led to lawsuits and complicated side deals to settle contractual issues with talent and reps. His package was swelled by an option award valued at $48 million. ISS, a leading shareholder advisory service, flagged the magnitude of the grant and the fact that it “lacks performance criteria and vests solely over time” — meaning it’s not linked to any specific metrics improving at the company.
The stock units vest over four years and payouts will depend on stock performance. An AT&T rep said Kilar’s “compensation is structured to be consistent with compensation practices in the media and technology industry.”
Shareholders Reject Pay
Kilar’s boss, AT&T CEO John Stankey, earned $21 million last year, down 6.5%. The company attributed the decline to a 50% reduction in his salary from July 1 through year end and a 50% limit on the payout against the target for his short-term award for 2020. The telco’s former CEO Randall Stephenson earned $29 million. Shareholders took umbrage at the trio of big payouts and socked it to the board at the annual meeting April 30. Less than 49% of stockholder votes were cast in favor of executive pay, which is a terrible tally. “Under 70% approval is when boards start taking the vote as a strong indictment against them. This is far worse than that,” said Landis-Weaver.
Shareholder votes on compensation are called “Say On Pay” and are required by law at least once every three years, though many companies hold them annually. They are non-binding, but rejection looks bad. Annual meetings are unspooling now through July for companies with a calendar year-end. So far, shareholders at a record number of companies across industries from Starbucks to GE to IBM have defied 2020 pay packages.
In a statement after the AT&T annual meeting, board chair William Kennard said that, “Over the years, shareholder feedback has helped us design a compensation program that pays for performance, is competitive for key talent, and aligns the interests of executives and stockholders. As we further engage with our owners on this important topic, the Board will carefully consider today’s advisory vote to ensure that our approach to compensation continues to reflect these principles.”
At Discovery, the compensation committee also noted tweaks to the 2020 pay formula: “As management had no influence over these macro-economic events and they were not anticipated or considered at the time the 2020 performance goals are set, the Committee felt it was appropriate to adjust performances for the impact of these unforeseen events.”
CEO David Zaslav (who earned $37.7 million) got a shout-out for transitioning employees to remote work, instituting safety protocols, cutting costs, conserving cash and keeping the business running amid challenges. Also, “Mr. Zaslav provided exceptional leadership with respect to the expansion of our direct-to-consumer business and the successful launch of Discovery+.” The streaming service launched on January 4, 2021. Discovery shares were down 6% last year.
A company spokesperson noted that the altered metrics “applied equally to bonus eligible rank-and-file employees, who benefited from the adjustment.”
Likewise, the ViacomCBS committee acknowledged that while it believes long-term performance incentives should be the most meaningful component of compensation, it limited that last year “given the uncertain environment when the awards were granted.” The committee set “the weighting at 25% with the intent to increase it in future years once the market stabilizes.”
Achievements for CEO Bob Bakish in 2020 (he earned $39.97 million) included “positioning us for the future” when CBS All Access would rebrand as Paramount+ and launch in March 2021. Bakish also realized Viacom-CBS merger synergies, sold assets and “continued to provide strategic leadership and management for our company during a uniquely challenging time of uncertainty and transition.” Viacom shares dipped 8% in 2020.
If HBO Max, Paramount+ and Discovery+ were still works in progress in 2020, longtime pure-play streaming frontrunner Netflix was in a very different place and had a huge advantage when theaters closed and most production ceased, feasting on a stay-at-home audience and adding a record 37 million new subscribers for the year. The stock surged 63%. Co-CEOs Reed Hastings and Ted Sarandos earned, respectively, $43.2 million and $39.3 million.
At Disney, 2020 compensation reflected in part shareholder pushback from previous years and CEO Bob Chapek’s package came in at $14.2 million. He started the job in February and there’s no year-earlier figure to compare. But the compensation committee said it “considered investor feedback when making executive compensation decisions. As a new CEO, Mr. Chapek’s target compensation was set significantly lower than prior CEO target compensation, below the median for our Media and General Industry Peers.”
Executive chairman and former CEO Bob Iger, who left day-to-day operations to focus on content, earned $21 million last year, down 55% from the year before.
The impressive rollout of Disney+, which led Disney shares to a 24% gain for the year, overshadowed devastation at theme parks — the hardest-hit entertainment business along with movie theaters and live events — which took a $6.9 billion hit for the company’s 2020 fiscal year ended in September.
“Mr. Iger did a tremendous job of overseeing the creative output of the Company to help fuel the successful launch of Disney+ and to position our DTC platform for future success,” the committee said. Chapek “adeptly managed the enormous disruption to the Company’s business, while at the same time restructuring Disney’s media and entertainment businesses to fuel the long-term creative and financial growth of the Company.”
Yet 31% of stockholders still voted against compensation at Disney’s annual meeting in March.
Companies defend pay packages by pointing out that stock and option awards, which are granted at an estimated value, are “at risk” if the share price falls. However, that risk has rarely materialized, quite the opposite. For much of the last decade, due to an extended bull market, the original estimate has ended up being too low compared with where the stock is trading when the grants are ultimately cashed in. Even in a year like 2020, after a short, sharp blip, the overall market surged and its momentum continues.
Experts also point out that CEOs can reap windfalls beyond annual pay packages by exercising stock options that were granted previously. Charter Communications CEO Tom Rutledge, for instance, realized $224 million in 2020 from previously granted option awards. Those awards were included in his pay tally when first granted so are not part of his 2020 compensation — which would be double counting. Charter shares rose 33% last year. Rutledge didn’t sell shares except what was needed to cover taxes.
The amount was much bigger than his actual 2020 pay package of $39 million, which was up 344% from 2019, swelled by an option grant related to renewing his contract last year.
Why grant new stock and option awards when there are already so many outstanding?
Every proxy makes it clear why. Compensation committees say they need to keep pay competitive to attract and retain the best talent. And they say their own CEO’s pay must to be aligned with a “peer group” of other companies, which they list in the proxy. Since they all list each other it’s a hard cycle to break, with Disney perhaps the first.
“It’s like Lake Wobegone, where all the children are above average,” Minow joked.
Media and entertainment’s highest-paid public company CEOs and other executives