Are CEO pay raises during layoffs ethical or outrageous?

Amid the ongoing global economic downturn, companies are grappling with the difficult decision of laying off employees and implementing pay cuts. However, in the midst of these challenging circumstances, some CEOs have drawn attention for receiving salary hikes, leading to a contentious debate on the ethical implications of such actions. As per People Matters’ report, many CEOs have been awarded pay raises even as their employees are experiencing job losses. 

Hence, the question arises: are these CEO pay raises during layoffs ethical or outrageous? To find out the answer, we spoke to a few industry experts. While some argue that CEO pay raises may be justified based on performance and market conditions, others view them as unethical, particularly during a time when employees are facing job losses and pay cuts.

Unpacking CEO compensation

Before delving into the ethical considerations of CEO pay raises during layoffs, it's important to understand the various ways through which CEOs earn, beyond their basic salary. Pratik Vaidya, MD and CVO of Karma Global explained that while foregoing their actual salary may appear to be a significant sacrifice, the reality is that CEO compensation is made up of various components beyond just their base salary.

“One key element is stock holdings, which often constitutes a significant portion of income for top-level executives. This means that CEOs have a cushion to fall back on, one way or another, due to the diversified nature of their compensation structure,” Vaidya told People Matters. 

To elaborate on his point, Vaidya gave the example of Zoom which fired around 1,300 employees. Additionally, CEO Eric Yuan took a salary cut of 98 per cent. “When Zoom announced layoffs and a pay cut for CEO Eric Yuan, the company's stock surged by 10%. This implies that Yuan, who holds 22% of Zoom shares, may potentially earn more from his stock holdings than the salary he is foregoing,” said the CVO of Karma Global.

Not just Zoom, several other major tech firms' stocks have seen an increase after layoffs, as it indicates a reduced financial burden. For instance, “Google gained 15% after firing 12,000 employees, Amazon's stock surged by 19% with promises of increased efficiency through staff reduction, and Meta experienced a massive 50% bounce back after Mark Zuckerberg laid off workers and launched a share buyback program,” he revealed. 

When companies make the decision to reduce executive and worker pay, as well as downsize their workforce, in order to lower labour costs and increase the operating margin between revenue and cost, it's often observed that the company's share price tends to rise. 

“This phenomenon can be attributed to the fundamental economic principle of supply and demand, which explains how the relationship between supply and demand affects the prices of goods and services. Just as prices tend to fall when supply exceeds demand, and rise when demand exceeds supply, the same logic can be applied in this context as well,” said Pratik Vaidya.

The CEO salary dilemma: To hike or not?

The topic of whether CEOs should take a salary hike or not has been a subject of debate among industry experts. Critics of CEO salary hikes contend that in certain instances, leaders receive hefty pay raises despite their companies' underperformance or financial challenges, while other employees face layoffs or salary reductions. Conversely, supporters of salary hikes argue that exceptional leaders ought to be compensated for their abilities, knowledge, and input towards their organisations' triumph.

Mr Prasenjit Bhattachraya, Founder and Director of Great Place to Work®, India, believes that if all employees in the organisation are receiving a salary hike, then the CEO can consider taking one as well. However, if only the leader is receiving a salary hike, they should not take it. 

"CEOs should take salary hikes if everyone else is getting it in their organisation. If not, no. They always have the option of having a larger profit share at the end of the year if the company does well by year-end. Salary hikes for the CEO when people in their organisation are losing jobs is perverse. Why would any self-respecting CEO do it? Leaders, we all know, eat last,” he said. 

Similarly, Mr Anil Agarwal, Co-Founder and CEO of InCruiter (IaaS), feel that leaders should be willing to go beyond their own salary or hike and provide their employees with additional support. 

“Leaders must remain empathetic and strive to save their greatest asset – employees, rather than making rash decisions like layoffs. Honestly, it is that point of time when leaders must give back to their employees for all the hard work and loyalty they have demonstrated since they joined the organisation. And to ensure this, leaders should even go to the extent of sacrificing their salary or hike and offer them additional support, be it financially or emotionally,” said Agarwal.

On the other hand, Prashant Gupta, Founder and CEO of Caerus3 Advisors and Think-Tank, stressed that layoffs are a crucial component of a firm’s redesign and reorganisation for future growth and that running an organisation with a smaller workforce and higher productivity poses a challenge for management. Therefore, one should not impede a leader from seeking higher hikes or bonuses.

“The job of a CEO involves people management, strategy, and more importantly the ability to take and minimise organisational risk. Hiring and layoffs are two sides of the same coin - the organisation and both are cyclical in nature. Layoffs are part of organisational design, and part of reorganisation for the future. This in no way should impact a CEO or the CXO demanding higher hikes or bonuses. Remember to run an organisation with a lower headcount and higher productivity is a challenge for the management for which they should be awarded,” explained Gupta. 

Despite supply chain disruptions, inflation, and layoffs, companies such as HSBC, Wipro, Infosys, and Citigroup have raised salaries for top executives, while cutting jobs and wages for workers. The AFL-CIO's recent study on executive pay revealed a record-high ratio between CEO and worker wages, with CEOs earning 324 times the median worker's pay in 2021. The average S&P 500 CEO earned $18.3 million, while real wages fell by 2.4%.