Recession Fears Spark a Round of CEO Pay Cuts

Some companies are tightening belts to weather worsening economic conditions

Eric Yuan speaks onstage during the Dropbox Work In Progress Conference at Pier 48 on September 25, 2019 in San Francisco, California.

Matt Winkelmeyer / Getty Images

Key Takeaways

  • CEOs at Zoom, Apple, Goldman Sachs, Morgan Stanley, and other major companies have taken pay cuts recently.
  • Despite the cuts, CEOs are extremely well compensated, and some employees may view the cuts as symbolic.
  • The salary cuts were spurred by a downturn in the tech and finance sector brought on by the Federal Reserve's anti-inflation interest rate hikes.
  • Corporations' outlook for the economy has soured, with many predicting a recession in the year ahead, earnings calls show.

A growing list of high-profile companies are trimming CEO pay as fears of recession mount among major corporations.

Zoom (ZM) became the most recent major company to announce a pay cut for its top executive this week when CEO Eric Yuan said he was taking a 98% salary cut, following major firms such as Apple (AAPL), Intel (INTC), and Goldman Sachs (GS). The companies cited the same clouded economic outlook in recent earnings calls, and are taking cost-cutting measures.

Yuan’s cut will impact his salary, which makes up $300,000 out of his $1.1 million total compensation, according to an SEC filing. His stake in Zoom had made him one of the world’s richest people in 2020 as the pandemic pushed more workers into virtual meetings, and Forbes still estimates his net worth at $3.8 billion despite Zoom’s stock having tanked 86% from its peak.

“Employees could view them as symbolic,” said Joshua T. White, a professor of finance at Vanderbilt University and a former economist for the Securities and Exchange Commission. “But I believe shareholders will view them as genuine attempts to prudently adjust compensation after a rough year for shareholder returns in 2022.”

CEO pay cuts have become a common move during economic downturns in past years. When the pandemic struck in 2020, 647 out of the Russell 3000 companies announced CEO pay cuts (with 512 following through), according to an analysis of compensation data by Fortune and compliance company Diligent in 2021.

The salary cuts and gloomy earnings-season statements about the economic outlook, many of which predicted a recession this year, reflect the precarious position of the economy as it weathers the Federal Reserve’s anti-inflation interest rate hikes. 

The rise in interest rates has hit the tech industry first and hardest. A layoff tracker created by Internet entrepreneur Roger Lee has tallied 326 tech companies laying off 98,100 workers so far this year. For example, Zoom, whose videoconferencing technology was widely adopted during the pandemic, laid off 1,300 workers in addition to Yuan’s 98% pay cut. 

“We worked tirelessly and made Zoom better for our customers and users. But we also made mistakes,” Yuan wrote in a blog post. “We didn’t take as much time as we should have to thoroughly analyze our teams or assess if we were growing sustainably, toward the highest priorities.” 

Yuan went on to cite “the uncertainty of the global economy” and ‘the current economic environment as contributors to the staff cut.

“The tech industry is really sensitive to changes in interest rates, and it's because most of their profitability comes from projects that take a lot of pay off,” White said. “Small changes in the interest rates really affect the value of cash flows way out in the future versus a consumer staples company like Procter and Gamble.” 

Yuan’s counterparts at other companies have taken less steep pay cuts. Apple’s Tim Cook, for example, still made $49 million after his 40% salary cut. Intel CEO Pat Gelsinger took a 25% pay reduction according to a Reuters report, 

Tech is not the only industry in which CEO pay is getting slashed. Goldman Sachs CEO David Solomon saw his pay for 2022 cut by 29%, and Morgan Stanley (MS) CEO James Gorman’s was reduced 10%.

While tech and finance have suffered some of the biggest shocks from the Fed’s interest rate hike campaign, concerns about a wider recession have spread throughout corporate America. Indeed, an economic downturn was the number one worry of U.S. CEOs polled by The Conference Board in mid-November through Mid-December.

For example, Elon Musk, CEO of electric carmaker Tesla (TSLA), said the U.S. was likely headed for a “difficult recession” in 2023 in an earnings call Jan. 26. Ford’s (F) Chief Financial Officer John Lawler predicted a “mild recession” in an earnings call last week, and McDonald’s (MCD) CEO Christopher J. Kempczinski forecast a “mild to moderate” one. UPS (UPS) CFO Brian Newman said 2023 would be “a bumpy year due to rising interest rates, decades-high inflation, recession forecasts” in an earnings call last week.

The widespread recession concerns have yet to spur equally widespread layoffs. The high-profile workforce reductions at tech companies haven’t made a dent in the national labor statistics, which show unemployment at its lowest in more than 50 years. 

Article Sources
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