Executive pay cuts not what they seem
Top people at Knight-Swift, Werner and Covenant agreed to temporary pay cuts. CCJ Magazine reported the big guys at the big carriers are making sacrifices “to help control costs during the COVID-19 pandemic.”
At Knight-Swift, CEO David Jackson takes a cut of 20%. At Werner, CEO Derek Leathers takes a 25% hit. Covenant CEO David Parker loses 15%. Details differ for each company, but all noted the changes in filings with the Securities and Exchange Commission. The cuts in base pay also were reported by the Wall Street Journal and other financial media.
Knight-Swift is the biggest of the three, so let’s look at CEO David Jackson to see how this works. According to Simply Wall Street, Dave’s annual compensation totals $4.6 million. A 20% reduction would mean Dave is giving up almost $1 million, right?
According to Knight-Swift’s SEC filing, Dave’s salary reduction begins April 13 and ends July 10. So, the cut doesn’t apply to the whole year, just to three months – one fiscal quarter. That would still be more than $1 million in pay, and 20% of that is $200,000 – not exactly small change.
The filing states the 20% reduction applies to base salary only. It also explains, “The temporary reduction in base salary will not affect any other items of compensation.” For Dave, “other items of compensation” include cash bonuses plus company stock worth about $3.8 million.
All by itself, Dave’s base salary is not $4.6 million. It’s $800,000.
Seems base salary is often just a small part of top executive compensation. Other examples in transportation include J.B. Hunt CEO John Roberts III, whose base pay is $845,000, while his total pay is more than $6 million. Before his retirement on May 7, C.H. Robinson CEO John Wiehoff’s base pay was $1.1 million; his total pay was over $8 million.
Then there’s Fred Smith, the founder, chairman, and principal executive officer of Fedex. Fred’s base pay is $1.3 million. His total pay is almost $16 million.
So at Knight-Swift, Dave’s 20% base pay cut applies – at least for now – to just one fiscal quarter, or $200,000 of his $800,000 base pay. According to my math, 20% of $200,000 comes out to $40,000.
OK, Dave is sacrificing $40,000 for the cause. But remember, in total compensation Dave earns more than $4 million a year. That’s almost $77,000 a week or roughly $11,000 every day of the year. By that measure, $40,000 is going to cost Dave less than four days’ actual pay.
The stated purpose for the reductions is to lower costs in the context of the COVID-19 pandemic. But it will be hard to see the impact of Dave’s $40,000 on Knight-Swift revenues of roughly $1 billion a quarter – 40,000 goes into 1 billion 25,000 times. It wouldn’t amount to a sliver or even a line in a company pie chart.
I admit a million here, a million there, or even $40,000 hurts if it’s coming out of your pocket – no matter how deep that pocket is. And I realize some elements of executive pay can be other than immediate cash: stock or stock options, for example.
Also, the base-pay cuts apply to the second quarter of the year for a reason. Those months were expected to be dismal if not catastrophic for much of the trucking community. Accelerating economic damage caused by the COVID-19 pandemic could put Knight-Swift or any other big-time carrier in trouble. In that case, bonuses, stock and other goodies could shrink or go away altogether. It won’t happen, but conceivably it could.
Still, it is disheartening to do the math and learn what appeared to be a commendable 20% pay cut is more like 1% in practice. It’s symbolic, I assume, but even as a symbol it’s kind of pathetic.
Of course, I expect a corporate finance person to call and explain how I have it all wrong.
I’ll be waiting by the phone. LL