By Inti Pacheco 

Chief executives of large U.S. companies rode a more than decadelong bull market to a string of record pay days.

Now, the stock market's coronavirus-fueled swoon could wipe out hundreds of millions of dollars from executive pay packages and prompt a recalibration of how CEO compensation is set.

The potential losses highlight the flip side of stock-based compensation, experts say. The rout, which has destroyed trillions of dollars in market value for millions of retirees and investors, also is taking a chunk out of the equity awards that lifted many CEOs' pay to all-time highs in recent years.

For 143 CEOs of S&P 500 companies, the median compensation in 2019 was $13 million, up from $11.2 million for the same group in 2018 and on pace to set a record if the pattern holds for the 2019 data, according to a Wall Street Journal analysis.

The Journal analysis uses total compensation, including salary, bonus and stock awards as they are valued in securities filings and provided by MyLogIQ, a research and data firm.

The CEOs in the Journal analysis received a median raise of 11.1% in 2019, up from a 6.6% bump for the same group in 2018. The median raise for S&P 500 companies in 2018 was 6.1%, when companies finished out the year posting sluggish shareholder returns.

Following the recent market selloff and the expected slowdown in business, companies now are grappling with how and whether to reset financial targets and other goals that determine executive pay, said Seymour Burchman, an executive compensation pay consultant at Semler Brossy Consulting Group. "They're going to rely a lot more on discretion at year-end to see how well the company did given the circumstances," Mr. Burchman said.

Equity awards, which include the biggest chunk of compensation, could now be split in half or quarters and spread out over time, compensation experts say. Companies could delay the grants, or use averages of stock prices for different periods when paying them out. In coming weeks, compensation committees will have to figure out how much discretion they can use to structure pay.

As of the March 19 market close, 18 S&P 500 chiefs had lost a combined $177 million on the value of their stock options, according to an analysis by Institutional Shareholder Services, a proxy advisory firm.

David Zaslav, chief executive of Discovery Inc., could potentially lose as much as $47 million on the value of options set to expire in January of 2021, ISS estimated. In 2018, Mr. Zaslav received around $130 million in total compensation and his median annual compensation over the past 10 years has been $42 million. A spokesman for Discovery declined to comment.

Some companies set their operating plans well before the coronavirus arrived, and set compensation targets their CEOs are unlikely to hit.

"They are now taking a pause in that process to make a more informed decision," said David Bell, a corporate governance partner at Fenwick & West LLP. Companies could make midyear changes to compensation targets in their performance criteria, or boards could use their discretion to adjust pay totals at the end of the year, he said.

"If you haven't set your financial performance setting as of a week ago, how do you set those?" Mr. Bell said. "It's a challenge especially in this pay-for-performance culture."

Changing targets midyear or adjusting pay packages retroactively are practices investors ordinarily frown upon, though they could make allowances given the extraordinary nature of the crisis.

Airline executives voluntarily relinquished part of their compensation after the coronavirus forced thousands of flights to be canceled.

JetBlue Airways Corp. Chief Executive Robin Hayes temporarily cut his salary by 20%. United Airlines Holdings Inc. CEO Oscar Munoz said he would give up his base salary until June 30. Southwest Airlines Co. CEO Gary Kelly is taking a 10% cut from his salary as well.

Mr. Hayes's salary was 16% of his total compensation last year, Mr. Munoz's was 12% and Mr. Kelly's was 10%.

Pay increases for CEOs in 2019 were driven by a booming economy and hefty stock-market returns for investors across the board. Median shareholder return for companies in the Journal analysis reached 30% in 2019, according to ISS data, compared with a total return of 31.5% for the S&P 500. Shareholder return, a measure of stock appreciation and dividends, was about negative 3.2% for the analysis group in 2018.

Adobe Inc. paid its chief executive, Shantanu Narayen, $39.2 million in 2019, making him the highest-paid CEO among companies disclosing pay so far. In 2018, Mr. Narayen received $28.4 million. His compensation last year was made up of $37 million of stock, close to $1 million of non-equity incentives and $1 million in salary.

An Adobe spokeswoman said compensation for Mr. Narayen reflects performance-based equity vested after a three-year performance period. "Under Mr. Narayen's leadership, Adobe has delivered consistently strong financial results and shareholder returns," she said.

Starbucks Corp. CEO Kevin Johnson's pay in 2019 increased by almost $6 million for a total compensation of $19.2 million. Mr. Johnson received more options and stock in 2019 than in 2018, but his compensation went up mainly because of a cash bonus of $4.3 million. A Starbucks spokesman declined to comment.

These big payouts accompanied mostly robust stock-market returns in the past three years: 44% total return for Adobe, and 20% at Starbucks.

Not every CEO got a raise. Pay fell for 14 of the CEOs in the Journal's analysis. Stephen MacMillan, head of medical-equipment maker Hologic Inc., saw his 2019 pay fall to $12.4 million from $42 million in 2018. Mr. MacMillan received a one-time equity retention award in 2018 after another company attempted to hire him. Hologic posted a total shareholder return of 23% for the fiscal year that ended in September. Hologic pointed to its securities filings and didn't provide further comment.

Wells Fargo & Co. clawed back $15 million of pay awarded to Timothy Sloan, who left last year after failing to turn around the troubled lender. And Altria Group Inc. said it wouldn't give CEO Howard Willard a cash bonus for 2019, after the tobacco company took big write-downs on its investment in e-cigarette maker Juul Labs. The board did give Mr. Willard restricted stock awards for 2020, saying the awards reflect its confidence in his leadership.

Write to Inti Pacheco at inti.pacheco@wsj.com

 

(END) Dow Jones Newswires

March 23, 2020 07:04 ET (11:04 GMT)

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