Sonic Automotive, which operates 95 US car dealerships, started laying off and furloughing about a third of its workforce as the coronavirus pandemic crushed its sales. Then, it changed its executives’ pay packages — handing them a multimillion-dollar windfall.
On April 10, Sonic’s board gave its top executives stock options to replace performance-based share awards, regulatory filings show. The options it gave Chief Executive David Smith, whose family controls the company, are now worth about $5.16 million — more than four times the value of the performance-based stock awards he got last year.
Some of Sonic’s terminated employees, meanwhile, face hard times. After a decade of buying and selling cars, Allan Nadohl, 74, said he was laid off in March and now relies on US government retirement payments that don’t fully cover his bills in Los Angeles.
“Be a mensch,” Nadohl said, referring to Sonic executives with a Yiddish word meaning honorable person. “Take a 50 percent cut for six months.”
Sonic said in one of the filings that the changes were made in response to the pandemic, without elaborating. Neither the company nor Smith responded to requests for comment from Reuters.
Sonic is one of six US companies identified in a Reuters review of regulatory filings that have moved to shield their executives’ compensation from the pandemic’s economic fallout as they laid off or furloughed workers.
The others include plush toy seller Build-A-Bear Workshop, restaurant operator Red Robin Gourmet Burgers, retailer Signet Jewelers, fashion brand DKNY owner G-III Apparel Group and fracking sand producer Covia Holdings.
Reuters found 75 other companies that disclosed they are considering changes to executive pay plans in light of the pandemic’s impact on their businesses. Among them are ride-sharing giant Uber Technologies, hotel operator Hilton Worldwide Holdings, carrier Delta Air Lines, satellite radio company Sirius XM Holdings and Thomson Reuters, the parent company of Reuters News.
In an April 21 filing, for example, Sirius XM said it “may be prudent” to change executive pay terms to ensure it can attract and retain “senior management talent.”
Delta said in a filing that its performance measures no longer suited the “current reality” and that the value of executives’ incentive pay had declined by more than half in the pandemic.
Sirius XM did not comment in response to requests from Reuters, and Delta declined to comment. G-III and Signet said the changes were needed to retain management talent, while Build-A-Bear said the moves aligned the interests of executives with shareholders. Covia, Red Robin, Uber and Hilton said in filings that uncertainty arising from the pandemic caused them to revisit performance pay.
Thomson Reuters said in a filing that it had approved executive performance targets in February and early March without the benefit of being able to consider the pandemic’s impact on its business, which it said it would continue to monitor and assess. David Crundwell, a vice president for corporate affairs, referred to the filing and declined to comment further.
Reuters identified the companies by searching filings submitted to the US Securities and Exchange Commission this year and finding those that mentioned the pandemic in the context of executive compensation. The findings are a sampling and do not include companies that may have changed executive pay without explicitly tying the moves to the pandemic.
Critics say protecting executives’ pay in downturns undermines practices intended to tie compensation to shareholder returns. Nell Minow, vice chair of corporate governance consultant ValueEdge Advisors, said such plans need both an upside and a downside.
“Otherwise, there is no point,” she said.
Others counter that the moves to protect executive pay might serve investors as well as executives.
“It’s critical to motivate the team and get through the crisis,” said Yonat Assayag, partner at pay consultant ClearBridge Compensation Group. “Through that lens, a lot of these decisions are very much aligned with shareholder interests.”
To be sure, many top executives will likely see their pay go down this year because of dwindling profits and lower share prices, and some companies’ compensation changes may not fully make up for the pandemic’s impact on executive pay.
More than 500 companies in the Russell 3000 index have announced cuts to the base salaries of their chief executives, to save money or show they are sharing workers’ pain, according to compensation consultant Semler Brossy. Base salaries, however, account for only a tenth of the median pay of chief executives at the largest 500 US companies, according to research firm Equilar. They earn the bulk of their compensation through stock awards.
Build-A-Bear, which sells customized stuffed animals, announced a 20 percent executive salary reduction in March as it furloughed more than 90 percent of its 4,300 workers. That translated to a cut of $142,800 from the $714,000 salary of CEO Sharon John.
Two weeks later, however, the company granted its top brass stock grants of roughly equivalent value to the salary cuts.
Build-A-Bear did not respond to requests for comment. In a securities filing on May 1, the company said the stock awards were made “to further align the interests” of executives and shareholders.
Many companies have not made decisions on whether and how to adjust executive pay amid the pandemic. Investors and corporate governance experts said they are watching closely.
“We will look very hard at the outcomes of 2020 awards,” said Hans-Christoph Hirt, head of the stewardship and engagement arm of asset manager Federated Hermes, which has $606 billion in assets under management. “We wouldn’t want to see targets lowered on the fly.”
Vanguard, the world’s largest mutual fund firm, said on its Web site earlier this month that it was not appropriate for boards to create “easier” executive performance targets, despite the challenging environment.
Sonic moved to protect executive pay on April 10, a few weeks after it started layoffs and furloughs of what would eventually total about 3,000 employees, company filings show.
The previous pay plan would have awarded stock to executives based on earnings. Sonic replaced it with options that gave executives the right to buy company stock, starting in 2021, at the beaten-down price the shares hit on April 9 of this year — at the height of the pandemic, when their value had been halved from their most recent peak.
Sonic’s shares have risen 67 percent since April 10, as much of the stock market has recovered on the Federal Reserve’s intervention and massive government stimulus spending. Smith said on the company’s first-quarter earnings call on April 30 that sales had dropped about 40 percent year-on-year since the start of the pandemic.