(REUTERS/Brendan McDermid)
IBM CEO Ginni Rometty did something unexpected earlier this week when announcing the company’s fourth quarter earnings, which showed a 5 percent revenue decrease and marked the seventh quarterly drop in a row. “In view of the company’s overall full year results,” she said in the company’s press release, ”my senior team and I have recommended that we forgo our personal annual incentive payments for 2013.”
Rometty’s decision to decline her annual bonus is a reminder of what a hot-button issue executive pay has become. However much it may be designed to reward executives for their performance, it also sends a strong message to investors, employees and the public.
In the same week that Rometty made the announcement, for instance, news came that JPMorgan CEO Jamie Dimon would get a raise, despite billions of dollars in penalties that the bank owes following a trading scandal. JPMorgan’s board of directors reportedly vigorously debated the raise, with some saying he should be rewarded for leading the bank through a tough period.
“The notoriety and level of attention that executive pay has received over the last five to six years has really grown,” says Aaron Boyd, the director of governance research for Equilar, an executive compensation data firm. “It’s become a larger decision about not just, ‘Did you do a good job?’ Now you have to consider what it looks like, what the shareholders think, [and] is it motivating or demotivating to employees.”
CEOs shunned their bonuses with some frequency during the recession, when cutting their own pay was a gesture of sharing the pain with employees whose own bonuses were getting slashed or whose 401(k) matches had gone away. Yet it still happens rarely enough that it should make shareholders take notice, says David Wise, a senior consultant with the Hay Group, which advises companies on executive compensation. That means Rometty’s decision could look like a relatively good thing to her constituents outside the company.
“You don’t see a lot of CEOs or a lot of management teams declining bonuses on regular basis,” Wise says. “When it does happen, it’s signal to shareholders that management teams are in it for the long haul.”
Equilar’s Boyd says when a CEO declines a bonus, it’s a way of demonstrating to shareholders that they’re focused on setting the company up for success. “They’re not just dying to get the money without thinking about the health and well-being of the company and its shareholders.”
IBM has been hit by declining growth in its hardware business as other technologies, such as cloud computing, take off. The company’s quarterly profits were up six percent in the fourth quarter, beating expectations, but its full-year net income dropped one percent. IBM also said it plans to make more staff cuts.
As a result, the move by Rometty and her senior team also has the potential to send a message to employees. Edward Lawler, director of the Center for Effective Organizations at the University of Southern California, says Rometty’s move could help show employees that she’s holding herself accountable. “It sends a message to employees not only that we need to perform better, but I’m taking some responsibility for where we are and following through by it affecting my bonus,” he says. “It’s a strong leadership statement.”
Still, the significance of the move depends on the size of the CEO’s overall pay package. Long-term incentives like stock options or other equity can often dwarf the size of an annual bonus. For example, even after Oracle CEO Larry Ellison voluntarily declined his bonus in fiscal 2013, shareholders rejected his massive pay package in a non-binding vote at the company’s annual meeting last October. Ellison still made $78.4 million, remaining one of the country’s most well-compensated executives. “In the case of Oracle, the bonus is a fly speck on what he makes,” says Nell Minow, a co-owner and director of GMI Ratings, which rates companies for their governance practices.
Rometty’s target bonus, says IBM spokesman Edward Barbini, was $4 million, though it’s unclear at what rate it would have paid out given last year’s results. Most boards typically use a formula to determine whether the CEO gets anywhere from zero to two times the target bonus, depending on performance, Wise says. At IBM, the maximum bonus payout is three times the target.
For 2012, Rometty received a $3.9 million annual incentive and $16.2 million in overall pay.
How shareholders and employees will ultimately respond to her recent announcement is yet to be seen. But giving up a bonus was Rometty’s way of saying that she takes responsibility that “2013 wasn’t all we hoped it would be,” Barbini says. “She certainly wants to lead by example.”
Jena McGregor is a columnist for On Leadership.
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