In August, JD.com was pleased to report “strong performance” for the year’s second quarter, as figures for China’s number two e-commerce venture showed net revenues were up an impressive 61 percent on the year before. The number of fulfilled orders, meanwhile, was 87 percent greater than in 2014, and mobile orders were up a mammoth 290 percent in the same period. “Encouraged by another quarter of strong top-line growth”, said the company’s CFO Sidney Huang, the results underscored the company’s already stellar reputation and the opportunities still on offer in China’s burgeoning e-commerce market. Beyond that, buried beneath the headline figures, was another announcement of note: JD’s Chief Executive, Richard Qiangdong Liu, for his services, was to receive an annual salary of just one yuan.
Unusual in the sense that improved company performance is usually coupled with a pay rise, Liu has chosen instead to line up alongside Mark Zuckerberg, Steve Jobs and Meg Whitman, and join the $1 salary club. “Under this plan, Mr Liu will receive CNY1.00 [10p] per year in cash salary and zero cash bonus during the 10-year period”, according to the company statement. In a period when pressures to narrow the pay gap are weighing on policymakers and corporates, executive compensation appears to be breaching the lower limit.
“It ties pay to performance mechanically”, said Professor Martin Conyon, Director of Doctoral Programs at Bentley University. “If your salary is a dollar then all other compensation is in the form of bonuses, equity plans and so on. These, by design, always link compensation payouts to the performance of the executive.”
Combined market cap of companies with the $1 pay scheme
Share of the S&P 500, 1993
Share of the S&P 500, 2011
When introduced in the early decades of the 20th century, the scheme was originally intended to free funds for the war effort, and participating business and government executives were dubbed ‘dollar-a-year-men’. “This historic foundation for the $1 salary gives it a ‘public service’ aspect”, said Jennifer Hill, Professor of Corporate Law and Director of the Ross Parsons Centre of Commercial, Corporate and Taxation Law at the University of Sydney. Skip forwards to the present day and the scheme has enjoyed something of a resurgence – albeit for very different reasons.
A popular party
“CEOs generally elect to receive $1 in salary when they already have a significant equity stake in the company”, said David Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and Faculty Director of the Corporate Governance Research Initiative. “You generally see this with founder CEOs – like Larry Page of Google or Steve Jobs at Apple. They already have a lot of stock and they want to signal to investors that they are on the same page with them, that they’ll earn money dollar for dollar as stock price changes rather than through salary and bonuses. It’s rare that you see a non-founder CEO agree to this arrangement, although Meg Whitman did so in her early years with HP.”
Studies show that between 1993 and 2011 the combined market cap of companies employing the $1 pay scheme went from $0.5bn to $875bn, and grew from 0.01 percent of the S&P 500 to 7.5 percent.
“The trend towards the $1 salary club is certainly a reflection of public ire during the global financial crisis, and the fact that in many jurisdictions taxpayer funds were used to bail out financial institutions”, said Hill. The reasons for the payout, however, varied greatly from case to case. Chrysler, for instance, adopted the scheme as part of its financial bailout conditions, whereas Apple and Steve Jobs did so due to the latter’s faith in the company’s ability to turn a healthy profit.
“There are two types of CEOs who fall into this category”, said David Yermack, Albert Fingerhut Professor of Finance and Business Transformation at New York University Stern School of Business. “Some are company founders who are extraordinarily wealthy and have no real need for a salary, so they pay themselves a nominal amount – maybe not $1, but something far lower than usual. Bill Gates and Warren Buffett are two well-known examples in this group.
“The second type is more interesting: these are CEOs who voluntarily forgo compensation, almost always at a time that the company is facing financial problems. Bill Ford Jr, Chairman of Ford Motor, very publicly did this during the financial crisis years. It is harder to take these cases seriously, because usually there is an implicit contract between the CEO and the board to award make-good compensation in the future if the company recovers.”
Justification for the decision lies with the philosophy that taking a $1 salary not only underlines a commitment to company performance, but also ties the employee’s financial gains to that of investors’.
“The CEO is making it clear that, if the performance does not improve, they will take nothing. It is equivalent to someone working on an extremely aggressive sales commission arrangement: you eat what you kill”, said Brian Main, Professor of Business Economics at Edinburgh University Business School.
Inequality and insignificance
Membership of the $1 club also flies in the face of criticisms regarding the widening executive-to-worker pay ratio, and a great many tech execs have gone to great lengths to escape accusations of inequality and make a positive contribution. One report, authored by the AFL-CIO and published in May, showed S&P 500 executives received on average 373 times that of the average worker, up from the 331 in 2013 and – more tellingly – 42 in 1980. Across the Atlantic, High Pay Centre figures show the average CEO to worker pay ratio of the FTSE 100 companies came in at a lesser, albeit unsavoury still, 183 to one. The problem is so acute even the US Securities and Exchange Commission (SEC) voted in August three to two in favour of a motion that would see publicly traded companies disclose the ratio between executive and worker pay.
The share of corporate income put aside for the five highest-paid executives has ballooned in recent decades, up from an average of five percent in 1993 to more than 15 percent in 2005. Economic Policy Institute figures show inflation-adjusted US executive pay increased 937 percent between 1978 and 2013, more than double the amount by which the stock market expanded in the same period. More important still is the extent to which it eclipsed the 10.2 percent rise for the average workers: while in 1965 the ratio stood at 20 to one, it has lately tipped the 300 mark.
Intent on escaping the reputational damage wrought by income inequality, major names in technology (whose CEOs often take up a more public position than those in rival sectors) are warming to the idea of a minimum or less-than-minimum wage. Steve Jobs popularised the idea, receiving a salary of only $1 a year between 1997 and 2001. More recently, serial entrepreneur Elon Musk was unhappy with his $35,360 minimum salary in 2014 and took not a penny of it – reminiscent of his days at Queen’s University when he lived on a budget of $30 a month. Oracle’s Larry Ellison, Google’s Sergey Brin and Larry Page, Twitter’s Jack Dorsey, and the ubiquitous Mark Zuckerberg are all distinguished members of the $1 club, but their cumulative effect on pay inequality is marginal.
“The $1 salary executives are not the norm. Their influence on the average (or a better statistic is the median) CEO compensation to worker pay ratio is negligible”, said Conyon. “Besides which, what is really important is the fair market value of the executive’s pay (not just the salary element). The SEC – and other good corporate governance dominions – require the reporting of this figure – not just the ‘salary’. It’s very difficult to ‘conceal’ CEO compensation in countries like the US.”
Not what it seems
The decision to take a $1 salary is seen by opponents as either an overblown PR initiative or – worse still – a means of escaping taxes. Stock growth and capital gains are taxed at a much lower rate than income, and, assuming the company is doing well, a $1 salary brings with it far greater rewards than a fat paycheck would. As Warren Buffett so succinctly put it on CNBC: “I’ll probably be the lowest paying taxpayer in the office.” In 2013, Meg Whitman and Larry Ellison earned $17.6m and $79.6m respectively in stock options and performance-based awards. Likewise, despite Zuckerberg’s assertion that he has “made enough money”, his net worth exceeded $41bn as of August, according to Forbes, and left him little incentive to supplement his income with a generous salary.
The trouble comes when a commitment to a $1 salary is coupled with philanthropic-minded statements about pay and progress, when in actuality the measures do little, if anything, to benefit anyone other the executive in question. For critics, the mere fact the $1 salary is so widespread is confirmation enough that the decision carries more benefits for firms than they are letting on, particularly when taking into account the fact that adoptees are typically among the most profitable technology companies out there.
“The financial benefits to the company are fairly straightforward”, said Larcker. “The company saves the dollar value of compensation that the executive has forgone. In the case of a true $1 salary, this amounts to a few million – depending on the size of the company. For a company such as Google or Apple, this is relatively trivial, given the profits these firms generate. From a symbolic standpoint, a $1 salary tends to generate goodwill – among investors, the press and especially employees – that the CEO is personally invested in the company and working to grow value. How much of that goodwill translates into economic goodwill is hard to say.”
The debate about pay disparity is not merely confined to salary but to all forms of compensation, and for as long as the gulf between executive and worker compensation remains, a consolatory $1 salary amounts to nothing in the way of a solution.
“I think the real point of these decisions is to demonstrate commitment to the company by the manager, and also to put moral pressure on the regular workforce to accept wage reductions”, said Yermack. “In a unionised company like Ford, this sort of gesture may be especially important as a negotiating tactic.”
Critics of the system also note $1 salaries do not necessarily show executives are focused on income inequality, and instead highlight the ability of wealthy individuals to shift income for personal gain where others cannot. As has been highlighted time and again by the likes of Joseph Stiglitz, Thomas Piketty and others, inequality will continue to widen for as long as inefficiencies in the taxation system remain, and members of the $1 club are no exception – though that is not to say they are necessarily offenders either.
Gap in faith
In a period when many have grown frustrated about the gulf between executive and worker pay, the principle of a $1 salary, at least symbolically speaking, is a sound one. Certainly, the decision is arguably more useful as a PR gimmick than it is as a solution to income inequality, but it does also do a great deal to align executive pay more closely with performance.
“While there is certainly a public relations element to the $1 salary, it is hard to fault an individual for taking less in compensation than they deserve”, said Larcker. “It’s hard to discern what the motivation is behind each of these CEOs – each one of them makes this decision for their own reason – but it might be too cynical to say it is purely a marketing ploy. Certainly if you think of the other side of the coin – the very wealthy CEOs such as Larry Ellison at Oracle that continue to receive very large annual equity grants – the contrast couldn’t be more stark. Generally, a $1 salary CEO is demonstrating some level of good faith, even if he or she wants the public admiration too.”
“It’s the design of the compensation package that matters and if the expected value of it is at market rate”, said Conyon. “A lot of the $1 folks are executives with a significant ownership stake in the company. So their incentives are to optimise firm value and this is aligned with the interests of other owners. They all sink or swim together. Remember, too, that this is a market-based contract: neither the executive nor the firm is forced into it and the terms are presumably mutually agreeable to both parties.”
Looking at the issue objectively, where the $1 salary is most effective is with regards to performance-related pay. “The arrangement is less about ‘marketing’ and more about establishing the CEO’s commitment and belief in the viable future of the company”, said Main. “If it works out, then the CEO will do very well (as happened for Jobs) and no one will really grudge them that reward. But is should not be seen as a cheap or charitable arrangement.”
It may be the members of the $1 club have done little to close the gap between executive and worker, but they have done a great deal to quieten critics who say the ties between pay and performance are too loose.
“The $1 salary might obscure the pay gap, but more generally it should remind investors that it’s not the annual pay of the CEO that is important, it’s the total wealth that the CEO has invested in the firm and how that motivates him or her on a day-to-day basis”, said Larcker.
The method is not exempt from criticism, but few would dispute the fact that a $1 salary ensures the executive’s own gains coincide with those of the company. And while the decision does little to combat income inequality, as it is so often said to do, that isn’t to say it doesn’t have a role to play in protecting against wayward executive pay.