Discover more from Jamaal’s Letter
When your CEO takes a “98%” salary cut, it's virtue signaling, not sharing the pain
Zoom CEO's salary reduction, amid layoffs, is misleading and meaningless.
Praise abounds for Zoom CEO Eric Yuan who, last week, became the latest tech chief to announce layoffs amid a tech company recession. While many high-profile CEOs across tech and finance are taking pay cuts, announcing layoffs, and making dire forecasts, Yuan, an executive darling of the pandemic, announced that he was cutting his pay by 98% at the same time the company announced 1,300 layoffs.
The CEO of video-calling company Zoom is taking a 98% pay cut after laying off 1,300 workers.
Eric Yuan said on Tuesday that Zoom was letting around 15% of its workforce go, which he said would affect teams across the company. Like many other companies that have recently announced layoffs, he attributed the move to over-hiring during the pandemic.
"As the CEO and founder of Zoom, I am accountable for these mistakes and the actions we take today – and I want to show accountability not just in words but in my own actions," Yuan wrote in an email to staff on Tuesday. "To that end, I am reducing my salary for the coming fiscal year by 98% and foregoing my FY23 corporate bonus."
I’ve seen countless mentions in the press and online of Yuan’s “real CEO accountability,” his exemplary leadership example, and his demonstration of “being in this together” with Zoom’s remaining employees.
But before we give Yuan too much credit, let’s make one thing clear: His “98%” salary cut is both smaller than most people realize and a masterclass in effective virtue signaling.
I’m not criticizing the pay cut itself, I’m criticizing the people lauding praise on what is, so obviously, a public relations-motivated decision.
To be clear, reducing CEO pay amid layoffs isn’t necessarily a bad thing. Still, Zoom’s headline-grabbing move is fooling many people into thinking that, A) CEO salary cuts are a good thing and, B) CEO pay cuts are financially meaningful to the company.
There are three reasons why these reactions are especially naive.
CEO pay cuts that don’t touch stock-based compensation are small in magnitude and large in symbolism.
For America’s largest companies, non-stock-based compensation -- salary and cash bonuses -- represent, on average, less than 60% of the average CEO’s overall compensation.
In fiscal year pay 2018, stock-based compensation comprises the majority of CEO pay at S&P 500 and S&P 400 companies for the first time. The trend is the same for smaller companies with stock-based compensation reaching 49 percent and 42 percent of total CEO pay for S&P 600 companies and Russell non-S&P 1500 companies, respectively.
Salary cuts that don’t touch stock-based compensation are likely small in magnitude and large in symbolism. In 2022, Yuan’s salary was $300,000, and his total compensation was around $1.1 million. Forbes estimates his net worth at $4.1 billion, and as of a 2019 regulatory filing, Yuan owned 19.1% of Zoom’s outstanding stock.
If Yuan’s salary for 2023 is $10,000 after the 98% pay cut, as reported, then Yuan was poised to get a raise in 2023 to $500k. It’s unclear what his bonus might have been, but in April of 2022, he was granted an additional 8,420 shares of stock, in the form of restricted stock units, that vests in April of this year. At current prices, that represents more than $600,000.
The more significant point is that a 98% salary cut isn’t a 98% cut in total compensation. It sounds larger than it is and doesn’t tell the whole story.
(There’s a chance that Zoom’s board upholds the spirit of this pay reduction and dramatically cuts Yuan’s 2023 stock-based compensation. No announcement has been made about that, yet.)
My goal isn’t to shame Yuan’s wealth. As the founder of Zoom, he’s built a generational technology platform from which he’s created well-earned generational wealth. Instead, my goal is to call out the red herring that is a 98% salary cut.
CEO pay cuts are financially meaningless for the company
PR aside, perhaps Yuan’s pay cut is saving the company valuable resources. No, it is meaningless.
Zoom generated over $4 billion in revenue and roughly $1.4 billion in profit in its fiscal year ending January 2022. The company also generated more than $1.4 billion in free cash flow, another measure of cash profitability.
Yuan’s 98% pay cut represents less than 1/10 of 1% of the company’s profits.
It’s essentially nothing.
CEO pay cuts don’t reduce how many people get laid off
A popular argument praising Yuan suggests that by taking a pay cut, he was able to lay off fewer of Zoom’s employees.
This logic suggests that if the CEO, or leadership team, takes a pay cut, the cost-savings could help mitigate layoffs.
This just isn’t true. We know this because when companies announce layoffs, they typically announce them in large, round numbers. Google announced 12,000 layoffs. Meta announced 11,000. Zoom announced 1,300 layoffs.
What Zoom didn’t announce was 1,298 layoffs: The number of employees that would have been laid off had the company used Yuan’s foregone 2023 salary to keep another two Zoom employees at the company. (Zoom’s median compensation is around $211,000 according to Levels.fyi)
(There’s some nuance here: Because many of Zoom’s leadership team took 20% pay cuts, the pool of capital available to offset letting people go is larger than if the CEO alone took a pay reduction. However, as the math above explains, all of this is negligible in Zoom’s larger financial picture.)
But all CEO pay cuts aren’t created equal. Apple disclosed in a regulatory filing that its CEO, Tim Cook, would take a 40% pay cut on total compensation in 2023. This includes stock-based compensation, which makes Tim Cook’s cut more meaningful than Yuan’s. That said, the cut, roughly $34 million, represents an even smaller percentage of Apple’s nearly $100 billion in 2022 profit.
The most generous viewing of these pay cuts, whether they include stock-based compensation or not, is that they are designed to signal to employees concerned that the company’s leadership isn’t sharing in the pain. If that’s the case, I hope employees ask the right follow-up questions. The first should be, “how big of a reduction are you taking in total compensation?”
If companies, and their boards, are looking for more than good press, a CEO pay cut should be on total compensation, not merely salary.