The coronavirus outbreak has hammered the restaurant, hotel, and airline industries. Their revenues are drying up as people everywhere take on social distancing to slow the spread of the virus.
Other industries, like the movie theatre industry, which has more than 150,000 workers, are also in serious trouble as cash flow falls to zero and hourly workers are being told to stay at home.
Some CEOs have responded to this crisis by taking a pay cut. So far, it is almost entirely centred around the airline industry, which has seen many CEOs either take complete pay cuts or a percentage reduction.
These pay cuts are hitting their base salary, which is often a tiny percentage of their overall compensation. For example, Delta CEO Ed Bastian’s base salary is $891,667, according to the latest proxy statement from the company. That is 6% of his $14.9 million total compensation package — which is based on share awards, option awards, and other types of compensation that are not connected to the company’s share price. Still, cutting the base salary to do something to stem the financial bleeding is likely appreciated by his workforce.
Delta’s board of directors wants the share price to go up.
REQUIRED:
1. Using Positive Accounting Theory, explain the pay cut undertaken by the CEO of Delta.
2. It is said in the article that ‘Delta’s board of directors wants the share price to go up.’ Is rewarding the senior management with bonuses based on the organisation’s share price an appropriate method? Explain your answer referring to Positive Accounting Theory.
