CEOs Share Economic Pain

Russ Smyth made an uncommon promise when he became the $950,000-a-year chief executive of H&R Block Inc. this summer. He agreed -- in advance -- to a pay cut if the tax-return preparer hits bad times.

Mr. Smyth's employment contract lets directors trim his salary when they slash pay for other top managers. The 51-year-old executive says he accepted the provision because "I believe in leadership by example."

Mr. Smyth is among a small but growing number of CEOs pledging to share the pain with senior-level colleagues during tough times. Some agree to contracts such as Mr. Smyth's. Others abandon a common contract provision that lets them quit and collect lucrative severance payments if their pay is cut -- as long as other officers' pay is cut at the same time.

At least 62 CEOs have one of these arrangements, concludes a review of 3,200 accords by the Corporate Library for The Wall Street Journal. More than half have been signed since 2004, estimates Paul Hodgson, a senior research associate at the Portland, Maine, governance-research firm.

Robert Stucker, who frequently advises CEOs during contract talks, estimates that 5% to 10% of new CEO contracts contain pay-cut provisions, and projects the proportion will rise. Mr. Stucker, chairman of Chicago law firm Vedder Price, says he has helped negotiate 12 such provisions for incoming chiefs over the past six years.

So far, it doesn't appear any CEO has forfeited any pay. But the agreements reflect investor concerns over executive pay and increased board oversight. Activist shareholders complain that CEOs often reap big rewards even when profits fall and shares decline. Contracts that specify CEO pay -- and allow the CEO to resign if directors curb that pay -- are one cause of the disparity. Nearly 77% of CEOs of public companies have employment agreements, Mr. Hodgson says.

Though the contract provisions are new, certain executives have long taken voluntary pay cuts, typically when they dismiss or cut pay for rank-and-file workers. David Barger, CEO of JetBlue Airways Corp., halved his $500,000 annual salary for the second half of this year, not long after JetBlue announced a hiring freeze. The heads of Immtech Pharmaceuticals Inc. and First American Corp. also cut their pay this year.

These moves sometimes generate as much criticism as praise from employees. Continental Airlines Inc. Chief Executive Larry Kellner and his second in command suspended their salaries on June 1 and relinquished incentive pay for 2008. But the head of the union representing Continental's 5,000 pilots calls the move "more symbolic than painful" and says it "doesn't begin to compare to the sacrifices made by pilots," who are working at pay levels lower than seven years ago.

Employee resentment can be particularly strong when executives quietly accept additional compensation after trumpeting a pay cut. Gary E. Holdren, CEO of corporate consultant Huron Consulting Group Inc., last year said in a company-wide email that he would redirect his $1 million bonus to an employee bonus pool, according to a former executive. Mr. Holdren also signed a new contract last year, allowing directors to lower his $1.1 million salary when cutting the pay of other top executives.

Then, in March Huron gave Mr. Holdren restricted shares valued at $3.3 million -- more than a year earlier, when his annual grant of restricted shares was valued at $2.4 million. "A lot of the managing directors were upset" over the award, because it effectively negated the relinquished bonus, the former executive recalls. A Huron spokeswoman declined to comment.

Laurel Bellows, an employment attorney at Bellows and Bellows in Chicago, says a CEO contract that permits pay cuts could help retain other managers who "feel they are being treated the same as the CEO."

Donald Knauss signed an employment accord similar to Mr. Smyth's when he took command of Clorox Co. in 2006. It allows the board to reduce his salary as long as it cuts the pay of other executive officers by a similar amount at the same time. The promise "is the right thing to do," says Mr. Knauss, whose two immediate predecessors had similar agreements.

H&R Block executives have never taken a pay cut, a spokeswoman says. But Chairman Richard C. Breeden says, "Everyone's pay should be linked to performance, and Block executives understand that." Mr. Breeden, a former chairman of the U.S. Securities and Exchange Commission, says too many executive contracts "make little sense for shareholders."

During contract talks, Ms. Bellows has seen the small chance of actually having to take a pay cut persuade some CEOs to agree to such clauses. "The optimistic CEO will say, 'I can sign this contract because I don't think it will happen,'" she says.

Write to Joann S. Lublin at joann.lublin@wsj.com