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A cap on CEO salaries - creeping socialism?

By Dino Cesta - posted Monday, 16 March 2009


The practicality of implementing the shareholder empowered option will however be a challenging one since it is unlikely that individual investors such as “mums and dads” will have sufficient voting power to veto salary and bonus payments, as they will be outweighed by institutional investors.

Shareholders may also be more likely to reject than approve salary increases and bonus incentives which may result in impracticable and protracted negotiations - how and who would the Board of Directors negotiate with? And cynically, institutional investors may also be politically skewed to veto any salary increases or bonus payments as a mechanism to oust a CEO.

Apart from an unpopular option of increasing the tax rate above 45 per cent on salaries and/or bonus payments over a certain amount, an alternative legislative option for evaluation is to implement benchmarks that ensures salary changes factor such aspects as cost of living pressures, industry and international standards; and that short and long term bonuses rewarded to CEOs correlate with the financial results delivered by the company within pre-determined bandwidths.

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If recommendations regarding CEO and senior executive salary changes and/or bonus payments are outside these benchmarks, then the federal government should consider establishing an independent tribunal, or utilising a pre-existing one, which approves or reject such increases; or alternatively, identify a viable mechanism that gives shareholders the authority to approve or reject CEO and senior executive remuneration outside specified benchmarks.

In this current environment of public and political discontent concerning CEO remuneration, it will be difficult to engage in a rational debate on the topic. While there is some support in the view that CEO and senior executive pay packets on the surface appear excessive, particularly where it has considerably exceeded increases in wages of main-street Australia, or the investment return value to shareholders, common sense must prevail.

A solution is somewhere between the polarised views under debate. Well considered regulation of CEO and senior executive remuneration may be appropriate - so far as it does not overly neglect the more naturally attuned market forces, nor undermine the future prosperity of Australia by instigating the brain-drain of CEOs, senior executives, and future Australian leaders to companies beyond Australian shores.

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About the Author

Dino Cesta is a freelance communicator of thoughts, opinions and ideas on politics, economic and social issues and public policy. Cofounder of the non-profit organisation Hand in Hand Arthouse, and the Newcastle Italian Film Festival, Dino graduated with a Bachelor of Economics and Master of Politics and Public Policy. You can follow Dino on View from the Obelisk or Twitter on @dinoc888

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