Demoralisation and incentive - the price of executive salaries

A senior manager of a multinational company once told me that a key function of astronomical CEO salaries is that they cause great envy amongst fellow workers. This in turn creates a huge incentive for them to aim up the corporate chain, which should translate into higher productivity gains.

This appears to be the case at Qantas, where the directors are asking for a 66 per cent rise in their salaries to take it up over the one million mark. This in a year where average weekly earnings of their frontline staff, those manning the boarding gates, unloading the luggage or serving customers on flights rose only 3 per cent.

Whilst the directors may be envious, the dominant emotions of the rest of the staff are demoralisation and anger. This is unlikely to translate into productivity gains. In fact, the opposite may be true, as industrial action looks a real possibility at Qantas.

Increasingly, the psychological management of a corporation’s junior staff is to quell their feelings of demoralisation in an attempt to stir their incentive for promotion, stroked by publication of the stratospheric salaries of their bosses.

But patients I see from the corporate sector speak of their sense of hopelessness after being laid off or denied a promotion, whilst they see their bosses further enriched. The effects of large executive salaries are increasingly stamping out any rational claim for creating incentives.

One of the great myths of the corporate executive is that they are risk-raking corporate entrepreneurs, when in fact they take no personal risk in their decisions. The true entrepreneur takes great personal financial risk in the hope of great personal gain. The likes of Richard Pratt and Harry Triguboff are clear examples. Pratt was a struggling actor before he started out in business whilst Triguboff was a newly arrived immigrant driving a taxi. Both took great risks before attaining enormous financial reward.

Our executives take little or no personal risk for the certainty of great personal gain.

They function much more like corporate bureaucrats. Their day-to-day work is managing money and cutting costs. Whilst they like to present themselves as cutting-edge thinkers streaming with new ideas, they are some of the least creative people in our community - armies of accountants, financiers and lawyers. There are very far from being the business versions of a Peter Carey or a Baz Luhrmann.

If shareholders and society viewed the CEO more as a super bureaucrat rather than a superhuman saviour, we would simply not accept paying them many multiples of our top bureaucrats.

The examples of David Murray, the CEO of Commonwealth Bank, and Max Moore-Wilton, the CEO of Sydney Airport Corporation, are a case in point. Both spent much of their lives as public servants - leading teams, answering to politician bosses and managing money. There is no question that they were both very good.

Their job descriptions changed little when CBA was privatised and Wilton left the Prime Minister’s Office to move to his private sector role. But their salaries leapt into the heavens nevertheless.

Furthermore, executives have become as adept as our politicians in shifting blame and absolving themselves of responsibility. If they fail they can point to the demanding conditions of the world market and the uncertainty shrouding global politics. If the markets go up and with it the value of their business, you won’t see any CEOs suggesting they had nothing to do with it.

David Murray argued a 30 per cent rise in his salary was justified because the share price of Commonwealth Bank rose in the past year. This was in a time of a booming Australian share market where practically everything rose in value. He made no suggestion that he may have had little to do it.
 
Meanwhile, staff are left wondering why they can’t get a 3 per cent pay rise.

It’s the market, stupid, I can hear some of you saying. This is true, but the market does not exist for its own sake. It exists ultimately for the betterment of society. When the market is not functioning in this regard it is time for the government to step in. Currently the demoralisation and sense of unfairness experienced by thousands of workers is not balanced by the encouragement of dubious innovation by a handful of corporate bureaucrats.