Excessive executive salaries proven to damage the corporate bottom line

Unions will wage a three-pronged assault on executive pay in the wake of research shattering the mythological link between gold-plated executive remuneration and company performance.

The Labor Council of NSW will pressure for legislative change, greater activity by super fund trustees and grass-roots industrial campaigns to end the explosion in CEO pay, which has jumped to 74 times the average weekly wage.

The research, conducted by a team of academics commissioned by the Labor Council, found that the often-stated link between high executive pay and company performance does not exist.

They found that executive pay levels had exploded in the past decade from 22 times average weekly earnings in 1992 to 74 times average weekly earnings today. And in the finance sector the figures are more perverse, CEOs earning 188 times the salary of customer-service staff.

By analysing the performance of companies against three criteria - return on equity, share price change and change in earnings per share - the researchers found that excessive pay levels actually coincide with a worse bottom line.

"If you look at the numbers, it is accurate to say the more you pay a CEO the worse the company performs and the less you pay the better it performs," researcher Dr John Shields, from Sydney University's School of Business says.

Applying this analysis, the authors identified a performance-optimal range for executive remuneration of between 17 and 24 times average wage and salary earnings, beyond which the performance of a company begins to deteriorate. This means that any company paying its CEO more than $800,000 begins to be a bad bet.

Labor Council secretary John Robertson says research takes the debate about executive remuneration to a new level.

"This research shows that executive pay is not just a moral issue; it is a shareholder issue and it is a job-security issue," he says. "For workers, it shows that an excessively paid CEO is likely to preside over a weaker company, meaning their jobs are less secure.

A panel convened by the Labor Council found some common ground between Federal Opposition treasury spokesman Bob McMullan, shareholder activist Stephen Mayne and the Australian Consumers Association's Catherine Wolthuizen.

They highlighted the vital role unions can play, especially in their capacity as trustees of industry superannuation funds, which have significant holdings in the top companies.

Mayne says industry and public super funds with union board representation account for $150 billion, or a quarter of Australia's total market share.

Robertson says the onus is now on the union movement to build on the research by campaigning with their members to raise pressure for political change to make company boards more accountable.

Time for Change

In the report, the authors identify a range of reforms to address the pay blowout and increase accountability, including:-

• Government use of purchasing policy to encourage firms with moderate executive packages.
• The Australian Stock Exchange's (ASX) regulatory functions are compromised, as the ASX is itself a privately listed company. These functions should be transferred to a fully independent entity such as the Australian Securities and Investment Commission (ASIC).
• Restricting the use and abuse of share options by means of a specified cap on the ratio of executive options to the company's total share issue and via the imposition of a minimum vesting period of three years.
• Action, including legislation, to make superannuation funds more accountable for executive pay decisions, with nominees required to report to members on executive pay decisions.
• Registration of all organizations providing commercial services in the field of executive remuneration, with annual reports required to a relevant statutory authority.
• Introduction of more stringent disclosure requirements, requiring formal shareholder approval for all executive salary decisions.

For a full copy of the report, click here.