Heads I win: tails you lose

The 100 chief executive officers (CEOs) who comprise the membership of the Business Council of Australia (BCA) represent the self-proclaimed elite of Australian business leadership. The CEOs who constitute the current BCA Board have day-to-day control of some of the most significant firms in the national economy, including Wesfarmers; IBM Australia; Qantas; Zinifex; ABN AMRO; Rio Tinto; and Boral - as well as the entity charged with the voluntary regulation of Australian-listed companies, the Australian Stock Exchange (ASX).

Individually and collectively they have also been in the forefront of the employer campaign for greater flexibility in Australian employment relations, as well as for increased labour productivity and labour cost competitiveness.

Since the election of the Howard Government in 1996, the BCA has enjoyed unparalleled access to the corridors of political power and past and serving members of the BCA board have been among the most outspoken critics of the “over-regulation” of Australia’s economy and labour markets.

The BCA has had a major influence on the Howard Government’s reform agenda, particularly the successive rounds of legislative change to the industrial relations system, the latest and by far the most radical instalment of which is the Work Choices legislation, which came into force late last year.

The BCA CEOs’ advocacy of more thoroughgoing reform of the Australian wages system inevitably invites consideration of their own remuneration as salaried employees and of how their pay has changed over time. In this regard, the long-term trend in the reported levels of CEO total cash remuneration in the 51 Australia Stock Exchange (ASX) listed companies whose CEOs are current BCA members is both instructive and disturbing.

There are four specific areas of concern - all of which, in my view, warrant more serious public debate, notwithstanding the more rigorous reporting and accountability provisions introduced by the 2004 “CLERP9” legislation.

BCA CEOs have enjoyed long-term cash earnings growth far in excess of that of ordinary Australian wage and salary earners.

Over the past 16 years, the reported average annual total cash earnings of ASX listed companies currently led by BCA CEOs has risen from just over half a million dollars to over $3.4 million. Over the same period, for private sector employees, average full-time adult total earnings has risen from $29,200 to $54,000. The rise in BCA CEO cash earnings equates to an average compound annual growth rate of 13.5 per cent (or 10.7 per cent in inflation-adjusted terms) compared to just 4.2 per cent (or approximately 1.4 per cent in real terms) for ordinary full-time wage and salary earners, while the gross cash earnings gap between the two groups has widened from 18:1 to 63:1.

This growth in CEO pay levels is difficult to reconcile with the BCA CEO’s persistent advocacy of a more competitive labour cost structure for the Australian economy. In relation to pay restraint, the stance of the executives and boards of BCA member firms is one of “doing as we say” rather than “doing as we do”.

The chief source of the surge in cash remuneration is cash “incentive plans”. Cash incentive payments have now overtaken fixed pay as the principal component of BCA CEO cash earnings, now accounting for 60 per cent of the total. Last year, BCA CEOs covered by cash incentive plans received average cash bonuses of $2.06 million, an increase of 55 per cent on the previous year’s average.

In truth, though, this reveals only part of the whole story, since these data relate only to the cash component of total CEO remuneration. Yet, we also know that since the early 1990s, equity-based “rewards”, including share grants, share options and associated share “rights” have assumed increasing importance in CEO’s total remuneration packages, to the point where equity now contributes between 40 and 50 per cent of the estimated total.

The remuneration consulting firm the HayGroup estimates that the contribution of “long-term incentives” (i.e. equity-based plans) to CEO remuneration in the largest listed Australia firms has risen progressively from 13 per cent in 1990 to 39 per cent in 2004. While the late 1990s surge in option grants and share shareholdings has evidently come to end, equity plans continue to overshadow cash as the major source of CEO wealth acquisition. In 2005-4, BCA CEOs held, on average, 2.6 million shares in their employing company, with a majority having from $10-$30 million in company equity.