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Heads I win: tails you lose

By John Shields - posted Tuesday, 21 March 2006


Over the past five years reported termination payments made to departing BCA CEOs averaged $3.3 million, up from $2.3 million in the 1990s. Such payments are further indication of the continuing bargaining power of incoming and incumbent CEOs relative to their notional employers, the board of directors. Like the more recent practice of the “golden hello” and the “long-service bonus”, such payments, which are generally additional to standard superannuation benefits, amount to a form of disguised income supplementation.

The BCA’s aggressive support for the gutting of unfair dismissal laws makes a mockery of its contention that multi-million dollar termination payments are justified on the grounds that CEOs lack specific protections from early dismissal. Here, as in other aspects of the debate on pay, the highly paid employees who comprise the BCA have elevated the policy double standard to something of an art form.

Many company boards behave more like executive accomplices than as independent guardians of shareholder interest.

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It is still the case, as Berle and Means noted back in 1932, that the separation of ownership and control in the modern public corporation fundamentally advantages the salaried executive over ordinary shareholders and their notional representatives on the company board. Whatever the advances in recent voluntary and mandatory corporate governance requirements, it is still the case that many non-executive directors hold their positions at the behest of the incumbent CEO. Indeed, many are themselves ex-CEOs.

Despite the appearance of board independence and the existence of “independent” remuneration committees, the balance of day-to-day boardroom power clearly continues to reside with the CEO. In this respect, it is particularly significant that the BCA itself is comprised of CEOs rather than, say, board chairpersons (with the exception of executive chairs, of course).

According to US law professors Lucian Bebchuk and Jesse Fried, far from acting in shareholders’ interests, and far from executive pay being determined by arms-length bargaining, executives use the power of their positions to extract an “economic rent” above and beyond what could be achieved by means of “optimal contracting”.

The issue here is one of “asymmetric information” - the “agent” has greater knowledge, and hence power, than does the “principal”. Using recent US evidence, Bebchuk and Fried argue that, despite closer scrutiny and new reporting requirements, CEOs have managed to maximise their personal returns by uncoupling pay from performance, persuading or forcing boards to renegotiate or soften performance hurdles, reprice out-of-the-money options, and offer access to disguised income in the form of generous sign-on payments (or “golden hellos”), special retirement benefits, retention and long-service bonuses, no-interest company loans, special zero-cost share rights, post-termination consulting fees and the like.

As such, executive incentive plans that purport to advance shareholders' interests may be little more than devices to camouflage economically unwarranted levels of income and wealth appropriation.

The evidence to date indicates that such “rent extraction” practices are alive and well in corporate Australia - all of which goes to show that unchecked growth in CEO remuneration is merely the symptom; the underlying problem is that of boardroom timidity and complicity.

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The full version of the evidence and findings on which this piece is based is available here. (pdf file 125KB)



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About the Author

Dr John Shields teaches human resource management and has a special interest in the fields of performance and reward management at the School of Business, Work and Organisational Studies, University of Sydney.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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