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A cap on CEO salaries - creeping socialism?

By Dino Cesta - posted Monday, 16 March 2009


There’s an element of “irrational exuberance” regarding the level of CEO and senior executive remuneration. While some of that concern is warranted, there’s also an aspect of hypocrisy being played out in the public domain by politicians on all sides of the political fence.

If politicians wish to play devil’s advocate when it comes to CEO remuneration, then it’s only fair and reasonable that similar standards apply to them. As governments contributed to the disorder that the world economies now find themselves, should taxpayers also have the right to demand that politicians’ salaries be frozen or paid salaries and parliamentary pensions be recouped from politicians who failed to prevent or contain the current economic crisis, and perhaps, past economic crises?

Should we demand that former Prime Minister and Treasurer Paul Keating refund his parliamentary pension pay-out because of the “recession we had to have”, or demand that parliamentary members of the NSW State Government refund their salaries due to their seeming inability to manage the State economy?

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Where do we draw the line? Are Australian CEOs being unreasonably targeted for the unscrupulous behaviour of certain CEOs in countries such as the United States and Britain? Or for the ineffectual financial system policies that contributed to the current economic malaise that the world finds itself in?

Comparatively, Australian companies across many sectors have fared reasonably well against the backdrop of a gloomy global economy. While major overseas organisations have delivered negative profit results in the billions and have been assisted with ongoing government bailouts, during the most recent reporting season, a Goldman Sachs JB Were report noted that Australian-based companies delivering positive results outweighed companies with unsatisfactory results by ten to nine, with the remainder of companies performing within expectations.

Some of that credit should be directed to many Australian CEOs’ prudent decision-making in steering their companies through the current turbulent economic operating environment. While there will inevitably be exceptions to the rule, we should not be tainting all CEOs with the same brush.

CEOs are easy targets in placing culpability in such an environment. A balanced perspective, however, is needed on the debate of CEO salaries. It may be currently politically expedient to attack CEOs. However, there may be long term consequences of this political opportunism in an attempt by both past and present governments to deflect their own failures in contributing to and containing the crises in the economy.

If Australia wishes to attract and retain quality CEOs and senior executives, it must offer remuneration packages that are internationally competitive. By excessively restricting the salaries of CEOs and senior executives or require them to refund past payments, we risk losing the best talents to overseas countries and companies. The resultant brain drain will have dire long term consequences for Australia’s next phase of economic prosperity.

There is arguably a creeping socialism in motion by proposing to place a cap on CEO salaries, and does it risk setting a future precedent targeting other salary earners, or even the maximum assets any one individual can own? The Australian Government therefore needs to be heedful in not rewinding the clock to pre-deregulation days and risk becoming an increasingly regulated “sickle and hammer” state.

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There is nonetheless merit in evaluating some of the options being proposed as part of the debate - including empowering shareholders with the authority to restrict termination payments over a specified amount, particularly in cases where the CEO or executive team have failed to deliver results on behalf of shareholders; and limit remuneration packages of CEOs in which companies financially gain from government bailouts.

It is, however, a questionable practice to place a cap on CEO and senior executive remuneration packages or to require shareholders to approve their remuneration. We need to ensure that market forces, albeit imperfect, still play a fundamental role in setting remuneration benchmarks, in alignment with the industry in question and/or international standards. A possible CEO remuneration option for inclusion is to incorporate a bonus potential based on jobs creation in the company.

On the surface, the attractiveness in providing shareholder investors with greater powers in approving CEO salaries offers an additional checking mechanism, particularly in cases where salary increases and/or short and long term bonuses rewarded to CEOs do not correlate with the financial results delivered by the company or cost of living pressures. If shareholders have the right to vote for and against multi-billion dollar takeovers and acquisitions, why not on a CEO’s remuneration?

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.

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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