Commonsense fairness - CEO pay

The issue of huge payments to CEOs has finally reached crisis proportions. For decades political leaders have called for restraint but in reality have done very little about it. In fact, they are very much part of the problem. Recently, Prime Minister Kevin Rudd condemned the excessive salary packages, even at the G20 summit.

He has delegated the task of bureaucratic oversight to APRA (Australian Prudential Regulation Authority). However, APRA only wishes to avoid excessive risk-taking in Australia's financial institutions. APRA has said that it does not intend to focus on the levels of compensation paid to executives.

The real issue is what to do about it. It certainly requires political will and intervention to set remuneration levels. Remember first of all that there is little or no correlation between CEO's compensation and organisational performance. There are numerous instances of obscenely high payments for CEOs while poor organisational performance is the norm. The "pay peanuts and you get monkeys" justification of high packages is nonsense. Other factors are relentlessly driving that spiral. What should be the guiding principle when seeking remedies and who should implement them?

Above all let's be guided by common sense fairness. The average wage is about $52,000 a year. The Pacific Brand CEO’s package is $1.8 million - about 35 times the average wage. However, there are many packages that come to 75 times, or even 100 times that. The spiral is totally out of control.

Clearly this situation requires government intervention. There is no sound reason at all why governments should not mandate as to remunerations for private sector CEOs and executives.

The position taken by the Australian Institute of Company Directors (AICD), recently restated, is that only Corporate Boards can set CEO pay levels, but this has proven to be painfully self-serving and inadequate. Government intervention could be done best by legislating for a maximum ratio based on the average wage of 1:10 as the maximum base salary package for a CEO. I suggest that this is would be a very generous proposition. That cap would result in a maximum CEO base salary of $520,000.

Surely all income derives from the same common economy. An egalitarian society cannot afford double standards: democracy or plutocracy is the choice here. Quite apart from this ideological preference, the practicalities of containing unsustainable wage increases and/or workweek reductions surely demand not just brakes but serious reductions in CEO packages as well.

Disappointingly, several ALP Ministers have already said that it would be "very difficult to do something about it". Why would that be so? Well, politicians often have a life after Parliament and many join the corporate elite as directors or consultants. There are plenty examples of this. Former New South Wales Premiers Nick Greiner and Bob Carr come to mind. Both are earning far in excess of their salaries as premiers. We could also mention the former ALP Federal Minister Graham Richardson, and many others. Politicians would not be interested in upsetting possible future providers of corporate benefits.

Furthermore, both major parties are beneficiaries of very substantial corporate donations at election time, the subject of a current Parliamentary inquiry initiated by the courageous ALP Senator Faulkner. It remains to be seen if Faulkner will be successful. Public outrage is intensifying as a result of media coverage. Remarkably, it doesn't seem to occur to the political leaders that drastically tackling this issue would actually result in the approval of a great majority of voters!

There are other measures that could be introduced, either in addition or independently:

1. shareholders could be empowered to approve executive salaries;
2. a very progressive income tax above a certain income level could be levied, say above $100,000; and
3. employee share ownership schemes and workplace democratic institutions could be introduced, as done in the US and Europe for decades already. Australia is very late with this.

The Australian Shareholders' Association (ASA), in a recent draft for consultation purposes, while supporting the view of AICD on Board prerogatives, do want to give shareholders a much stronger voice in approving or disapproving remuneration reports and recommendations. At present they can only voice an opinion. Moreover, mostly even the big institutional shareholders have gone along with recommendation by Corporate Boards. Clearly, empowering shareholders would also require new legislation - therefore government intervention.

Similarly, any increase in marginal tax for high-income earners would require political will and action.

Finally, the government could develop legislation to facilitate broad-based Employee Share Ownership Plans, as in the US, as well as legislation to introduce participation by employees in decision-making, as exists in most European countries. Involvement by employee representatives on Corporate Boards, plus permanent Employee Enterprise Councils, would achieve much greater workplace democracy. This would ensure transparency, advance knowledge of strategic plans for the business and break down the "them and us" culture. The government draft industrial legislation package now going to the Senate should include such measures rather than sticking with the old adversarial context. There is really nothing innovative in this package.

In the US, where the incidence of obscenely high executive salary packages is greatest, there is evidence that ESOPs (employee stock ownership plans), covering 10 per cent of all employees, act as a brake on executive remuneration.

The National Center for Employee Ownership (NCEO) has conducted a survey on this topic Executive Compensation in ESOP Companies, November 2005. The results strongly suggest that ESOP companies have a much more restrained approach to executive remuneration than many of their non-ESOP peers. Executives in ESOP companies earn less than their peers in similar non-ESOP companies, both in current and deferred compensation.