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As executive pay increases, company performance declines, according to the New South Wales Labor Council. No, it's not trade union rhetoric, but the result of a detailed study by three academics of the performance of Australian companies, and their highly paid chief executives. The research was commissioned by the Labor Council. | |
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During the 1990s there were startling increases in the earnings of senior executives, with overall growth of around 400 per cent, about ten times the growth of ordinary worker earnings. This high pay was rationalised on the grounds that it would produce better returns for the shareholders. The subject has become more and more controversial, with particular attention being given to the size of payouts to departing executives. | |
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The researchers say bluntly that the often-stated link between high executive pay and company performance does not exist. "Indeed, the evidence is that as an executive's pay increases, the performance of the company deteriorates." | |
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So the shareholders gained no benefit from excessive remuneration for executives. But there are wider community implications. The report says, "The yawning pay gap between senior executives and ordinary workers makes a mockery of the employer insistence on wage restraint for the lowest paid workers and raises fundamental questions about both the social justice and the organisational worth of the multimillion-dollar payouts being made." | |
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The academics, specialists in business or economics, were Dr John Shields (University of Sydney), Dr Michael O'Donnell (University of Canberra) and Dr John O'Brien (University of New South Wales). Their report reviews the main published studies on executive pay, both in Australia and overseas. One chapter is devoted to examining the economic and business arguments for and against high pay for executives. The authors agree that no organization can ignore external labour markets, but list a number of reasons for questioning the current practice in Australia. | |
| Revealing results |
The most compelling arguments against high pay come from an analysis of the actual results in top Australian companies. The authors examined the data from the Australian Financial Review annual survey of executive remuneration, which covers Australia's largest 150 companies. They compared this with three measures of company performance: the return on equity, changes in the share price, and the change in earnings per share. | |
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When company performance was measured against these criteria they say, "statistical analysis shows that high executive pay levels actually coincide with a lower bottom line". | |
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Here's a typical startling statistic, amongst many. Take the 20 worst performing companies in 2000-2001, and compare them with the 20 best, measuring by the return on equity. The executives in the 20 worst performers were paid in salaries 2.5 times the executives in the best. Their shareholdings were 16 times greater than the best performers. | |
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The authors identified the best range for optimal performance. When executive salary was between 17 and 24 times average wages, company performance seemed best. Beyond that, the performance of a company began to deteriorate. | |
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The companies concerned have been paying a lot more recently for their executives. In 1992 executive remuneration for the 50 highest paid CEOs was 22 times average weekly earnings. In 2002 it was 74 times. But the cash remuneration was only part of the story. For the top 100 executives, the value of the share options they held was, on average, $11.9 million, and the shares they held was, on average, $160 million. The authors say, "There is little evidence that the greater accent on share options and other long-term incentives has enhanced shareholder value." | |
| Rewards for failure |
On the controversial issue of large termination payments to departing senior executives, the report notes that in many cases, these "golden handshakes" are many times greater than annual salary, and critics describe them as "rewards for executive failure". | |
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The authors say, "The nature and magnitude of these exit payments raise serious questions about corporate governance. Quite apart from the issue of pay equity, the phenomenon highlights a fundamental lack of procedural transparency." | |
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The authors have come up with a number of proposals for improvement. One of the recommendations relates to superannuation funds. With union and employee nominees on the boards of industry funds, the authors recommend that the union movement should influence the public debate. In addition, the investment power of superannuation funds should be used "to promote good practice". | |
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A second suggestion requires legislative change so that nominees on superannuation funds would be required to report to members on executive pay decisions. | |
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The authors welcome the attempts by the Australian Stock Exchange to promote good practice, but point out that the exchange is itself a listed company. They suggest the regulatory functions it exercises should be transferred to an independent body such as the Australian Securities and Investment Commission (ASIC).
Amongst other suggestions, the report says:
- Government purchasing policy should be used to encourage firms with moderate executive packages.
- The taxpayer subsidy of executive pay and perks should end by placing an enforceable limit on "reasonable business expenses".
- Executive remuneration consultants should be registered, and required to report to a statutory authority.
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"These recommendations involve significant legislative change and their implementation will therefore require considerable political and ethical will. They also highlight the limitations of 'self-regulation'. Executive pay is too important an issue to be left to corporate boardrooms, the remuneration consultants, and the self-regulators. If the level of wages paid to ordinary employees is rightly a matter of social and economic interest, then so too are the stratospheric sums paid to those at the top end of the corporate hierarchy." | |
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From the shareholders' point of view, the report was welcomed by Stuart Wilson, of the Australian Shareholders Association. He suggested that boards of companies employing CEOs on multimillion-dollar packages "should be seriously considering revitalising their companies by halving executive pay". | |
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Now wouldn't that be something? | |