News on the multi-million dollar salaries paid to the CEO’s of Australia’s largest companies inevitably raises questions about whether they are worth the big bucks. And the results of the highest paying companies last financial year indicate they may not be.
A major US research house, MSCI, has had a look at the American situation and concluded that when it comes to CEO pay and long-term company performance, “more than 61 per cent of the companies we studied showed poor alignment relative to their peers”.
That means that CEO pay in most companies does not bear a relationship to company performance over the 10-year period.
And the accepted wisdom of using equity incentives for CEOs to boost company performance looks to be be flawed. MCSI research chief Rick Marshall made the observation in the report that “the 40-year-old approach of using equity compensation to align the interests of CEOs with shareholders may be broken”.
Natalia Nikolova, senior lecturer in management at University of Technology Sydney, told The New Daily “many studies argue performance is not strongly related to executive pay.”
But there’s the whole executive remuneration industry working on the belief that it is and executives aren’t going to put their hands up and say ‘we don’t need high payments.'”
So what does the situation look like in Australia? MCSI hasn’t run the numbers here but The New Daily has taken a quick look at the performance of the 10 companies with the highest paid executives over the last year to get an idea of their performance.
Here’s how our analysis looks with the top payers compared to the ASX average profit growth figure of 12.6 per cent for the 2016/17 year.
While that is not quite the same as the MCSI research over 10 years it does give an indication of relative performance of the top paying companies with the market in general.
One interesting thing to note is that only four of the top payers bettered the ASX profit performance average. And one of those, Ramsay Health, was only 0.3 per centage points above the average.
To be fair, Qantas, despite slipping 17.2 per cent, was coming off an all time high in 2015/6. But CEO Alan Joyce saw his pay almost double to $25 million in the financial year just gone, pushing him to what is likely to be near the top of the list when the latest figures are available in a few weeks.
And CBA chief Ian Narev took a pay cut of $4.8 million last financial year as a result of the litany of financial scandals to hit the bank in recent times.
But with the majority of top paying companies underperforming the ASX, shareholders could be forgiven for wondering what they are getting for the big bucks paid to CEOs.
Another interesting thing about the list of top payers is that six of the top ten payers aren’t even in the to 20 companies in terms of size. So shareholders often aren’t remunerating CEOs on the value of the assets they oversee.
Source: ASXThe biggest companies might struggle in the next few years to perform as well as they have recently, according to Roger Montgomery, CEO of Montgomery Investment Management.
“Telstra has not grown it earnings in 18 years and the big financials and miners will have problems performing as well as they have over the last five years. That means about 40 per cent of the ASX is challenged in terms of performance,” he said.