Finance Finance News The million-dollar ‘dark art’ of CEO pay is eroding our trust

The million-dollar ‘dark art’ of CEO pay is eroding our trust

'Executive pay is so complex it leads to risky outcomes for business.' Photo: Getty
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Parliament and the Australian public are right to ask questions about the “dark art” of executive pay – even insiders will tell you it has become excessive.

After revelations that CEO Ahmed Fahour is earning $5.6 million a year, Australia Post chairman John Stanhope will be hauled before the Senate to justify the salary and bonus. But we probably won’t like what we hear.

After spending time with the big hitters of corporate Australia, you realise these are the most confident and self-assured people you could meet. Overseeing billion-dollar deals and thousands of jobs, they need to be.

That is, until you discuss executive pay. Australians don’t like to talk about what they earn at the best of times, let alone when they are approving million-dollar bonuses.

Decision makers know people are paid beyond what is acceptable and they know people are starting to ask questions.

One director of a bank told me he considered executive pay a serious risk for his organisation.

Another leading business figure called executive pay a “dark art that few know how to practice”.

That’s a truth few would admit.

Shareholders and the public are right to ask for explanations on what senior management gets paid. When I review pay structures for companies, that’s my first question.

In the case of Ahmed Fahour’s $5.6 million package as CEO of Australia Post, I would ask them to explain how they assessed his skills and his value-add to the company to come to that dollar figure.

Confidence quickly becomes overshadowed by vague justifications. They push it down the food chain or across to what their competitors are doing.

Those answers won’t stand the test of scrutiny forever. A better explanation is increasingly expected.

The truth is, executive remuneration has been taken out of the hands of shareholders and thrown to the accountants and lawyers.

The number crunchers and those who fret over compliance are more concerned with regulation than the best interest of the organisation. Industry standards, ASIC and ASX by-laws along with assumed best practice mean the average remuneration report is now dozens of pages of charts and legalese.

Australia post salary
Ahmed Fahour received a $4.4 million salary and a $1.2 million bonus last financial year. Photo: AAP

Any public company has to publish a remuneration report each year. If you’re looking for a test of patience you should download one and try to figure out what they’re talking about.

When I reviewed hundreds of these reports last year I realised it isn’t that boards were necessarily endorsing the big dollars for their management.

Instead, they are overwhelmed by a culture of compliance and uniformity. And so they become virtual carbon copies of each other, an issue governance experts are taking note of.

This uniformity has been developed over decades of applying the rule of thirds. Execs are paid one-third in a base salary, another third for short-term returns and the final third for long-term growth.

That makes sense in theory, but compliance needs to be fused with the expectations of the public. It currently is not.

Until this happens, trust in Australian business will diminish.

Customers and staff become sceptical of their intentions.

And that jeopardises both business confidence and the strength of the Australian economy.

Conrad Liveris is a workforce diversity specialist and completes a yearly review of executive remuneration.

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