Finance Finance News Why executive pay must be pulled back into line

Why executive pay must be pulled back into line

The reporting season will expose just how bad the problem is. Photo: Getty
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Over the next few months pressure will build on top executives to take a pay cut, and rightly so.

Big business starts its annual reporting season in August and you can be certain there will be golden handshakes, massive paydays and mind-boggling bonuses.

Excessive executive pay has become a rallying cry, and for good reason. You and I struggle to comprehend how one person could legitimately earn, as the average ASX200 executive does, $1.7 million a year.

Late last month, both former treasurer Peter Costello and the Australian Banking Association called for reform.

ABA chief executive Anna Bligh, who represents some of the biggest companies and best-paid executives on the Australian stock exchange, said on Wednesday that those earning “very generous salary packages” ought to be able to “demonstrate the value that they provide to the company and, in some cases, beyond the company’s interests”.

Mr Costello said the public feel that “banks are important but they look at salaries and say, ‘Are they really necessary? Are we getting value for money?'”

No, is the obvious answer. Executives do not prove their worth, and show little to no sympathy for these calls for greater transparency. They hide behind annual remuneration reports and claim to have little say over their pay – as the bank CEOs did when they fronted Parliament.

It’s a pathetic excuse, as the man or woman on the street can easily see that most executives are overpaid.

A survey of 1000 people by the Governance Institute of Australia, published this week, found that more than three-quarters of respondents said that paying CEOs $3 million was ‘unethical’.

Even $660,000 was considered unethical by more than half of the participants. Most thought $300,000 was acceptable.

Overpayment of executives is frustrating at the best of times, but especially when low wage growth and inequality are an open concern of Philip Lowe, Governor of the Reserve Bank.

This isn’t just lazy communication, though that doesn’t help. The simple truth is that executives simply don’t deserve the huge amounts they earn.

Take a report from the Australian Council of Superannuation Investors, which found that between 2001 and 2008 CEO pay rose by 120 per cent, or by almost $1 million. The report also found that in 2015, top CEOs took home 76 per cent of their maximum bonus. (Bonuses usually constitute of two-thirds of their overall pay.)

The market is clearly distorted.

ASX-listed companies, banks included, overwhelmingly service their home country of Australia. Sure, some companies like Wesfarmers, Macquarie and LendLease have a large international presence, but they are a small sliver of business. Others might have interests in New Zealand, the US or Asia, but these foreign markets are never their primary concern.

Thus, their pay should reflect the Australian market and local expectations.

Instead, executive pay appears to be based on what can be demanded in the US, UK and Europe.

One solution is to force executives to disclose how much they earn as a comparison to their average worker. This happens in the US, and similar movements are being made in the UK.

The University of Queensland’s Julie Walker wrote that disclosing the ratio of pay between workers and executives places real constraints on what the boss takes home.

When I discuss this issue with remuneration advisers and business leaders there is an understanding that transparency, realigning packages and cutting the pay of some is needed.

No, I don’t expect that to happen overnight or in this reporting season.

But as the focus on what the boss earns continues, hopefully it will come back into line with community expectations.

Conrad Liveris is a corporate adviser on workplaces and risk. He holds a Certificate in Governance and Risk Management and a Master of Commerce.

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