The usual justification for the exorbitant CEO remuneration packages offered by Australian public companies is that such riches are required to attract the very best executives through a global search effort. Further, the claim is that remuneration is tied to performance and, as such, is justified. The stark evidence of public company performance is clear – it isn’t working!
CEO pay is typically comprised of three main components: salary, short-term incentives for performance and long-term rewards for performance. Performance bonuses should be aligned with real, sustained profits and shareholder risk. Simply increasing performance over the previous business cycle is hardly worth a huge reward if the company remains a poor performer in the market. Long-term rewards measured over three years are not aligned with the investment performance horizon of the investors.
Recent research has shown no significant correlation between an imported CEO and company performance. There have been controversial successes such as Paul Anderson for BHP (still a non-executive director of BHP Billiton), recognised failures a plenty and hotly debated incumbents like Sol Trujillo at Telstra (who recently announced his resignation). Many credit Westpac for the explosion in CEO remuneration in Australia due to its generosity with Bob Joss. Joss joined Westpac in 1993 on an annual salary of $1.9m, almost equal to the combined salaries of the other big three banks’ CEOs. Combined with his executive options package, Joss left Australia after six years with around $40m extra in his pocket.
To add insult to injury, a failed CEO can expect a handsome payout for being fired. While the average Australian worker who is fired considers themselves lucky to receive their employee entitlements, a failed CEO who has cost a public company and its shareholders millions (or billions) of dollars can look forward to a ‘Golden Parachute’ – a multimillion dollar payment to disappear quietly and leave the company to lick its wounds.
For more than a decade, the Howard government was deaf to the cries from the public to rein in the soaring disparity between CEO compensation and company performance. The Howard Government was equally immune to repeated warnings about the commercial and social consequences of the ever-widening gap between CEO remuneration and employee salaries. On both the governance and social issues, the Howard Government did nothing – or worse, facilitated the excesses of the CEO.
Now there is a ‘bipartisan’ push to make the vote on executive pay as described in remuneration reports more than symbolic. This is another ill-considered, knee-jerk response using an ineffective lever for a system that is already broken.
The Global Financial Crisis (a gift from our good friends, CEOs in the USA) is bringing many of us a lot of pain and there is plenty more to come. However, it also brings us a rare opportunity for change. Let’s use this time of pain to make painful changes so that when we hit the upswing, we have a better system.
The Rudd Government has shown leadership in this area and should step up now with the commitment to change for the better. Our legislators and regulators should establish a maximum level of CEO fixed remuneration (say $1m/yr) and a standardised formula for relating company performance to short-term and long-term CEO bonuses. FBT and other mechanisms already provide for sensible tracking, disclosure, management and costing of benefits. As for ‘Golden Parachutes’ the regulators should heed the call to end this heinous practice once and for all.
We need responsible, accountable, transparent governance of our public companies and institutions. No one needs a million dollar salary, as much as most of us would like to have one. Executives, the people who actually manage a company, should be held to at least as high a standard as the directors, who already face very real personal liabilities if their stewardship fails in any way.
A key responsibility of a competent CEO (or manager at any level) is to groom candidates to replace the incumbent. Let’s grow our own, Australian CEOs, attract home expat Australians who have the experience and networks to fill the CEO role. Australian studies have consistently reported Australian management as in decline for over a decade. Let’s use this time of imposed pain to go through the painful process of shedding our old prejudices, stop copying the failing American model down the gurgler and build an organic capability to manage and lead our own businesses in the 21st century.
Jordan Green is an experienced CEO, Chairman/Non-Executive Director and investor. He serves growth companies as a non-executive director and/or adviser with a focus on managing and mitigating the execution risk of a business through effective governance and management. Email: jordan [at] ieee.org
Photo: wwarby (Flickr)