When it comes to executive pay, the market is broken. The game, you might say, is rigged.
Chief executives and their assorted lobby groups are fond of saying ”that’s the market” when there’s a need to defend the massive salaries. ”Look at America,” they cry. ”You have to pay top dollar to attract the best talent!”
Indeed, look at America. The Wall Street protests are now in their fourth week. And even though the protesters have struggled to identify – let alone voice – a clear message, they know something is awry.
But we digress. Nowhere is the challenge to the capitalist system more clearly enshrined than in the debate over executive pay. Here – the system’s ultimate incarnation of self-interest – is where the rubber really hits the road.
Once again this year, executive pay is rising strongly while share prices are down and returns to shareholders falling. If capitalism were functioning efficiently, executive pay would fall when returns to shareholders decline; pay would match performance, risk would match rewards. Yet they don’t.
In the case of executive remuneration, pay has failed to match performance for 20 years – ironically ever since the mandatory disclosure of salaries was introduced in the early 1990s and the ”me too” pay spiral began.
A recent study by the Australian Council of Super Investors (ACSI) showed median chief executive fixed pay among the top 100 companies rose 131 per cent during the decade to 2010, and the median bonus increased by 190 per cent. That far outstripped the 31 per cent increase in the S&P/ASX 100 over the decade to June 30, 2010.
BusinessDay’s cover story at the weekend found base pay was up last year by 9 per cent and total remuneration edged down 1.3 per cent. It might stall but it doesn’t fall.
We have workers’ pay rising at roughly 3 per cent a year, and the average super fund return over the decade at a little more than 3 per cent as well. Nonetheless, executive salaries have witnessed double-digit returns.
How can this possibly be regarded as a functioning market, as capitalism? The market is broken. Supply and demand are not intersecting efficiently. On the supply side, there are plenty of contenders for CEO roles. Scarcity is a bogus argument – especially as there is no credible evidence that paying more money achieves a better result.
The alpha-male types who inhabit high ranks are there as much for the competition, the power and the vanity, as they are for the money. Will $10 million make a Gail Kelly or a Ralph Norris perform twice as well for Westpac or Commonwealth Bank than $5 million?
Sol Trujillo, the former Telstra CEO drafted in at great expense from the US, is the quintessential example of frittering away shareholders’ money on a false proposition – that Telstra had to go to the US and pay top dollar to get the best talent.
Top executives face pressure, long hours and enormous responsibilities. Of that there is no doubt. They should be compensated for that. Theirs is a cutthroat game, an occupation whose rewards should reflect its risks.
The question is one of degree. It is simply one of numbers – the market.
It should never be forgotten – although it often seems overlooked – that executives are not the owners.
The owners of the company are the shareholders. The board of directors, on behalf of the shareholders, appoints the executives and decides the salaries.
This is the theory, but sadly, the reality is the executives behave like the owners and the directors too often act in the interests of the executives rather than the shareholders.
This ”market for executive labour” is also broken because of the large voting blocks of shares controlled by institutions.
Many years ago, these money managers were typically low-key types, but the explosion in super money in the 1990s entailed a concomitant explosion in fund managers’ fees and salaries.
Suddenly this was a large industry, feting itself with awards and excessive fees. The stars at MLC, Perpetual or Colonial, for the sake of example, were now in the same remuneration league as the executives of the companies whose shares they controlled. They, too, were simply stewards of other people’s money and both needed the other to justify their own largesse.
Executives only have to keep a few big fund managers ”sweet” to get their pay rises approved. Even if small shareholders revolt, via a rejection of the non-compulsory ”remuneration report”, the fundies are usually reticent about rocking the boat.
Yes, they do deploy their proxies to reject executive excess from time to time, but this is the exception, not the rule.