Nowhere is the disconnect between the business fraternity and the wider community greater than on the issue of executive salaries.
Forget trying to explain a $10m-plus pay packet with references to “international benchmarks” and “long-term incentives”. The public simply doesn’t accept that anyone, no matter how brilliant, is worth $190,000 a week - or 150 times the average salary.
Given this depth of anger among voters towards the occasionally obscene salaries received by our corporate leaders, the Rudd government has shown remarkable restraint on the issue.
Sure, at times, it’s been decidedly populist. It announced the Productivity Commission’s review into executive salaries during the public outrage over Sue Morphet’s misunderstood pay rise at Pacific Brands. And, from Kevin Rudd down, there’s been plenty of rhetoric.
But the government could have taken the easy, vote-winning route and reached for the big stick, setting caps and other artificial limits on executive salaries. Instead, it has tacitly acknowledged that, despite the headlines and a few terrible abuses, the system of setting executive pay isn’t broken; it just needs a little strategic tinkering and strengthening.
The Productivity Commission report on Executive Remuneration in Australia, released today, should ease fears in the business community about the introduction of a prescriptive, legislated approach to setting salaries. By and large, it says the market is working, corporate governance in Australia is at a high standard and average salaries, despite soaring in the past decade and a half, are still well below those in Britain and the US.
But there are areas where change is needed. In particular, it wants more independent thought on boards’ remuneration committees, which set pay for the executives. One of the chief criticisms of companies is that their compliant boards, advised by self-interested consultants, have waved through huge and poorly understood pay packages for their top executives.
The Productivity Commission, which recruited the consumer champion Allan Fels for the report, also wants bonuses tied to real, long-term performance rather than to short-term returns that rely on risk-taking (that could endanger the company in the long-run) or plain dumb luck. It wants simpler, plain English explanations of executives’ pay in annual reports.
And it wants to end the practice of executives using complicated investment tools, such hedging, to take the downside risk out of the options and shares they’re issued in lieu of cash. If they can’t lose, where’s the incentive to improve the company’s performance and share price?
Finally, the commission wants to give shareholders more say. It, sensibly, resisted the temptation to give shareholders a “binding” vote on executive pay at AGMs. Instead, it recommended a kind of two-strikes-and-you’re-out rule. If more than 25 per cent of shareholders vote against your remuneration report at the AGM, you have to come back the following year and explain any action you’ve taken. If you cop another 25 per cent-plus vote, the entire board has to put itself at the mercy of shareholders by going for re-election. That’s a good compromise.
Business leaders insist the system is working just fine and that the few “outliers” – in particular the massive, inexplicable termination payments for executives who have failed – are moral rather than market failings. The trouble is, these outliers are usually found at our blue-chip companies, the ones we should trust the most.
It’s up the business community, particularly compliant boards, to get on top of the issue. Or the government, with the anger of voters ringing in its ears, really will reach for the big stick.
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