TONY SMITH. CEO remuneration and socio-economic decline

Superannuation investors are keenly interested in income distribution patterns. They also monitor the ethics of companies in which they might invest. Recently they published a report of research into the Australian Stock Exchange’s top 100 Chief Executive Officers. The report found that CEO salaries and bonuses continue at obscene levels and that their remuneration has little correlation with performance.

The report by the Australian Council of Superannuation Investors found that the median pay for top CEOs was some $4.5m. and that the median bonus was $1.6m. In the context of the negative findings of the royal commission into financial institutions it is surprising that only one CEO was denied his bonus. Such excess does little for public confidence.

The top ten CEOs – all males – had pay of over $10m. On average male CEOs earn $1m more than female CEOs. Median pay for CEOs has risen 25% in five years while worker pay has declined. The CEO earns in the order of 78 times the pay of an average worker.

The disparity in remuneration between CEOs and workers is a symptom of the current economic malaise and is a factor in declining productivity and performance. It is no secret that retrenchments are invariably accompanied by rises in share values. Yet sackings also cause discontent in the workforce, drive down wages, bring uncertainty to local communities and compromise safety. Maintenance of machinery is made more difficult, workplace accidents increase, corporate memories are lost and customer service suffers.

It has always been a central Liberal Party claim that it is a superior economic manager. Not surprisingly, when the Liberals come to power, what passes for a demonstration of this efficiency is really a complete abrogation of management authority. Rather than show how they can manage public utilities and make them profitable Liberal governments do no more than sell the asset off and make an illusory profit which they then squander. There is a distinct parallel between Liberal ideology and business philosophy.

Liberal governments have always been keen to privatise profits and socialise costs. Businesses have similarly sought to maximise returns to investors and executives and the easiest way to do this when government is sympathetic is to drive down the returns to the workforce. This is a zero sum game.

Prime Minister John Howard was sometimes criticised for lacking a vision for Australia, but much of the criticism was inaccurate. He had several aims including that of making Australia the world’s biggest share-holding democracy. Perceptive observers criticised Howard not for lacking vision but for the likely impact of this policy. In particular, it was plain that as public assets were privatised the common wealth which binds society would be diminished and perhaps lost forever. Commitment to the common good would become illusory. While the free marketeers raged against the cradle to grave care of the nanny state, placing public assets into private hands ensures that people are confronted at every moment of their lives by corporations driven by the profit motive.

The failure of shareholders to discipline CEOs and rein in these obscene levels of salaries and bonuses becomes more alarming in the context of government privatisation policies and laissez faire attitudes to the market. No one who has attended an annual general meeting of shareholders could be impressed by ‘corporate governance’. The lack of democracy is all too obvious. It might even be that the current discontent with politicians reflects the impact of corporate style on politics. Rather than being able to control the excesses of corporations, politicians want to emulate them. Recent revelations about former ministers taking jobs in areas where they once made decisions suggest that the corporate world has influence on government both overt and subtle.

A friend of mine named Ned was a prime mover in a Social Developers Network. He dedicated his life to undertaking the kinds of work which he felt society ought to be able to expect from their governments but which economic rationalist philosophies increasingly left to profit driven corporations. Governments have been abandoning even basic functions such as health, education, protection of environment and conflict resolution. One of Ned’s suggestions was that a ceiling should be placed on salaries for all Australians, a desire that all should live more simply so that all might simply live.

Capping CEO salaries runs counter to the free market ideology which adheres to the discredited notion that wealth trickles down from the top of town to create jobs. They will rant against any proposal that seeks to rein in corporate greed. They will seek to characterise such suggestions as bolshy but in reality, these excessive salaries create social tensions which governments are unable or in the case of Liberal Party governments, unwilling to resolve. Corporations are now so embedded in social life that they must be held accountable for their actions.

Dr Tony Smith is a former political science academic with interests in elections, parliament and political ethics.

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5 Responses to TONY SMITH. CEO remuneration and socio-economic decline

  1. Charles Lowe says:

    As is almost always the case, the question is not “How hard do we wring our (impotent) hands?”.

    The question is the one that governing politicians face daily: “What can we do about it?”

    Simple. We persuade Labor to do what it has eschewed since at least 2007 (when I first wrote to Penny Wong (the then Opposition Industry Spokesperson) proposing this).

    Firstly we amend the Corporations Act by inserting this additional clause: “A non-natural but legal person shall behave toward a natural and legal person as if that non-natural but legal person were a natural and legal person.” Which means that company directors can be sued for not exercising empathy in their decisions.

    Sued as a proportion of the exhorbitant “salaries” they command. If Director of COmpany X receives $20M recompense per year and Director of Company Y receives $2M per year and each commits the same non-empathic behaviour: Director X pays 10 times what Director Y would.

    Is Labor up to this?

    No. Not until the NSW and Federal branches do what Andrews has done in Victoria; reform its electoral donations laws.

  2. Paul Rowe says:

    Great article , gets to the nuts and bolts of the matter . Executive remuneration is so out of control in this country now in fact it’s obscene .
    We constantly hear from them that they , boards , have to offer big $$$$$ to attract the best person for the job , often comparing them to Wall st , while it’s workforce is compared to China and India , where if you survive the redundancy chain , you are often faced with doing more , with less staff for less or stagnant pay . Some companies even have a policy of what is acceptable as a pay increase . Supposedly they call this a democracy , where an enterprise system is decided before you even Bargain. Sally Mcmanus was right , the system is broken and there is much evidence out there to back up those claims

  3. steve jordan says:

    Tony, in addition to the huge salaries of executives, it appears from a quite recent report on the share trading by directors, that they are using their insider information as a basis for these trades. However, the practice does not fall under the legal definition of insider trading for some reason ; who knows why?

  4. Peter Dixon says:

    Absolutely, and shamefully, true! Rob Stewart might be pretty right, too.

  5. Rob Stewart says:

    Agree with everything you say Tony, especially about the rapacious greed of the Top End Of Town. Just a couple of comments though. Your article focuses on the fostering of this disgrace as a special area of expertise in derelict government and governance when the Liberals are in office. I would argue both sides of our single major party (the LibLab Corporate Welfare Party) are guilty of it, particularly since Labor started selling its principles out as neoliberal and neo-globalisation became ascendant from the late 1970s. The Hawke/Keating Government’s did some good things but they couldn’t sell public assets off quickly enough – think CBA for a start – Howard was furious that there would be nothing left for him to flog off. Similarly the Democrats in the US and Labour in the UK.

    The ALP’s appalling loss in the last election was a key moment in my opinion. So shattered by the loss Albo seems lost in terms of where to go. But I will guess it will be all pro business. Apparently you’re not even allowed to say “top end of town” in the ALP anymore. There is no class difference, Point Piper is just the same as Port Pirie. All you have to do is “have a go and you’ll get a go”. Just ask Scomo.

    You can rest assured corporate greed and excess will be locked in when the ALP eventually gets back in.

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