CEO pay is obscene but it's not the real issue

Sydney Morning Herald
October 4 2017

Yes the pay is obscene, but don't be distracted.

According to some estimates, US chief executives earn somewhere around 400 times the salary of the average worker in their companies. Four hundred times.   

Few people would begrudge successful business people a little extra for the hard work and effort to get to – and stay at – the top. But that's more than just a little extra.

By comparison, the average Japanese chief executive earns around 50 times the average worker's pay, and the British 180 times. The ABC recently reported that among an Australian sample, chief executives received between 15 times and 100 times the average employee's pay packet.   

It's a brave person who argues that any chief executive could objectively be worth up to 400 times what they pay their employees, no matter who that manager is.

And that's the problem – these things aren't objective. There's a very nice little self-reinforcing process that sees compensation consultants paid for giving advice to boards as to how much executives should be paid.

They do it by comparing the salaries of similar chief executives – whose pay was set by comparing them to similar chief executives … and so on.

It's the corporate version of keeping up with the Joneses – and shareholders are footing the bill.

Those numbers blow out even further, though, when you add short and long-term bonuses to the mix – which often dwarf a corporate boss' regular salary.

It's obscene, and should be changed. But, it's a sideshow, and here's why.

Yes, those at the top of the tree are paid a comparative fortune. And they often receive bonuses on top of that for cutting costs, including laying off staff.   

But on a per share basis, those salaries are almost always close to a rounding error. That is, when amortised across the company's owners, even if pay was cut in half, shareholder returns wouldn't improve by any noticeable amount.

For example, CBA's outgoing boss, Ian Narev​, earned $5.5 million in the last financial year, down from $12.3 million in 2016.

That's a fraction of 1 percent of the company's $130 billion market capitalisation. And it's still a fraction of 1 percent, compared with the company's recently announced $10 billion profit.

Narev could have worked for $1, and shareholder returns wouldn't have improved perceptibly.

The problem, then, isn't that being paid too much impacts shareholder returns in the year the salary is paid. Ideological concerns aside, paying Narev (or most other ASX-listed company chief executives) less won't move the dial.

Instead, we should look to incentives. While Narev's $5.5 million doesn't mean anything financially to CBA shareholders, you can bet the fall from $12.3 million the year before was keenly felt by Narev. The reverse, for chief executives who did receive big bonuses, is almost certainly true.

There are a couple of nice aphorisms that, together, highlight the real problem: "Whose bread I eat, his song I sing" and "What gets measured, gets done" summarise the challenge neatly.

When you offer a corporate executive a lotto-winning-equivalent amount of money for achieving certain objectives, you'd better believe it focuses the mind, and drives certain behaviour (and if any chief executive tells you it doesn't, then suggest they give the bonus back. I'll bet they don't).

But bonuses are paid on notoriously short-term results – usually a single year's performance, sometimes three. And the metrics used? Company profits and share price gains.

So let me give you an analogy. If I'm being remunerated on managing your car's financial performance over the short term, it's easy to manage. I won't bother getting it serviced. I won't replace the tyres, even though the tread is getting low, and I'll put cheap fuel in it. Then, I'll show you how much money I "saved" on car maintenance and you'll give me a bonus.

Then, I'll sell it for you, being a little economical with the truth when talking to the buyer, and showing him how little it costs to run. Impressed, he'll pay me more, sending the car's price up. Bingo, a higher sale price, and another bonus for me.

Of course, the costs aren't sustainable, and the car was overpriced … but I don't care: I've received my bonus and I'm off to greener pastures. The car is someone else's problem now.

Chief executives are objectively paid too much money. There is a real issue of social equality at play.

But even when it comes to a purely financial transaction, the system is broken. The simplest fix – though chief executives the world over would complain bitterly – is to pay bonuses to chief executives based on the company results over the following five years.

That way, they're incentivised to set a company up for long-term success – not just put lipstick on a pig.

Why is union corruption so obscene ?

Why are the Labor pollies such incompetent imbeciles ?

Is it because they are the best union brown nosers ?

The side benefits do not justify the perpetuation of the status quo as described.  As usual, you mistake what has been a genuine mix of capitalism and socialism for pure capitalism.  If pure capitalism had been permitted to reign, you can pretty much guarantee that many of the social and health issues pertaining today would not exist.

For example, without universal healthcare, with its inputs of cash to health professionals and such, how much real forward movement would there have been in health research and treatments?  Without the 'free tertiary education' that came into play,  how much real forward movement would there have been in those same arenas?

Capital, rather than seeking advances and thus profit from such advances, would have been content to remain in industry and mining etc, where the returns were guaranteed and the cash grabs are quick.  In fact, you see a lot of that going on right now, with the Flight of the Mild Geese to the 'cheap labour nations' -  which is, as I've outlined before, a short term fix and a move that contains within itself the seeds of its own demise.*

*As those nations 'rise' in economic activity, and the Abandoned Western Nations slowly subside into the same mire as currently occupied by those Cheap Labour Nations as a result of lack of production and of genuine opportunity and prosperity, trade will inevitably come to a standstill.... and once that happens........ that short-term fix will die.  Without an adequate return on labour and an opportunity for genuine national and personal prosperity HERE, and a continued disparity between earnings in one nation or another, meaning that the 'richer' will continue to buy produced goods - that is the inevitable result of this Flight of The Mild Geese.

As for 'power structures' it sounds like you are again mistaking some mythical 'right' of a self-appointed 'better class' to dictate terms for a genuine balance of power within a society.

Narrow-based power groups, such as 'business' people, have been proven over and over again to be far too often a bunch of total bugger-ups, who are capable of making the most monumental mistakes costing billions and showing talent only in escaping with the pot of gold hidden within the company framework. 

Any unconstrained 'power structure' is a disaster waiting to happen, and it is appalling that such as one as you would even consider that kind of Hitlerist/Stalinist structure to be a socially  and economically valid one.

When there is a fair balance of rights for all, including Unions, this nation functioned much better.

I think at times you, aquascoot, mistake elitism for some kind of divine right.

Again you are mistaken -  trading with those nations has no value to Australia when Australia is unable to sustain a level of prosperity for all, and the end result will be that this 'cheaper' output will rust on the wharves.

The majority of people in those nations have not risen out of poverty, but are enduring the evils of the rise of a comparatively 'wealthy' industrial working class, which necessitates a rise in the costs of everything else, thus ensuring that the real 'status quo' remains the same = poverty. 

It is of no value for a a Thaimbodian to be able to buy a fish and a bag of rice one day for $1 and the next for $2.  If it were true that poverty was being abolished, why then do the rates of infant mortality etc not change for the better?  Why would those companies go there in the first place if it were not for the opportunity to exploit CHEAP labor.

At the same time, the abandoned 'high labour cost' countries are suffering a rise in poverty and a decline in real earnings, and thus are steadily becoming less and less able to buy finished products.

Impoverishing one nation to marginally raise living standards in another is doomed to failure as an economic strategy.  All you end up with is two poverty-ridden economies, and your production staggers to a halt, since neither the exploited peoples can buy your high-priced cars nor the people of the nation you have abandoned.

Fair trade would fail when everyone goes "market price".

Grappler Racist Filth wrote on Dec 27^th, 2017 at 11:29am:


Sorry Grapples but you haven't thought that one out. If there is a selling price then automatically there must be a buying price. Somebody saw value at that price and bought it. That my dear Grapples is a market.

juliar wrote on Dec 27^th, 2017 at 11:45am:



Now those are the kinds of social and human standards we need here... we all need to be as desperate as an Asian and all need to live at the bottom of the pile so as to make those at the top feel good.... everyone should be an absolute serf to the Stalinist state and be totally owned in every way by that State, so as to benefit its Emperor and Mandarins with billions of dollars.

And we all need to learn to be knock-down, drag-em-out without any notice psychopathic thugs in life - rip into people without warning and stomp on them like some gang of raiding Vikings setting upon a peaceful village - apply the same standards as the one-hit thugs in the streets, go back to the days of the apes, lest we be swamped by decent human beings.