Commentary
(article published in The Australian)
The Kevin Rudd-led push for executive pay restraint has won support from an unusual quarter.
In fact he is a maverick remuneration consultant who accuses "cowardly" boards of not standing up to the pay demands of chief executives.
Greg Brogan, a 25-year industry veteran who runs his own consultancy, Executive Pay Systems, says remuneration has risen far in excess of performance through the overuse of market-linked methodologies.
Unlike Rudd, Brogan says that with banks the solution lies not in regulation but in boards standing up to chief executives. "The CEO works for the board and the board is meant to be the boss," he says.
"Now the crunch has come and the evidence is that all is not right, it is time for the board to step up and take charge."
Brogan says boards justify the salary structures on the basis of expert advice, but few outsiders know how the process really works. He cites the "mathematical idiocy" of the peer-ranked method, in which a board is advised the CEO should be better paid than the "median" salary in that sector.
"No one is ever advised to pay below market median for fear of not being able to attract and retain the executive talent." By definition, 50 out of 100 peer companies are paying sub-median packages, he points out. "So how come they don't have to pay median or above to avoid the diabolical risk of losing such an exquisite set of talented executives?" he asks.
Boards argue that they have to compete globally for talent -- thus justifying far higher salaries -- but performance measures are linked to local peers, which (until recently) produced softer performance hurdles.
"Basically it's nonsense (but) executives and CEOs didn't question it because they didn't want the gravy train to stop."
On his analysis, few listed stocks have performed in line with with executive pay increases, as measured by nine performance indicators.
For example, Qantas's top five executives enjoyed a 200 per cent-plus pay rise between 2002 and 2008, but the airline's return on capital employed (ROCE) -- the most generous measure -- grew only 84 per cent. The trends are the same with the ANZ Bank (pay up 65 per cent, ROCE up 15 per cent), Lend Lease (250 per cent, 100 per cent) and CSR (100 per cent, 10 per cent).
Brogan says these companies are not the worst performers, but typical of corporate Australia.
He urges boards to adopt performance indicators and "religiously adhere" to them.
Brogan used to advise on schemes for upper-level executives, but found his counsel often went down poorly with remuneration committees.
"The fact that executives were not performing was not a very palatable suggestion, particularly where the board would be held accountable if the CEO was to leave," he says.
Brogan now specialises in performance-based schemes for lower to middle market. "Ironically, CEOs have no bones at all about imposing rigid performance criteria at the lower levels."
