(article published in The Australian)
A top-performing company will reward its most senior executives with a generous salary.
This is because it's a top-notch performer and the hard-working execs deserve every dollar.
Right? Well, not quite.
We've all suspected a gaping disconnect between remuneration and performance, but now a maverick remuneration consultant has offered us a behind-the-scenes understanding of how the problem has emerged.
According to Greg Brogan of Executive Pay Systems, most remuneration schemes are a "joke" because they're tied to market-linked measures, rather than genuinely robust performance criteria.
For instance, most boards argue that they need their CEO's pay to fall in the "top quintile" of comparative global pay in their industry. That sounds fair enough, but if every company strives to pay above the median salary, then the average package just keeps notching higher.
Brogan contends that while they are meant to be the CEO's master, boards are scared to tell the CEO he's overpaid. After all, if the CEO spits the dummy and creates problems, the directors might be held to blame.
On Brogan's analysis, remuneration for most blue-chip execs has risen far in excess of performance.
For example, Qantas's top five executives received a 200 per cent-plus pay rise between 2002 and 2008, but the airline's return on capital employed -- the most generous measure -- grew only 84 per cent. And Qantas is a typical case study, rather than the worst example.
Brogan doesn't offer a definite solution in terms of the ideal remuneration formula, apart from the emphasis shifting from what others are paid to genuine performance measures.
Even if a company proves a dinky-di bottler during the CEO's reign, problems can emerge long after the options or incentive shares have been cashed in. Over at the ANZ, former CEO John McFarlane's legacy as a charismatic fixer has been tarnished by the lending scandals, which resulted from practices at the bank during his time.
Criterion doesn't believe top execs should work for peanuts, or even pistachio nuts. But we would suggest that any CEO claiming to have a global market worth needs to prove just that. How about producing those letters of offer from top US or European rivals?
Disturbingly, Brogan's research that few blue chips have been able to justify executive salary increases on the basis of performance -- and that's whether you use return on capital, return on equity, net profit or total shareholder return.
For shareholders, it's pretty hard to determine a good or bad investment on the basis of executive pay levels. But it would help if they asked their board tougher questions about why they need to pay their CEOs in the "top quintile". After all, if a company is so top-notch -- and aren't they all -- top candidates will be throwing themselves at their portals.
Criterion has a penchant for boards and CEOs that lead by example but, frankly, they're the exception rather than the rule.
Woolworths has been one of the best performers of the past decade. Paul Simons, who ran the retailer until 1994, subscribed to an unusual policy that the highest-paid exec be paid no more than 30 times more than the lowest-paid toiler.
While Woolies ran the show out of a shoebox in George Street, Coles Myer's inept custodians were luxuriating in their infamous Battlestar Galactica HQ in eastern Melbourne.
We can't assert that Woolies' past high-end thrift contributed to its ongoing prosperity, but surely it did not harm when it came to lecturing the rank and file about the need for efficiencies and such.
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