Right: Former NSW Treasurer Michael Costa: " ... companies will offer large remuneration packages in order to attract the best corporate talent available".Arguments against reducing CEO salaries and termination payments
1. Moves to limit payments to CEO are politically motivated
It has been claimed that bids by political parties all around the world to rein in executive salaries are an attempt to curry favour with voters. It has been suggested that governments are only concerned to be seen to be punishing CEOs so that the electors will not vote against them.
In an analysis published in Alertnet on August 25, 2008, Sarah Sanderson wrote of the situation in the lead-up to the United States presidential election, 'Politicians from both parties finally appear to be seeing which way the wind is blowing on this one. Last year, a Financial Times/Harris poll revealed that 77 percent of Americans think chief executives "earn too much." And that sentiment has likely intensified in 2008, with one banker after another walking away from the mortgage mess with overflowing pockets.
The presidential candidates have responded to public outrage over bloated CEO pay by promising to boost shareholder power over executive pay packages. Barack Obama is the sponsor of a Senate bill that would grant shareholders a nonbinding advisory vote each year. John McCain has suggested he'd like shareholders to have veto power.'
Similar comments have been made about the efforts of the Australian government to limit executive salaries. Michael Costa, in an opinion piece published in The Australian on March 27, 2009, stated, 'The problem with the Government's announcement is that it is not motivated by concerns about transparency. It is another childish attempt to blame our economic problems on executive greed. It also is an attempt by a desperate government to extricate itself from its failure to get Pacific Brands to change its decision to move part of its operation offshore.
By linking executive remuneration to class war and broader economic problems, Swan is following in Kevin Rudd's ideological footsteps. Swan asserts that "the largesse of the last decade has been a slap in the face of many working people" and that many recent payments to executives have been viewed as obscene.
It may be true that many people are angry about executive salaries but that doesn't provide grounds for the Government to engage in a general attack on chief executives and the corporate sector.'
2. Moves to limit payments to CEO will reduce corporations' capacity to attract the most able corporate managers
It has been claimed that high salaries allow companies to attract the most talented corporate managers. It has further been claimed that in a globalised corporate environment, Australia and other nations must offer large salaries to attract the best chief executives the world has to offer.
The Age's political commentator Michelle Grattan noted in an opinion piece published on March 19, 2009, '[Limiting CEO salaries] arguably creates head-hunting problems, whether attracting top talent or undertaking the search.'
Janet Albrechtsen in an opinion piece published in The Australian on March 3, 2009, also noted that if the Australian Government excessively regulates corporate salaries it will become very hard for Australian companies to attract talented executives. Ms Albrechsten argues, 'In a globalised world, talent flows from the area of highest regulation to the least. While some loss of local talent is inevitable because we can never, and should never, match the jurisdiction of least regulation, why make it dramatically worse in return for no real benefit?...
We accept easily the vast amounts paid to golfers, tennis players, rock stars and actors. No one ever whines about the pay discrepancy between a key grip and lead actor. Why do we constantly invoke such meaningless comparisons in the corporate sphere? We should be encouraging our best and brightest to run our most productive enterprises. While it may presently be fashionable to complain about the undoubted mistakes in executive compensation, let's not substitute a system that drives talent out of our key businesses.'
A similar point was made by Michael Costa is an article published in The Australian on March 27, 2009. Michael Costa states, 'Highly skilled executives command large salaries. Just because governments and sections of the community believe these salaries to be excessive or obscene doesn't mean they are wrong. Morality has nothing to do with it...
The market for chief executives is not the same as the market for production workers.
Many factors explain the growth of executive salaries and the relative decline of production workers' salaries, including their relative supply and demand...' Mr Costa argues that good CEOs are in relatively short supply compared to workers generally and therefore companies will offer large remuneration packages in order to attract the best corporate talent available.
In an article written for BizTimes.Com, and published on October 6, 2008, Jessica Ollenberg stated, 'CEOs in large companies may have the shelf life of a pro football player, and if we want to attract top talent to these economy-driving opportunities, as a country we must offer a large incentive package. Where publicly traded companies may wish to empower a "celebrity" CEO to drive shareholder confidence, CEOs must be lured from one high-paying opportunity to a higher-paying opportunity. Done well, this creates overall positive economic impact.'
3. CEO are not primarily responsible for the global financial crisis
It has been claimed that it was not the behaviour of CEOs in Australia or elsewhere in the world that created the global financial crisis. It has further been suggested that the salary packages and termination payments received by CEOs are also not responsible for the financial difficulties confronting international capitalism.
Herald Sun commentator Andrew Bolt suggested that the origins of the world financial crisis were the unrealistic home-ownership aspirations of many poor people in the United States. In a comment published on October 16, 2008, Andrew Bolt argued, 'The "greed" that initially created this crisis was of poor people in the US who took out home mortgages they had little hope of repaying. Banks were encouraged to lend them the money by federal laws demanding more lending to minorities, or else, and by the expectation that the US Government would underwrite such lending. It was magnified by many other (greedy) investors, many of the middle classes, who borrowed money to play the stock exchange or to bank on rising property values.'
Similarly, Robert Gottliebsen, in an opinion piece published in The Business Spectator on October 17, 2008, argued, 'Prime Minister Kevin Rudd believes that the big salaries paid in the global finance arena played a huge role in the catastrophe we are now seeing unfold.
On the surface he would appear to be right because all too many chief executives were prepared to take enormous risks to achieve profits and lock in bonuses. Sometimes those risks arose through over leveraging and on other occasions through investing in risky assets and ventures. But if Prime Minister Rudd wants the truth he needs to go back even further and ask why companies appointed these high-risk high-reward CEOs to begin with.
You don't have to look too far to find where at least some of the blame lies: with Mr and Mrs Middle Australia. All of us, and even Kevin Rudd himself, have played an important role in this disaster.
In Australia the superannuation industry is dominated by the demands of ordinary Australians. They demand that managers perform or be sacked. Ruthless but effective. And so every quarter or half year those institutions that fall to the bottom of the performance tables see a huge fund exodus. Accordingly fund managers give the company boards and CEOs the same instruction their clients gave them: "Perform or we will sack you".'
4. Good CEOs deserve the payments they receive
It has been claimed that CEOs perform an important function and therefore deserve the remuneration they receive. In an article written for BizTimes.Com, and published on October 6, 2008, Jessica Ollenberg stated, 'As CEOs create jobs, impact work-life and stimulate the economy, we should safeguard high salaries to CEOs - as we need to attract top talent there!'
It has been further argued that CEOs deserve far greater salaries than the average worker because their actions have the capacity to affect very many more lives.
In an opinion piece published in Capitalism Magazine on September 10, 2008, Dr Harry Binswanger stated, 'The mainstream media have reacted with indignation over reports that the average CEO of a large company earns 300 times the salary of the average employee.
In the 1960s, then-Objectivist Alan Greenspan made an excellent point relevant to pay differentials: the issue is the range of action and responsibility that a given position carries. Whether a man on the assembly line performs poorly or well has a narrow, limited effect on the company, but how well the CEO performs affects every aspect of the company, and even its continued existence.'
Dr Binswanger went on to explain further, 'The fate of the whole company lies in the CEO's hands. Only a very, very few people of those who'd like to make the high salary such a job has to carry can demonstrate the outstanding vision, leadership, adaptability, judgment, and integrative ability required.
Another way of stating this is that the CEO of a "large company"-- which is what the claimed statistic deals with--has a lot more than 300 employees, and the CEO is the man in charge of every one of them.'
It has further been argued that companies need to offer larger salary packages to attract innovative CEOs who will foster research and development. In an article titled, 'The role of innovation in the compensation of American executive leaders, Pascual Berrone, IESE professor, stated in November, 2008, 'R&D tends to be responsible for growth and market dominance to the extent that CEOs must take risks when making final decisions on which projects and investments to undertake. To stimulate the development of innovative projects that render new products, greater efficiency or market control, companies opt for highly attractive remuneration packages. As such, the need for innovation is directly behind the seemingly inexplicable CEO salary spike.' Thus, it is claimed, forward-looking, R&D-focused executives deserve the salaries they receive.
5. Hostility to CEOs is frequently ill-informed and based on prejudice
It has been claimed that many of the criticisms made about the salaries and termination payments made to CEOs are based on inaccurate information. This point was by John Colvin, chief executive of the Australian Institute of Company Directors, in an opinion piece published in The Australian.
John Colvin stated, 'Some figures bandied about are simply wrong. Departing Suncorp Metway chief executive John Mulcahy was reported to be leaving with a payout of $20 million. It turns out this figure included the total salary he had been paid during six years, leave entitlements and share incentives that he will never receive or are worthless. The actual termination payout figure was about $2 million, a year's base salary.
Departing Telstra chief Sol Trujillo was reported as taking home more than $50 million as a golden handshake, a figure repeated as fact. His actual termination payment was $3million, a year's base salary.
Pacific Brands chief executive Sue Morphet was criticised for awarding herself a pay rise that tripled her salary, then sacking 1850 workers. In fact the increase came because she was promoted from division head to chief executive; her salary was about half her predecessor's and relatively modest compared with that of heads of similar companies. More than half her new salary is rights to shares under short and long-term bonus schemes, much of which are locked up for long periods under vesting arrangements and, at the present Pacific Brands share price, worth a fraction of the value listed in company accounts.'
It has been claimed that many of the calls to reduce CEO salaries are the result of prejudice - a knee-jerk desire to punish CEOs believed to be responsible for the world financial crisis. On March 23, 2009, on the United States Consumer News and Business Channel (CNBC), Erik Sorenson warned of the dangers of popular prejudice fuelling an indiscriminate attack on CEO salaries. Sorenson stated, 'I know full well that folks are "mad as hell and (don't want) to take it anymore." Me too. But beware: the non-executive class may not be able or willing to view The Bonus in a sophisticated, discriminating way in this environment. The pitchforks are out and the torches are lit. Really, I get it - but let's hope we don't throw out the baby (bonus) with the bathwater (the real ne'er-do-well's who got us into this mess).'