Right: Pacific Brands workers rally to protest at their jobs being moved offshore. The company's CEO was accused of accepting a large pay increase while planning to retrench employees.
Arguments in favour of reducing CEO salaries and termination payments
1. CEO salaries and termination payments bear no relation to the value of the work these chief executives perform
It has been claimed that a false nation of 'market value' has been applied in determining the salaries to be paid to chief executive officers. According to this line of argument, once a particular salary has been paid to one CEO, then that rate of pay becomes the norm for all or at least many CEOs. Shaun Carney, writing in The Age in an opinion piece published on March 25, 2009, stated, 'It's quite a sweet deal. Pretty much every company has been bidding up the price without regard to any visible set of performance metrics, merely "they're paying that bloke over there that much, so we'll have to as well".' Those who object to this salary-setting process claim, with Shaun Carney, that it is largely detached from any objective estimation of the value of the work actually performed by CEOs.
Dr Klaas Woldring, a former Associate Professor of Southern Cross University, in an article published in Online Opinion on March 16, 2009, has stated, 'Remember first of all that there is little or no correlation between CEO's compensation and organisational performance. There are numerous instances of obscenely high payments for CEOs while poor organisational performance is the norm. The "pay peanuts and you get monkeys" justification of high packages is nonsense.'
A similar point has been made by Dr Richard Denniss in a report titled, 'The case for a new top tax rate' written for the Australia Institute and published in October 2008. Dr Denniss states, 'The recent financial crisis highlights the lack of correlation between ability and pay. While Australian and international financial executives have received enormous salaries, they have not protected their shareholders from billions of dollars worth of risky investments. Meanwhile, the much-lauded regulators in Australia receive significantly smaller remuneration than those they are responsible for regulating.'
It has been argued that high salaries actually discourage high levels of executive performance. A position paper released in April 2009 for the Productivity Commission's review of Regulation of Director and Executive Remuneration in Australia stated, 'In summary, when executive salaries are unduly inflated, change and progress is stymied. In particular, many of the executives often value money and wealth inordinately-a value that often coincides with uncooperative or rigid behavior. Alternatively, these executives often embrace the existing hierarchy, which culminates in the unmitigated rejection of divergent attitudes and attributes. Finally, these executives often epitomize the dominant echelons of society, and hence diversity is infringed and creativity is inhibited.'
2. CEO salaries and termination payments have grown at an unsustainable rate over the last twenty to thirty years
In an opinion piece published on March 4, 2009, and written by Shaun Carney, it was stated, 'In the past 30 years, the relativities between the average wage and executive pay have grown almost exponentially. As workers have been told ceaselessly that they must do more if they expect to improve their incomes, which is only fair enough, given how sloppy the nation's productivity performance has been over a long period, there's been no similar message for those at the top.'
CEO salaries have grown rapidly in Australia in recent years, with the Australian Financial Review estimating that earnings of the chief executives of Australia's largest 300 listed companies rose by 28 per cent in 2006-07 (Kirk 2007). This was compared to average full-time income growth of 3.4 per cent over the same period (ABS 2008).
A similar situation pertains in Canada. Janet McFarland, reporting in Canadian Report on Business.com noted on May 9, 2006, 'A 'Report-onpBusiness' survey of executive compensation shows that Canada's CEOs saw their pay soar an average of 39 per cent in 2005 compared with 2004 (itself a year of huge compensation increases) as stock markets and commodity prices rocketed higher.
While salaries and bonuses climbed a modest 6 per cent last year, CEOs saw their stock option gains climb 47 per cent over 2004. CEOs on average earned $1.8-million each from exercising stock options - a number that climbs to $4.5-million if only those CEOs who cashed out options are included.'
The situation is more dramatic in the United States. On March 19, 2009, Bruce Watson wrote for The Daily Finance, 'In 1965, the average CEO made 51 times the minimum wage; by 2006, CEO salaries had risen to 821 times times the minimum wage. Put another way, in the same period of time, CEOs went from making 24 times the wages of their average workers to 262 times the wages of the average worker. This means, incidentally, that the average CEO in 2007 made more in the first day of work than their average employee made all year.'
As an indication of the unsustainability of such payments, a recent survey of Australian company directors indicated that very many directors believed that the salaries paid CEOs are too high. A survey by consultants McKinsey of the directors of the Australian Stock Exchange's top 200 companies found 42.5 per cent of these companies' directors believed senior executive remuneration was too high and 9.2 per cent thought it was far too high. Of those that said bosses were paid too much, 22.2 per cent said senior executive remuneration was 100 per cent over the mark, or twice as much as the executives were worth. Another 47.6 per cent said the pay was 50 per cent too much.
3. Some of these payments have been made to the chief executives of companies in receipt of Government bail-out money or which have laid off large numbers of workers
It has been claimed that some of the high salaries being paid to CEOs are particularly inappropriate as the companies concerned have needed to be supported by large Government bail-outs or subsidies. Further, some of these companies have further demonstrated their poor performance by laying off large numbers of workers. These points have been made by Robyn Riley in an opinion piece published in The Age on March 17, 2009. Riley argues, 'The Rudd Government has been severely embarrassed by the overseas retreat by giant clothing manufacturer Pacific Brands.
The fact that the Government helped prop up the company to the tune of $20 million, only to see its executives grant themselves significant income boosts in the wake of the poor share performances, illustrated just what a double-edged sword such funding can be.
Yesterday the US Government suffered similar embarrassment when troubled insurer American International Group revealed it intended to pay hundreds of millions of dollars in bonuses and retention pay to its top executives.
No, not a sign of recovery for the ailing economy, just another example of gob-smacking arrogance and greed. AIG was one of the companies bailed out by American taxpayers to the tune of $170 billion. It was the biggest government rescue of a US company, deemed necessary after the giant insurer posted the biggest quarterly loss in US history.
You would think, then, its executives would feel a little humble, grateful even. Apparently not, because despite the outrage at the news AIG said its hands were tied and the bonuses would be paid.'
4. There is widespread popular support for strengthening regulations effecting CEO salaries
It has been argued that current regulations in Australia designed to regulate CEO salaries are either inadequate or ignored. Economic commentator, Alan Kohler, has discussed the inadequacy of Australian corporate regulation. He has written, 'The new non-binding vote on executive salaries is not really a vote on executive salaries; it's a resolution to adopt the company's remuneration report. Except the great majority of companies don't have one.
Many don't even show the salaries of the top five executives, as required by law since 1998, but instead stick to the old $10,000 bands. These merely show the number of executives in each band; you have to guess who's who.
And as for the remuneration policies -- that is, why the top five executives get paid what they do -- forget it. It's a total, entirely deliberate, mystery.
That despite the fact that s.300A of the Corporations Act clearly requires a remuneration report to be included in the annual report that contains discussion of remuneration policy, discussion of the relationship between that policy and the company's performance, and what each of the top five executives got paid.'
There appears to be widespread loss of confidence in allowing market forces to determine CEO salaries. In October, 2008, UMR an opinion research company, based in Australia and Zealand, conducted a survey on Australian attitudes to CEO salaries.
The survey findings indicated 92% of Australians believe that CEO salaries in Australia are too high and 78% think they are much too high. 72% of Australians support government regulation of CEO salaries whilst only 14% oppose this. 80% of Labor voters, as well as 63% of Coalition voters think the government should regulate CEO salaries. Only 3 per cent thought executive salaries were "about right". No one thought executive salaries were too low. Voters in NSW and Queensland were the most supportive with 75 per cent advocating intervention.
UMR pollster, John Utting, said it was rare for a poll to show such a clear expression of community sentiment. Mr Utting further stated, 'The politics of the time have just shone a light on what has always been there. The politics has just flushed it out in the open.'
5. It is inequitable to pay CEO very large and increasing salaries at a time when others are either losing their jobs or having their wage increases limited
The inequality of paying large salary packages to the CEOs of failed companies that are laying off workers has been stated by a British MP, John Robertson, Member for Glasgow North West, who observed, 'I've got constituents worried about whether they're going to have a job tomorrow, and lots of people are being made unemployed, and they see this man getting his large 700,000 pounds a year pension, and they come to me and they say, "Why can he get that and I can't get a job?"'
It has also been argued that the level of salary received by CEO is completely inequitable when compared to the wages received by a majority of workers. Dr Klaas Woldring, a former Associate
Business commentator Alan Kohler, writing for the Business Spectator, on March 19, 2009, stated, 'It has been plain for years that the law on termination payments [in Australia] needed to be changed: with executive salaries rising at many times the rate of ordinary earnings, the limit of seven times final salary before shareholder approval was required had become too high.'
It has been repeatedly noted that it will be very difficult to have workers accept either a reduction in their wages or the loss of their jobs, while CEOs continue to draw huge salaries. Ian John Macfarlane, a former governor of the Reserve Bank of Australia and former Chairman of the Payments System Board of the Reserve Bank and Chairman of the Council of Financial Regulators has stated, 'It will make it difficult for some companies to expect responsible outcomes for wages if their boss has just had some massive increase, particularly if it's not particularly well related to the profitability of the business concerned. I can see some tensions building up there.'
There has also been concern expressed that worker resentment at what are perceived as excessively high CEO salaries will result in employees working less effectively in protest. The chief executive of Canadian Tire has claimed companies do not operate in a vacuum and have to consider what society at large thinks. He believes there is a danger that if lower-level employees at the company resent that the "suits" make all the money they will quietly protest by simply doing no more than the bare minimum.