Thursday, April 9, 2009

Fulminating about executive salaries

I’ve been building up to writing a post on this and I’m about to boil over.

The topic of ‘executive renumeration’ is big in Australia right now. The Productivity Commission is looking into it. The Australian Government has acted in a very limited way, due to widespread community outrage, to curb salaries by making shareholder approval mandatory for termination payments that exceed a year’s base salary (big deal: they’ll just up the salary, but at least a salary is fully taxable). A discussion television program called Insight recently ran a program on the topic.

The evil prince Sol Trujillo has recently announced his coming departure on 30 June from the partially privatised Telstra, Australia’s paramount Telco. His salary package last year allowed for a maximum $13.4 million depending on performance, despite the fact that he alienated just about everybody, including the government. (Please explain to me why this is not outright theft.)

Since joining the company in 2005 he’s managed to sack 10 000 people, according to a February article in The Australian newspaper. The share price is currently lower than it was when the first lot of shares were floated in 1997. Jokes about Telstra service, if that’s not an oxymoron, are comedy staples.

The Productivity Commission is going to look at the regulatory framework that governs payment of executives and directors in Australia. It will look at some of the myths and truisms surrounding executive pay, such as: is it really tied to performance? Does upping salaries actually improve performance? Are the board members who make decisions acting on behalf of shareholders as they’re supposed to do or are they acting on behalf of executives?

I’ve been amazed at the narrowness of the media discussion of this issue. The Insight program features a journalist/host asking questions of an audience largely made up of people with an interest or expertise in the topic under discussion.

On the recent program that dealt with this topic, several of these audience members were shareholders. Some of them expressed the view that they were only angry because the ridiculous amounts being paid weren’t tied to performance. If the executives were doing their job, they wouldn’t mind the outrageous sums.

I’m going to be a contrarian on this issue and say: no-one pulling a salary is worth more than, say, $500 000 a year, no matter what they do. Sure, the job should pay enough so that lifestyle-wise these people can feel that they are above the herd (as well as being compensated for the hours involved and the responsibility). But beyond a salary that achieves that, perhaps they might actually perform better if they were paid less.

Look at a school principal. Their job is incredibly complex. They get paid an amount that recognises the sacrifices they make in terms of time and stress. And what value are they producing? The citizens of tomorrow, who will invent, create, toil, pay taxes, make the next generation, etc etc. Isn’t that worth more than anything a corporation produces? Yet school principals are paid a fraction of what the average CEO takes home. But we don't see them going on strike until their wages match those of the private sector mavericks.

Now here’s the thing. What if school principals behaved like spoilt brats, crossed their arms and said: ‘I wont get out of bed unless you pay me 3 million.’ The community would be shocked. Newspapers would be chock-full of letters condemning the avarice of these people and the poor example they were setting their students.

So rather than admiring the anti-social solipsists of big business for their ego-bound deludedness, we might actually question whether they are emotionally fit to lead an organisation. Isn’t greed one of the seven deadly sins? Doesn’t a belief that it’s worth sacrificing, say, 100 jobs so you can be paid obscenely indicate a dangerous egomania? And if these people are only in it for the money, will they really have the interests of the company and its shareholders at heart? What sort of school board would employ a principal who was obviously greedy and grasping?

Yet CEOs are admired for their selfishness, their childish petulance, and yes, their greed. Shareholders teach their own children not to be greedy, but tell these dingbats that they’re worth millions a year.

Of course, part of the problem is the way corporations are set up in the first place. Their first duty is to their shareholders and making a profit, rather than to the community as a whole. This has led to a culture whereby shareholders of traditional companies (not ethical investors) outsource their rapacious behaviour and even, in some cases, contempt for the environment, implicitly telling the company to do their dirty work for them. If you're going to do that, you want someone a little bit tough and ruthless.

The ironic thing is, whenever you interview someone in a powerful position making lots of money they always say they’re not doing it for the cash but because they love the job. If they’re not committed to the job for its own sake, they shouldn’t be there.

I don’t mind if someone identifies a gap in the market, starts a company and makes a squillion. They’ve taken financial risks and they deserve to reap the benefits, within the bounds of the law.

Business journalists have been part of the problem, particularly while the boom was still on. They’re just too embedded in the whole mad culture to make objective analyses. One journalist had the temerity to justify these amounts with the statement that top execs were vulnerable to losing their jobs at any time.

But CEOs are salaried. They’re not gambling on their own money like genuine entrepeneurs. The career risks they run in being judged on performance are no different in kind than those that everyone on a contract, so common these days in the professional world, is subject to, not to mention those in casual jobs who face financial obliteration on a daily basis. Why should they alone be compensated for job insecurity, compared with a market research telephone interviewer who is paid $19 an hour if they’re lucky, and for whom every shift could be their last?

That the people who make the crucial financial decisions in the plush boardrooms of the corporate world are in a little world of their own is indisputable. The recent Insight program included a member of the Telstra board, a board that, in the midst of a recession and following job cuts, had recently voted for base pay increases for executives. Amazingly, he justified this by stating that it was more stressful running a company in difficult times.

Does it never occur to these people that the company might actually do better if it used some of the obscene amounts it pays the top brass to create more positions for employees who actually do the work that counts, such as, in the case of Telstra, technicians, researchers and IT experts?

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