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CEO Pay: Too much?

August in Australia is ASX reporting season, and what grabs most newspaper headlines outside of the profit of the big four banks, are the CEO salary packages for the top 200 companies. Are the men and women leading our biggest firms worth the big dollars they command?

After the Global Financial Crisis in 2008, the structure and way in which CEO’s are paid has fundamentally changed. Executive remuneration is slanted towards bonuses and share options based on performance as opposed to ordinary salary. For CEO’s amongst ASX100 companies, average fixed pay is at the same level as nine years ago. However, this change has done little to the public perception that CEO’s are grossly over-remunerated.

The fundamental justification for such is high salaries is that it is appropriate compensation for the high risk, pressure and influence that are borne by a CEO. Alan Joyce (CEO of Qantas Group) received an eye-watering pay of $25 million for the 2016-2017, primarily as a result of meeting long-term incentive targets voted by shareholders years previously. Joyce has led a $2 billion restructure of Qantas, which saw extensive cost-cutting and job losses, resulting in heavy criticism of both Qantas and Joyce. However, this restructure led Qantas back to profitability and has seen it’s share price jump from a low of $1.07 in late 2013 to a rate of above $6 today. Is his salary package not a just and fair reward for the pressure and performance he has overseen?

The influence of a CEO becomes increasingly apparent when they are particularly bad! Destructive leaders can cause the workplace culture in their company to plummet, with lower employee engagement and higher levels of staff turnover. Those leaders who make poor short or long-term decisions can see billions wiped off a company’s valuation, with loss of reputation and consumer demand resulting in the CEO overseeing job losses. In August, a money laundering scandal hit Ian Narev the CEO of Commonwealth Bank of Australia (CBA). This has seen the CBA exposed to a potential nine figure fine, enormous brand damage and a ten percent drop in share value. Narev was forced to announce a departure date from the CBA, but will still take $5.5 million for the 16/17 financial year.

Currently, in Australia, transparency regarding CEO pay and how it compares to other employees within the company lags behind the world standard. As it stands, shareholders vote on board recommendations about the amount of the CEO remuneration package yearly. A ‘two-strike rule’ was introduced in 2011, to provide for the re-election of a company board, on the occasion that more than 25 percent of shareholders vote down the remuneration package on multiple occasions.

Unlike the US and UK, Australia does not mandate in company reports a metric which forces companies to compare CEO and executive pay as a ratio to the salary of the average employee within the business. Research has shown that if a company that pays its CEO a lower CEO to the average employee, this often receives little positive benefit. A company that pays a high ratio sees reduced employee engagement and satisfaction and an indirect adverse effect on investment potential.

CEOs are becoming more critical in a distributed business environment, and the strategic decisions they make not only on behalf of investors but also as some employers in the economy affects us all. Good CEOs who get increasingly risky and uncertain decisions right that benefit us all deserve to be remunerated well. However, to bring more public confidence and trust to the system, it’s incumbent on boards to be responsible when deliberating executive packages, mainly to underperforming ones. Governments should also consider legislating ratios into company reports that would increase transparency to all stakeholders.