tag:theconversation.com,2011:/ca/topics/executive-pay-1043/articlesExecutive pay – The Conversation2023-11-05T09:27:29Ztag:theconversation.com,2011:article/2165022023-11-05T09:27:29Z2023-11-05T09:27:29ZSouth Africa’s wage gap is huge: why companies should report what CEOs and workers earn<p>Inequality in South Africa is high, whether measured <a href="https://theconversation.com/south-africa-cant-crack-the-inequality-curse-why-and-what-can-be-done-213132">by income or wealth</a>. One of the results is that there’s acute public scrutiny of executive compensation.</p>
<p>This is understandable given that the skew in rewards for executives compared with wages of workers is one of the key drivers of rising inequality – in South Africa and across the globe.</p>
<p>Drawing on recent publicly available data, we undertook <a href="https://www.wits.ac.za/media/wits-university/faculties-and-schools/commerce-law-and-management/research-entities/scis/documents/companies-act-submission-to-parliament2023.pdf">a preliminary analysis</a> comparing chief executive officer (CEO) pay with average monthly pay ratios in the country. In our analysis CEO pay included a base salary and a variety of benefits. We then compared the CEO’s pay to the overall average monthly earning provided by the country’s statistics agency, StatsSA. </p>
<p><a href="https://www.statssa.gov.za/publications/Report-02-11-02/Report-02-11-022021.pdf">StatsSA estimates</a> show that the average monthly pay for all workers, regardless of their sector of employment, was R23,640 (about US$1,280). We acknowledge this number is a high figure, no doubt driven up by the <a href="https://www.oecd-ilibrary.org/content/paper/5kmms0t7p1ms-en?site=fr">dynamics</a> of South Africa’s labour market – high unemployment levels and high income inequality. The high figure had the effect of lowering the pay ratios, making them look better than they might actually be.</p>
<p>Using a sample of companies across various sectors of the economy our analysis showed that CEOs earn between 150 and 949 times more than the average pay of all South African workers. </p>
<p>Our findings are important because they shed light on inequality within firms – a key component of inequality in society in general.</p>
<p>We submitted our findings to hearings in parliament on two bills <a href="https://www.parliament.gov.za/bill/2314485">tabled earlier this year</a> – the Companies Amendment Bill and the Companies Second Amendment Bill. If passed, the bills would make it compulsory for companies to disclose their pay gap ratios. The aim is to encourage adequate disclosure so that all stakeholders have sufficient data to make informed decisions. </p>
<p>We are in favour of the bills because it will mean that companies can’t go on ignoring inequalities in earnings and wealth in South Africa. Disclosures will also provide other social actors with evidence to question inequalities within firms, and demand changes. </p>
<p>Our analysis differs from previous work. For example, one analysis focused only on pay ratios of companies in <a href="https://open.uct.ac.za/server/api/core/bitstreams/36640f3c-5b95-4a98-875b-35a8d859cfd4/content">consumer products and services</a> and another only on <a href="https://journals.co.za/doi/abs/10.4102/sajhrm.v16i0.983">state-owned entities</a>. There’s also a study that describes <a href="https://repository.up.ac.za/bitstream/handle/2263/27027/dissertation.pdf?sequence=1&isAllowed=y">the relationship between corporate performance and CEO pay</a>.</p>
<p>We saw a divergence between the earnings of CEOs employed at locally owned compared to transnational firms. There was also a difference between CEOs in privately owned companies and those at the helm of state-owned entities. We also found differences in earnings across and within sectors. </p>
<p>And we found there was a weak correlation between the CEO’s pay and their sector’s overall contribution to economic growth and employment share. For example, the remuneration gap in the mining sector is high yet the sector’s contribution to GDP and employment share has declined in the post-1994 period.</p>
<h2>Changes to the law</h2>
<p>The purpose of the bills tabled by trade and industry minister Ebrahim Patel is to improve the ease of doing business, clarify uncertainty and reduce bureaucratic red tape. </p>
<p>The changes also include clauses that would make remuneration disclosures mandatory for public companies and state-owned entities. </p>
<p>If the bills are passed, companies will be required to list the remuneration and total benefits received by the highest earning individual and the lowest earning employee. </p>
<p>Additionally, companies will be required to calculate a remuneration gap, defined as the ratio between the total remuneration of the top 5% highest paid individuals and that of the lowest paid 5%. This must be calculated at both the median and mean to avoid any distortion by outliers. </p>
<h2>What’s missing</h2>
<p>Based on our findings and the research we’re involved in, we argue that the bills don’t go far enough. There are gaps that need to be plugged for them to be truly effective.</p>
<p>The law should require firms to report the wages of the lowest paid person regardless of whether they are employed internally or outsourced. This isn’t the case at the moment.</p>
<p>This is important because employment growth in South Africa over the past 30 years has largely been in <a href="https://wiredspace.wits.ac.za/server/api/core/bitstreams/13cfa66a-b328-4ac8-91ce-f828db83fa6a/content">temporary employment services</a>.</p>
<p>Pay disclosures in the US allow for both categories of workers by recommending that firms with more than 100 employees hired through a labour contractor should file two separate reports, one for individuals paid via the firm’s payroll and a separate one to include outsourced workers. South Africa should adopt a similar threshold.</p>
<p>Secondly, the current version of the amendment is a missed opportunity to legislate reporting on <a href="https://www.nbi.org.za/wp-content/uploads/2021/05/NBI-GPG-Long-Paper-Outline_March-2021-FINAL1.pdf">gender pay gaps</a> at the firm level. This is already in place in Germany, the UK, Australia and New Zealand.</p>
<p>Despite <a href="https://www.researchgate.net/publication/346397261_Gender_and_Work_in_South_Africa">an increase in female participation rates</a> in the labour markets, female workers continue to face discrimination. <a href="https://www.statssa.gov.za/?p=12930#:%7E:text=Female%20workers%20earn%20approximately%2030,the%20South%20African%20labour%20market">Female workers earn</a> R70 on average for every R100 earned by male workers. These pay disparities along gender lines persist even when we account for worker characteristics by including age, educational attainment levels, experience, sector or industry and occupational characteristics. </p>
<p>We recommend the inclusion of payment disclosures along gender lines. </p>
<p>Thirdly, it is important to include the base pay made to the highest and lowest earning individual together with any short- and long-term benefits. This is because in some industries the base pay is low relative to the total package earned by executives. </p>
<p>While it is important to include both base pay and other short- and long-term benefits, we believe that the listed payments are not exhaustive. We propose the inclusion of the following:</p>
<ul>
<li><p>any tax-deductible expenses paid by the company on behalf of the highest and lowest paid individuals</p></li>
<li><p>compensation for loss of office paid to or received by any individual together with any other payments relating to termination of services.</p></li>
</ul>
<p>The proposed amendments do not specifically state whether in addition an individual remuneration gap will be calculated between the highest and lowest earning individuals. We recommend that this calculation is specifically included.</p><img src="https://counter.theconversation.com/content/216502/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imraan Valodia and the Southern Centre for Inequality Studies receive funding from a number of local and international foundations that support academic research.
</span></em></p><p class="fine-print"><em><span>Arabo K. Ewinyu and the Southern Centre for Inequality Studies receive funding from a number of local and international foundations that support academic research.</span></em></p>Changes in the law will ensure that companies can’t go on ignoring inequalities in earnings and wealth in South Africa.Imraan Valodia, Pro Vice-Chancellor: Climate, Sustainability and Inequality and Director: Southern Centre for Inequality Studies., University of the WitwatersrandArabo K. Ewinyu, Researcher, Southern Centre for Inequality Studies, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2130342023-10-02T20:46:22Z2023-10-02T20:46:22ZESG bonuses are on the rise: Are they improving sustainability or just increasing executive wealth?<figure><img src="https://images.theconversation.com/files/551053/original/file-20230928-23-g03iv7.jpg?ixlib=rb-1.1.0&rect=0%2C41%2C6976%2C4616&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More than three-quarters of large, publicly traded companies in Europe and North America now use environmental, social and corporate governance metrics when determining executive incentive compensation. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/esg-bonuses-are-on-the-rise-are-they-improving-sustainability-or-just-increasing-executive-wealth" width="100%" height="400"></iframe>
<p>An increasing number of companies are paying bonuses to executives in the pursuit of sustainability. Driven by an ever-growing focus on global issues, <a href="https://www.wtwco.com/en-ca/insights/2023/01/global-study-on-esg-incentives-in-executive-compensation">more than three-quarters of large, publicly traded companies</a> in Europe and North America now use environmental, social and corporate governance (ESG) metrics when determining executive bonuses. </p>
<p>In addition, nearly two-thirds of companies in Europe and the United Kingdom now include environmental criteria as part of their executive incentive schemes.</p>
<p>Typically, annual cash bonuses represent about <a href="https://doi.org/10.1016/B978-0-44-453594-8.00004-5">24 per cent of a typical CEO’s pay</a>. Since bonus payments depend on the achievement of specific performance goals, <a href="https://doi.org/10.1016/j.jfineco.2019.02.007">their influence on executives’ actions tends to be more immediate</a>. </p>
<p>While such incentives can <a href="https://doi.org/10.1002/smj.3018">enhance a firm’s ESG performance</a>, they also present an opportunity for executives to obtain bigger bonuses under the illusion of “doing good.” There is always a risk of executives manipulating performance metrics to gain bonuses.</p>
<h2>Examining ESG incentives</h2>
<p>We first noticed that a significant number of executives were being paid bonuses for achieving ESG goals in 2015. By 2020, more than 43 per cent of executives from the largest 500 publicly traded U.S. firms had ESG incentives. </p>
<p>Since the use of ESG incentives is relatively new, we suspected they might be susceptible to abuse and decided to investigate. Our <a href="https://doi.org/10.1108/SAMPJ-11-2022-0605">recent study</a> examines how ESG incentives impact yearly bonuses for top executives.</p>
<figure class="align-center ">
<img alt="Four stacks of coins sit on a table, each increasing in size. A small tree sits on three of the stacks and a hand is placing a fourth tree on the last, tallest stack of coins." src="https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/551062/original/file-20230928-25-vr2kf8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Two-thirds of companies in Europe and the United Kingdom now include environmental criteria as part of their executive incentive schemes.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Since these large companies are required to disclose information on how they pay their top executives, we used novel artificial intelligence to examine these companies’ documents. </p>
<p>In our analysis, we took into account how much money we expected executives to make, how much power they had over their firm’s board of directors, whether they used ESG incentives or not and whether a variety of corporate governance mechanisms (like sustainability committees) were in place.</p>
<h2>The good news and the bad news</h2>
<p>Our study found that overall, executives do not appear to be leveraging their power to get higher compensation through ESG incentives. That’s the good news. </p>
<p>The bad news, however, is that not all executives are wielding their power for good. Some executives seem to use their power to obtain higher bonuses from ESG incentives. This seems to happen particularly in environmentally sensitive industries (mining or oil and gas, for example) or in firms that have other corporate governance mechanisms in place, like sustainability committees. </p>
<p>It’s possible that tighter oversight is needed in certain industries or even that some <a href="https://doi.org/10.1007/s10551-012-1331-5">corporate governance mechanisms may be more for show than for governance</a>. For instance, board members should ensure they have the requisite knowledge to engage in meaningful conversations about the use of ESG incentives in compensation plans. </p>
<p>They may also need to put additional checks and balances in place to better monitor, control and advise management on the use of these incentives, especially with respect to the selection of ESG performance metrics.</p>
<h2>Why does this matter?</h2>
<p>Key stakeholders like the <a href="https://corpgov.law.harvard.edu/2018/07/01/the-directors-es-guidebook/">Canadian Coalition for Good Governance</a>, standard setters like the <a href="https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s1-general-requirements-for-disclosure-of-sustainability-related-financial-information.pdf?bypass=on">International Sustainability Standards Board</a> and rating agencies such as <a href="https://www.msci.com/documents/1296102/34424357/MSCI+ESG+Ratings+Methodology+-+Pay+Key+Issue.pdf/5bbf5a6c-cdd4-c7ba-87a0-2f8dc2bf4b96">MSCI</a> advise organizations to include ESG goals in executives’ compensation plans. The objective, presumably, is twofold: to measure what matters and provide executives with incentives to move their organizations toward sustainability.</p>
<p>However, the connection between ESG incentives and sustainability is not so clear-cut. We still need to learn more about the use of ESG incentives to be able to apply them properly. Moreover, firms often equate their ESG focus with sustainability, <a href="https://theconversation.com/what-is-sustainability-accounting-what-does-esg-mean-we-have-answers-150996">but the two are not the same</a>. </p>
<p>A focus on ESG is a focus on how environmental, social and governance factors affect the financial performance of the firm while a focus on sustainability is a focus on how the firm affects society and the environment. Think of it as the difference between a selfie and a landscape photo — one looks inward (ESG) and the other outward (sustainability).</p>
<figure class="align-center ">
<img alt="A group of people in business attire sit around a table looking at a computer screen that displays the letters ESG" src="https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/551063/original/file-20230928-27-tod5ti.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The connection between ESG incentives and sustainability is not so clear-cut. We still need to learn more about the use of ESG incentives to be able to apply them properly.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>There is limited evidence that awarding bonuses based on ESG criteria automatically translates into improved sustainability for a company. While there is <a href="https://www.gsb.stanford.edu/insights/does-it-pay-link-executive-compensation-esg-goals">some evidence they might</a>, it’s still too early for a definite answer.</p>
<p>ESG factors focus on risks and opportunities that affect <em>financial</em> performance, not necessarily those that are connected to planetary sustainability. In fact, there is no work to date that we are aware of that connects a firm’s ESG performance to planetary sustainability at all.</p>
<p>While ESG incentives may help a firm mitigate the risk of investors’ or regulators’ intervention, they don’t necessarily translate into sustainability performance. We cannot reiterate this enough: a focus on ESG is a focus on risk and opportunity management, not sustainability.</p>
<p>Our research is a reminder, to boards of directors, executives, regulators and standard-setters, that one-size-fits-all is rarely appropriate and without looking closely at what is happening, these incentives can be abused.</p><img src="https://counter.theconversation.com/content/213034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Leanne Keddie receives funding from the Social Sciences and Humanities Research Council (SSHRC), Carleton University and the Canadian Academic Accounting Association (CAAA). </span></em></p><p class="fine-print"><em><span>Michel Magnan receives funding from the Jarislowsky Foundation and the Institute for the Governance of Private and Public Organizations.</span></em></p>While incentives can enhance the environmental, social and corporate governance performance of businesses, there is a risk of executives manipulating these performance metrics to obtain bonuses.Leanne Keddie, Assistant Professor, Sprott School of Business, Carleton UniversityMichel Magnan, Professeur et Titulaire de la Chaire de Gouvernance S.A. Jarislowsky, Concordia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2042552023-04-28T17:29:12Z2023-04-28T17:29:12ZRecent banking crises are rooted in a system that rewards excessive risk-taking – as First Republic’s failure shows<figure><img src="https://images.theconversation.com/files/523616/original/file-20230501-991-zod71e.jpg?ixlib=rb-1.1.0&rect=114%2C198%2C4916%2C3198&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Another U.S. bank bit the dust.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/general-view-of-first-republic-bank-in-century-city-on-news-photo/1248481248">AaronP/Bauer-Griffin/GC Images via Getty Images</a></span></figcaption></figure><p>First Republic Bank <a href="https://www.marketwatch.com/story/jpmorgan-to-take-over-first-republic-after-regional-bank-was-closed-2ccd8069">became the second-biggest bank failure</a> in U.S. history after the lender was seized by the Federal Deposit Insurance Corp. and sold to JPMorgan Chase on May 1, 2023. First Republic is the latest victim of the panic that has roiled small and midsize banks since the <a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">failure of Silicon Valley Bank in March 2023</a>.</p>
<p>The collapse of SVB and now First Republic underscores how the impact of risky decisions at one bank can quickly spread into the broader financial system. It should also provide the impetus for policymakers and regulators to address a systemic problem that has plagued the banking industry from the <a href="https://www.federalreservehistory.org/essays/savings-and-loan-crisis">savings and loan crisis of the 1980s</a> to the <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">financial crisis of 2008</a> to the <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">recent turmoil following SVB’s demise</a>: incentive structures that encourage excessive risk-taking.</p>
<p>The Federal Reserve’s top regulator seems to agree. On April 28, the central bank’s vice chair for supervision <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230428a.htm">delivered a stinging report</a> on the collapse of Silicon Valley Bank, blaming its failures on its weak risk management, as well as supervisory missteps.</p>
<p><a href="https://www.sas.rochester.edu/eco/people/faculty/digby_alexandra/index.html">We are professors</a> <a href="https://www.minerva.edu/about/faculty/">of economics</a> who study and teach the history of financial crises. In each of the financial upheavals since the 1980s, the common denominator was risk. Banks provided incentives that encouraged executives to take big risks to boost profits, with few consequences if their bets turned bad. In other words, all carrot and no stick.</p>
<p>One question we are grappling with now is what can be done to keep history from repeating itself and threatening the banking system, economy and jobs of everyday people.</p>
<h2>S&L crisis sets the stage</h2>
<p>The precursor to the banking crises of the 21st century was the savings and loan crisis of the 1980s.</p>
<p>The so-called S&L crisis, like the collapse of SVB, <a href="https://www.federalreservehistory.org/essays/savings-and-loan-crisis">began in a rapidly changing interest rate environment</a>. Savings and loan banks, also known as thrifts, provided home loans at attractive interest rates. When the Federal Reserve under Chairman Paul Volcker aggressively raised rates in the late 1970s to fight raging inflation, S&Ls were suddenly earning less on fixed-rate mortgages while having to pay higher interest to attract depositors. At one point, their <a href="https://www.heraldtribune.com/story/opinion/columns/2019/11/28/rescue-by-unelected/2194940007/">losses topped US$100 billion</a>.</p>
<p>To help the teetering banks, the federal government <a href="https://www.federalreservehistory.org/essays/savings-and-loan-crisis">deregulated the thrift industry</a>, allowing S&Ls to expand beyond home loans to commercial real estate. S&L executives were often paid <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2315600">based on the size of their institutions’ assets</a>, and they aggressively lent to commercial real estate projects, taking on riskier loans to grow their loan portfolios quickly.</p>
<p>In the late 1980s, the commercial real estate boom turned bust. S&Ls, burdened by bad loans, failed in droves, requiring the federal government take over banks and delinquent commercial properties and sell the assets to recover money paid to insured depositors. Ultimately, the <a href="https://www.fdic.gov/bank/historical/history/167_188.pdf">bailout cost taxpayers more than $100 billion</a>.</p>
<h2>Short-term incentives</h2>
<p>The 2008 crisis is another obvious example of incentive structures that encourage risky strategies.</p>
<p>At all levels of mortgage financing – from Main Street lenders to Wall Street investment firms – executives prospered by taking excessive risks and passing them to someone else. Lenders passed mortgages <a href="https://irle.berkeley.edu/files/2012/The-Transformation-of-Mortgage-Finance-and-the-Industrial-Roots-of-the-Mortgage-Meltdown.pdf">made to people who could not afford them</a> onto Wall Street firms, which in turn bundled those into securities to sell to investors. It all came crashing down when the housing bubble burst, followed by a wave of foreclosures.</p>
<p>Incentives rewarded short-term performance, and executives responded by <a href="https://www.sciencedirect.com/science/article/abs/pii/S0929119914000042">taking bigger risks for immediate gains</a>. At the Wall Street investment banks Bear Stearns and Lehman Brothers, profits grew as the firms bundled increasingly risky loans into mortgage-backed securities to sell, buy and hold.</p>
<p>As foreclosures spread, the value of these securities plummeted, and Bear Stearns collapsed in early 2008, providing the spark of the financial crisis. Lehman failed in September of that year, paralyzing the global financial system and plunging the U.S. economy into the <a href="https://www.epi.org/publication/snapshot_20100127/">worst recession since the Great Depression</a>.</p>
<p>Executives at the banks, however, had already cashed in, and <a href="https://features.marketplace.org/why-no-ceo-went-jail-after-financial-crisis/">none were held accountable</a>. Researchers at Harvard University estimated that top executive teams at Bear Stearns and Lehman <a href="http://www.law.harvard.edu/faculty/bebchuk/pdfs/BCS-Wages-of-Failure-Nov09.pdf">pocketed a combined $2.4 billion in cash bonuses</a> and stock sales from 2000 to 2008.</p>
<h2>A familiar ring</h2>
<p>That brings us back to Silicon Valley Bank. </p>
<p>Executives tied up the bank’s assets in long-term Treasury and mortgage-backed securities, failing to protect against rising interest rates that <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">would undermine the value of these assets</a>. The interest rate risk was particularly acute for SVB, since a <a href="https://www.cnbc.com/2023/03/28/svb-customers-tried-to-pull-nearly-all-deposits-in-two-days-barr-says.html">large share of depositors were startups</a>, whose finances depend on investors’ access to cheap money.</p>
<p>When the Fed <a href="https://theconversation.com/us/topics/us-federal-reserve-256">began raising interest rates last year</a>, SVB was doubly exposed. As startups’ fundraising slowed, they withdrew money, which <a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">required SVB to sell long-term holdings</a> at a loss to cover the withdrawals. When the extent of SVB’s losses became known, depositors lost trust, spurring a run that ended with SVB’s collapse.</p>
<p>For executives, however, there was <a href="https://www.ft.com/content/02ff2860-2d5b-4e21-96af-cef596bff58e">little downside in discounting or even ignoring</a> the risk of rising rates. The cash bonus of SVB CEO Greg Becker <a href="https://news.bloomberglaw.com/esg/failed-bank-execs-dodge-pay-clawbacks-as-tougher-remedies-sought">more than doubled to $3 million</a> in 2021 from $1.4 million in 2017, lifting his total earnings to $10 million, up 60% from four years earlier. Becker also sold <a href="https://www.cnbc.com/2023/03/14/svb-execs-sold-84-million-of-the-banks-stock-over-the-past-2-years.html">nearly $30 million in stock</a> over the past two years, including some $3.6 million in the days leading up to his bank’s failure.</p>
<p>The impact of the failure was not contained to SVB. Share prices of many <a href="https://www.forbes.com/sites/brianbushard/2023/03/17/these-regional-banks-stocks-are-falling-as-contagion-fears-loom-following-svb-collapse/?sh=3929d3423814">midsize banks tumbled</a>. Another American bank, Signature, <a href="https://www.reuters.com/business/finance/new-york-state-regulators-close-signature-bank-2023-03-12/">collapsed days after SVB did</a>. </p>
<p>First Republic survived the initial panic in March after it <a href="https://nypost.com/2023/03/16/jpm-morgan-stanley-in-deal-talks-with-first-republic-report/">was rescued by a consortium</a> of major banks led by JPMorgan Chase, but the damage was already done. First Republic recently reported that <a href="https://apnews.com/article/first-republic-deposits-withdrawal-silicon-valley-11f9503216c49559ff8cf645963c8bfd">depositors withdrew more than $100 billion</a> in the six weeks following SVB’s collapse, and on May 1, the FDIC <a href="https://www.nytimes.com/2023/05/01/business/first-republic-bank-jpmorgan.html">seized control of the bank</a> and engineered a sale to JPMorgan Chase. </p>
<p>The crisis isn’t over yet. Banks <a href="https://www.fdic.gov/news/speeches/2023/spmar2723.html">had over $620 billion</a> in unrealized losses at the end of 2022, largely due to rapidly rising interest rates.</p>
<h2>The big picture</h2>
<p>So, what’s to be done? </p>
<p>We believe the bipartisan bill recently filed in Congress, the Failed Bank Executives Clawback, would be a good start. In the event of a bank failure, the legislation <a href="https://www.warren.senate.gov/newsroom/press-releases/warren-hawley-cortez-masto-braun-introduce-bipartisan-bill-to-claw-back-compensation-from-failed-bank-executives">would empower regulators to claw back</a> compensation received by bank executives in the five-year period preceding the failure.</p>
<p>Clawbacks, however, kick in only after the fact. To prevent risky behavior, regulators could require executive compensation to <a href="https://openyls.law.yale.edu/handle/20.500.13051/8112">prioritize long-term performance</a> over short-term gains. And new rules could restrict the ability of bank executives to take the money and run, including requiring executives to hold substantial portions of their stock and options until they retire. </p>
<p>The Fed’s new report on what led to SVB’s failure points in this direction. The 102-page report recommends new limits on executive compensation, saying leaders “were not compensated to manage the bank’s risk,” as well as stronger stress-testing and higher liquidity requirements. </p>
<p>We believe these are also good steps, but probably not enough.</p>
<p>It comes down to this: Financial crises are less likely to happen if banks and bank executives consider the interest of the entire banking system, not just themselves, their institutions and shareholders.</p>
<p><em>This article was updated on May 1, 2023, with details of the FDIC’s seizure of First Republic Bank and its sale to JPMorgan Chase.</em></p><img src="https://counter.theconversation.com/content/204255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The cause of banking crises since the debacle in the 1980s remains unchanged. Incentives encourage executives to take excessive risks, with few consequences if bets turn bad. It’s happening again.Alexandra Digby, Adjunct Assistant professor of Economics, University of RochesterDollie Davis, Associate Dean of Faculty, Minerva UniversityRobson Hiroshi Hatsukami Morgan, Assistant Professor of Social Sciences, Minerva UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1674542021-10-05T15:21:56Z2021-10-05T15:21:56ZSouth Africa is tightening its rules around executive pay, but gaps remain<figure><img src="https://images.theconversation.com/files/421820/original/file-20210917-48423-mwgya4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa <a href="https://doi.org/10.4102/sajems.v22i1.3251">has a large, and growing, wage gap</a>. The pay gap between executives and employees at the lowest end of the pay scale is increasing. This has seen <a href="https://doi.org/10.1080/10291954.2018.1465149">an increase in shareholder interest in director pay</a>. </p>
<p>South Africa has the highest wage inequality in the world, with a <a href="https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_650553.pdf">Gini coefficient of 0.639</a>. It is, therefore, not surprising that there has been a concerted effort to put more focus on director remuneration guidelines in the country’s latest set of published corporate governance rules.</p>
<p>Governance guidelines for companies are set out in a series of reports, known as the <a href="https://www.iodsa.co.za/page/kingIII?gclid=CjwKCAjwndCKBhAkEiwAgSDKQfivoGmXPv7elv983HAMSJFjyaC8zSph-R2Dh3LgO6jGJZPogag98hoCCQAQAvD_BwE">King Reports</a>. The <a href="https://www.iodsa.co.za/page/why-join?gclid=CjwKCAjw49qKBhAoEiwAHQVTo6vc5DN3jt-JNF1hKgni993pMRXZ8AcHnRyiFjl0NQRJbBblRxw2NRoCK08QAvD_BwE">Institute of Directors in South Africa</a> has published four. The first was published in 1994 and subsequently revised in 2002 (King II), 2009 (King III) and 2016 (King IV). The reports map out a set of voluntary principles and recommendations that apply to a wide range of organisations in the country, including listed and unlisted entities.</p>
<p>The latest – the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf">King IV Report</a> – is more explicit on executive remuneration. </p>
<p><a href="https://doi.org/10.1080/10291954.2021.1938882">We interviewed</a> South African institutional investors, remuneration committee members, CEOs and chief financial officers (CFOs)of financial services companies listed on the Johannesburg Stock Exchange. Our aim was to establish their views on remuneration governance. We selected this sector because pay policies and practices of several <a href="https://www.fin24.com/Companies/Financial-Services/big-funds-fight-fat-cats-20180715-2">financial services</a> companies recently received considerable shareholder scrutiny.</p>
<p>Our findings showed that most participants welcomed the three part-remuneration report and single figure pay disclosure proposed by King IV. They indicated that these recommendations noticeably standardised pay reporting by South African companies. </p>
<p>But there were also criticisms – and notes of caution – issued from many of those we interviewed. </p>
<h2>Insider views on King IV director pay suggestions</h2>
<p>The guidelines deal with remuneration for executives and non-executives.</p>
<p>They say that executive pay should be performance-based. Non-executives should receive a base fee and fees for meeting attendance. </p>
<p>The guidelines also recommend that companies listed on the Johannesburg Stock Exchange should publish a background statement, remuneration policy and implementation report. Details should be provided on the pay components allocated to individual directors. Additionally, listed companies should indicate how they intend to respond if a substantial number (defined as 25% or more) of shareholders cast their vote against the implementation reports or pay policies.</p>
<p>Remuneration committees should also ensure that director pay is transparently disclosed. This will enable investors to make informed voting and investment decisions. Institutional investors can have considerable influence over corporate policies. Their investment in local companies gives them substantial negotiation and voting power. High ranking executives, such as CEOs and CFOs, as well as remuneration committee members, often discuss remuneration concerns with these powerful investors during private meetings.</p>
<h2>The gaps</h2>
<p>Some interviewees cautioned that local remuneration committees should ensure that remuneration reports don’t become too technical. </p>
<p>Some also requested more guidance from the King Committee to make quantum pay disclosures more comparable across sectors. </p>
<p>They also emphasised that remuneration decision-makers should caution against over-reliance on consultants when compiling pay packages. Research shows that this can result in pay benchmarking. This is when remuneration is set at a higher or comparable level of a comparable organisation. Pay benchmarking can potentially lead to above-average emolument levels.</p>
<p>For their part, institutional investor interviewees indicated that they often meet South African companies they’ve invested in to discuss pay matters before casting their votes at annual general meetings. Most of them suggested that shareholder votes cast on director pay should be binding. </p>
<p>In contrast, the remuneration committee members and leading executives preferred the advisory vote suggested by King IV. </p>
<p>Everyone we interviewed agreed that there should be clearer consequences for companies if more than a quarter of their shareholders voted against their pay policies and implementation reports.</p>
<p>They also emphasised the importance of fair pay practices given the country’s large wage gap. Two of them referred to ‘equal pay for work of equal value’. Directors should accordingly be compensated based on their individual efforts and contributions to their companies. </p>
<p>In addition, the interviewees proposed extended vesting periods for share options to ensure that executives have a long-term focus.</p>
<p>They also agreed that executive pay should be linked to financial performance metrics as well sustainability-related performance outcomes. This led them to suggest that in future director pay should be more clearly linked to:</p>
<ul>
<li><p>the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf">triple bottom line context</a>. This refers to the economy, society and operating environment, and </p></li>
<li><p>the <a href="https://integratedreporting.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf">six capitals</a>. This refers to financial, manufactured, intellectual, human, social and relationship and natural capital. </p></li>
</ul>
<p>Social and ethics committees should help remuneration committees determine how they can link sustainability aspects to executive pay.</p>
<p>Some also issued a note of caution about amending pay regulations in light of the considerable regulatory burden that JSE-listed companies experience. Enhanced remuneration guidance might, therefore, rather be offered in a guidance note and in the future King V Report.</p>
<h2>What next</h2>
<p>In the context of the current pandemic, director remuneration practices and policies are likely to receive even more attention. It is likely that companies will receive more opposition in future if their leaders’ pay is not clearly linked to financial and non-financial performance metrics over the long run.</p>
<p>JSE-listed companies are encouraged to implement fair, responsible director pay policies and better align their pay practices with the King IV guidelines.</p>
<p>*Marilee van Zyl contributed to this article. She completed her MCom degree at Stellenbosch University and is an assistant governance consultant at FluidRock Governance Group._</p><img src="https://counter.theconversation.com/content/167454/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nadia Mans-Kemp received funding from the National Research Foundation but it was not connected to this research. </span></em></p>Director remuneration practices and policies are coming in for much greater scrutiny.Nadia Mans-Kemp, Academic in the Department of Business Management, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1614332021-05-25T12:03:47Z2021-05-25T12:03:47ZForcing disclosure of wages and executive pay in South Africa is a good idea: here’s why<figure><img src="https://images.theconversation.com/files/402333/original/file-20210524-19-6ci1ah.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Workers at a textile factory in Cape Town, South Africa. Differences between wages and executive pay isn't currently in the public domain.</span> <span class="attribution"><span class="source">Dwayne Senior/Bloomberg via Getty Images</span></span></figcaption></figure><p>Plans are afoot <a href="https://www.news24.com/citypress/business/proposed-law-to-force-wage-gap-disclosure-20210523">to make amendments to South Africa’s Companies Act</a> that would require companies to report on wage differentials. This is the gap between executive pay and the lowest paid workers in the company. The announcement was made by South Africa’s Minister of Trade and Industry Ebrahim Patel.</p>
<p>This is a significant development. And in my view, long overdue.</p>
<p>The proposed change would go some way to address the challenge of inequality in South Africa as well as better regulate excessive executive pay. This is because transparency about wage differentials will mean companies cannot continue to ignore the inequalities in earnings in South Africa. Transparency will also enable social actors to question inequality in companies and to change it. On top of this, at least in theory, the massive inequalities between executive pay and the wages of workers would put some pressure on the highest earners to curb their excessive pay. </p>
<p>In my view, this approach to addressing the problem may be more effective than laws that stipulate maximum pay.</p>
<p>The disclosure approach would help modernise South Africa’s corporate reporting in line with<a href="https://connect.sustainalytics.com/sfs-corporate-esg-in-focus-an-overview-of-esg-and-its-impact-on-companies?utm_term=&utm_campaign=Leads-Search-20&utm_source=adwords&utm_medium=ppc&hsa_acc=4619360780&hsa_cam=11145778763&hsa_grp=108965194933&hsa_ad=514798435870&hsa_src=g&hsa_tgt=dsa-390170183270&hsa_kw=&hsa_mt=b&hsa_net=adwords&hsa_ver=3&gclid=Cj0KCQjwna2FBhDPARIsACAEc_V9D6QptzDSs7N3DqLtgFYJBhesga2lnYwRokIroS-K1smamtSujVgaAvqzEALw_wcB"> a framework designed</a> to measure performance beyond financial returns to include environmental, social and governance responsibilities of business entities. </p>
<p>South Africa is one of the most unequal societies in the world. The country’s gini-coefficient – which is used to measure levels of income inequality in a country – <a href="https://www.indexmundi.com/facts/indicators/SI.POV.GINI/rankings">is the highest</a> in the world among countries that have data to construct the index. It is estimated to be 0.65. Even very unequal societies in Latin America, such as Brazil (0.51) and Chile (0.48) have lower levels of inequality. At the other end of the spectrum, are egalitarian countries like Sweden’s 0.29 and Denmark’s 0.28. </p>
<p>Levels of inequality are borne out by a host of other statistics too. For example, <a href="https://www.wits.ac.za/media/wits-university/faculties-and-schools/commerce-law-and-management/research-entities/scis/documents/Estimating%20the%20Distribution%20of%20Household%20Wealth%20in%20South%20Africa.pdf">the top 0.01% </a> of the wealthiest South Africans – 3500 individuals – own 15% of the total wealth in the country. Whereas the top 1% of individuals each have net wealth of R17.8 million, the bottom 50% of South Africans have net wealth of -R16 000. In other words their liabilities exceed their assets.</p>
<p>The initiative announced by the minister of trade and industry Ebrahim Patel comes against a backdrop of <a href="https://www.businesslive.co.za/bd/opinion/editorials/2021-05-21-editorial-law-on-wage-disclosure-is-a-step-towards-greater-equality/">increasing awareness</a> of the excessive levels of executive pay in the country. CEOs of the top companies in <a href="https://www.pwc.co.za/en/publications/executive-directors-report.html">South Africa earn</a>, on average, R24 million per year while the minimum wage for workers is just above R21 per hour – about R43 000 per year. One of the most striking statistics that demonstrates the massive wage inequality in South Africa was <a href="https://www.groundup.org.za/article/checkers-worker-would-take-291-years-earn-what-her-boss-was-paid-month/">the calculation</a> that it would take a low paid worker at Checkers – a large food retailer – 290 years to earn the equivalent of what then its then CEO Whitey Basson earned in one month.</p>
<p>This is not the basis <a href="https://www.newframe.com/category/editorial-and-analysis/">for a sustainable society</a>. This level of inequality is a structural trap that holds people back, leads to lower levels of economic growth, and sooner or later, to much higher levels of social unrest. </p>
<h2>Why it matters</h2>
<p>The amendments being proposed are innovative. But they are by no means unusual. Companies being required to go public with this information is increasingly becoming the norm across the world. </p>
<p>The environmental, social, and corporate governance investment framework evaluates companies beyond their financials. It also measures them on environmental, social and governance performance. This approach is being used widely across the globe and more and more investment decisions are now based on this framework.</p>
<p>Within the ‘social’, companies are evaluated on the labour practices and levels of inclusion. For example, does the company pay fair wages; does it have good relationships with the communities around it; does it train workers; does it promote small business?</p>
<p>One measure is whether the gap between workers and executive pay is fair and justified.</p>
<p>A number of countries have laws in place that require companies to report on pay gaps. In California, for example, firms are required <a href="https://www.dfeh.ca.gov/paydatareporting/">to submit pay data reports</a>. In Europe and the UK, companies are required to report on the gender pay gap within their organisation. The UK legislation <a href="https://www.bbc.com/news/business-39502872">has been effective</a> at making gender pay inequality transparent.</p>
<p>South Africa’s own corporate governance codes – the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf">King IV report</a> – is also in line with this framework, emphasising the fact that companies are part of a wider society where inclusivity and sustainability need greater attention.</p>
<p>There is a lot that needs to be clarified about the proposed amendments: will it apply to all companies, or just listed companies? Will it apply only to large companies, with an employment threshold, such as the <a href="http://www.labour.gov.za/DocumentCenter/Reports/Annual%20Reports/Employment%20Equity/2019%20-2020/20thCEE_Report_.pdf">employment equity reporting requirements</a>, which apply only to companies that employ more 50 workers? Will the amendments include the requirement to report on the gender pay gap, as is the case in many other jurisdictions? How is ‘executive’ defined? How does the legislation propose to deal with extensive sub-contracting arrangements that often hide low-paid work in so-called independent companies?</p>
<p>And will the minister use the opportunity to introduce tighter controls and reporting requirements on environmental considerations?</p>
<h2>First step</h2>
<p>Legislation to require reporting on issues such as wage differentials, the gender pay gap, and the impact on the environment are important for accountability and for creating the conditions for a more equitable society. But it’s important to recognise that changes to the law, on its own, won’t ensure more inclusive and equitable organisations. </p>
<p>As a society, South Africa needs to use the legislation to pressure companies to change the patterns of wage differentials. Without social action, the legislation alone will not change behaviour.</p>
<p>For example, South Africa’s Companies Act gives a lot of power to shareholders. Yet, shareholder action to hold executives accountable is not a hallmark of the country’s corporate governance milieu. Even when highly paid executives have failed to perform, shareholders have found it <a href="https://www.businesslive.co.za/bd/companies/2020-12-17-2020-the-year-shareholders-voted-against-high-executive-pay/">difficult to hold executives to account.</a>.</p>
<p>To ensure more equity and accountability, the amendments being proposed by the minister will require civil society organisations, NGOs and trade unions to use the data for social action aimed at promoting inclusivity and equity in companies.</p><img src="https://counter.theconversation.com/content/161433/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imraan Valodia receives funding from a number of local and international organizations that support research.</span></em></p>Companies being required to go public with information about executive and workers pay packets is increasingly becoming the norm.Imraan Valodia, Dean of the Faculty of Commerce, Law and Management, and Head of the Southern Centre for Inequality Studies, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1289502020-01-06T11:58:12Z2020-01-06T11:58:12ZCEOs make more in first week of January than average salary – pay ratios are the solution<figure><img src="https://images.theconversation.com/files/308432/original/file-20200103-11904-48uxre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-people-success-fortune-concept-happy-309411233">Shutterstock</a></span></figcaption></figure><p>The typical FTSE 100 CEO will have earned as much as the average UK worker earns in a year by 5pm on January 6 2020 – £29,559 for 33 hours of work, according to data <a href="http://highpaycentre.org/blog/high-pay-day-2020-scope-for-fairer-pay-and-lower-inequality-remains-conside">compiled by the High Pay Centre think tank</a>. By the close of the year, the same CEO would have earned £3.46 million – roughly 117 times the average wage in the UK. This is a staggering differential. </p>
<p>If you believe that excessive executive pay is a problem, this statistic illustrates the point perfectly. These figures even represent a reduction from previous years, although this is due more to shrinkage in overall CEO pay than increases at the bottom. And UK CEO pay actually pales in comparison to their counterparts in the US, where levels topped US$14.5m (£11.5m), <a href="https://www.vox.com/policy-and-politics/2019/6/26/18744304/ceo-pay-ratio-disclosure-2018">representing a 287-1 differential</a> with the average worker.</p>
<p>Contrast this to just 40 years ago when the average CEO was paid <a href="http://highpaycentre.org/files/one_law_for_them_report.pdf">18 times the average salary</a>. Still a handsome amount – arguably more than enough to reflect their levels of responsibility, skills and status. With inequality <a href="https://theconversation.com/inequality-in-the-oecd-is-at-a-record-high-and-society-is-suffering-as-a-result-119962">a serious problem</a>, the government should seriously consider extending its pay ratio legislation and give average salaries a boost. </p>
<h2>How we got here</h2>
<p>In 1982 the chairmen of some of the largest UK companies got together to map out a way to ratchet up executive pay. They reasoned that this was necessary to make UK CEO positions more competitive internationally. Recognising the inherent barriers to such a bold move, the group suggested that the most acceptable way to achieve this would be a wholesale adoption of the “pay for performance” approach, <a href="https://www.epi.org/publication/pay-corporate-executives-financial-professionals/">which had already begun to take hold in the US</a>. </p>
<p><a href="https://www.industrydocuments.ucsf.edu/tobacco/docs/#id=fmfl0196">According to the minutes of their meeting</a>, it was suggested that “any higher remuneration would need to be visibly linked to performance and achievement, if it is to be socially and politically acceptable”. The group believed this approach would “persuade employees at large British firms to accept more moderate settlements” (lower pay).</p>
<p>What followed was a huge shift in the way British executives were compensated, with more and more aspects of pay becoming performance based. Instead of increasing salaries, companies <a href="https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-how">used shares and bonuses</a> to reward CEOs. </p>
<p>Even more importantly, there was a <a href="https://theconversation.com/the-rise-fall-and-rise-again-of-businesses-serving-more-than-just-their-shareholders-124618">shift in focus to serve shareholders</a>, underpinned by the idea that this would benefit the company and “greed is good”. This led to a company’s share price becoming its primary measure of growth and success.</p>
<p>So, as firm productivity and profitability increased, executive pay grew. But nobody else, apart from CEOs, enjoyed a similar rise in their fortunes. In fact, ordinary wages have not only failed to mimic the growth in CEO pay, the three decades since have seen the differential between CEO and average pay <a href="http://highpaycentre.org/files/one_law_for_them_report.pdf">widen substantially</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/308435/original/file-20200103-11891-1w4cts7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The gap between CEO and average pay has considerably widened since the 1980s.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-underground-sign-mind-tha-gap-161537417">Shutterstock</a></span>
</figcaption>
</figure>
<p>In fact, figures show that ordinary wages have failed to keep pace with inflation and workers effectively earn less today, in real economic terms, <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/december2019">than they did before the financial crisis</a>. Wages have been reduced by globalisation, rapid automation <a href="https://www.oecd.org/els/emp/Globalisation-Jobs-and-Wages-2007.pdf">and the subsequent loss of worker bargaining power</a>. While this has enhanced the efficiency and profitability of big and successful firms, workers have not benefited in terms of what they are paid.</p>
<p>The vast difference between CEO and average pay touches on wider social concerns of growing inequality and the idea that modern companies enrich top executives at the expense of everyone else. CEOs of the largest public companies, <a href="https://www.epi.org/publication/ceo-compensation-2018/">usually fall within the top 1% of the income wealth and income scales</a>.</p>
<h2>Making executive pay fairer</h2>
<p>The British government introduced a law in 2018 <a href="https://www.gov.uk/government/news/new-executive-pay-transparency-measures-come-into-force">requiring listed companies to publish their ratio of CEO to median pay</a>. This is a <a href="https://theconversation.com/pay-ratios-could-curb-excessive-ceo-pay-and-counter-inequality-54496">step forward</a> in reducing the gap. As well as making the issue transparent, it can give rise to public outrage which encourages companies to increase how much they pay their employees.</p>
<p>A much further and more controversial step would be introducing upper limits for executive pay. Instead of targeting the amount executives are allowed to earn, these limits could focus on setting an appropriate gap between CEO pay and the lowest wage within the firm. So, for instance, a mandated pay limit of 50:1 would ensure the no CEO could not earn more than 50 times the lowest wage in the firm.</p>
<p>This is not without precedent. The Israeli government <a href="https://www.timesofisrael.com/knesset-ups-tax-penalties-for-extravagant-bank-ceo-pay/">passed a law in 2016</a> encouraging financial institutions to set CEO pay at no more than 35 times the salary of the lowest earner. Firms can pay their CEOs more than this but will be taxed doubly for the privilege. The move followed public outrage <a href="https://inequality.org/great-divide/israel-step-ceo-pay-cap/">over inequality and excessive CEO pay</a>. Switzerland has also considered pay ratios, although a referendum on setting them at 12:1 was <a href="https://www.theguardian.com/world/2013/nov/24/switzerland-votes-against-cap-executive-pay">rejected in 2013</a>.</p>
<p>The underpinning objective of any executive pay reform agenda should be less about reducing top pay levels, as it should be about making pay fairer. This could be achieved by indexing executive pay to the lower earnings within the firm. Just like the proverbial tide that lifts all boats, every rise in executive pay would trigger similar rises in the wages of the lowest paid. In this case, both the luxury yacht and the basic dinghy would rise higher.</p><img src="https://counter.theconversation.com/content/128950/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tobore Okah-Avae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nobody else, apart from CEOs, has enjoyed a similar rise in their fortunes since the 1980s.Tobore Okah-Avae, University Teacher, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1037812018-10-05T13:24:45Z2018-10-05T13:24:45ZHow shareholder profits conquered capitalism – and how workers can win back its benefits for themselves<figure><img src="https://images.theconversation.com/files/239159/original/file-20181003-52684-1rd4r5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wolves on Wall Street, but perhaps the time of shareholders' rule is drawing to an end.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wall-street-sign-focus-on-blurred-306271739">robert cicchetti/Shutterstock</a></span></figcaption></figure><p>In the early days of industrial capitalism there were no protections for workers, and industrialists took their profits with little heed to anyone else. Following the growth of the labour movement, the establishment of trade unions and the founding of the welfare state in the first half of the 20th century, corporations in decades after World War II embraced a more open, stakeholder capitalism, where profits were shared between employees, managers and shareholders. This led to a flourishing middle class as workers and communities benefited from the success of the corporations of which they were part.</p>
<p>But since the 1970s the pendulum has swung back towards a system where profits are shared less widely, causing major upheavals in society and the fortunes of labour and the middle classes. </p>
<p><a href="https://www.nytimes.com/2018/07/13/business/economy/wages-workers-profits.html">In the US</a>, labour’s share of income had been close to 70% until the 1970s, but had shrunk by the beginning of the 1980s even as profits increased. In the 21st century this accelerated: in 2000, labour’s share of income in the US accounted for some 66%, whereas corporate profits accounted for a little over 8%. Today, labour’s share has fallen to 62% while profits have risen to 12%. The same trend <a href="https://www.ippr.org/files/2018-08/1535639099_prosperity-and-justice-ippr-2018.pdf">is repeated in the UK</a>, where labour’s share of income has reduced from almost 70% in the 1970s to around 55% percent today.</p>
<p>Where has the money gone? For decades, real incomes for workers have largely stagnated while those of top executives have skyrocketed. In 2017, the top executives of America’s largest companies enjoyed an <a href="https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018">average pay increase of 17.6%</a>, while workers’ pay in those companies rose barely 0.3%. In 1965, the chief executives of the top 350 US companies earned salaries 20 times that of their workers. By 1989 that had risen to 58 times, and in 2017 <a href="https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018">the ratio was 312 times that of workers</a>. </p>
<p>Not surprisingly, compared to the middle-class prosperity that followed 1945, recent decades have seen widening inequality in society. The status quo overturned, capitalism has been hijacked by a profiteering elite. The question is whether society can find an alternative approach that shares the wealth more widely.</p>
<h2>Shareholders uber alles</h2>
<p>This trend coincided with the emergence of shareholder value as the overwhelming corporate ethos, as the interests of shareholders take primacy over those of other stakeholders in the business. With executives incentivised to maximise profits, meet quarterly share price targets and ensure profits are returned to shareholders, they have been able to game the system to ensure they receive excessive remuneration, while at the same time cutting costs and squeezing wage growth in search of higher profits. British housebuilder Persimmon this year paid its chief executive <a href="https://www.theguardian.com/business/2018/jan/09/persimmon-profits-chief-bonus-scheme">a £110m bonus, decried by critics as “corporate looting”</a>.</p>
<p>Outsourcing and offshoring have been examples of such cost-cutting, profit-driving initiatives: outsourcing low-skilled work is thought to account for <a href="https://www.nytimes.com/2018/09/08/business/economy/harvard-living-wage.html%20link">one-third of the increase in wage inequality</a> since the 1980s in the US. The percentage of US workers associated with temporary help agencies, on-call workers, or contractors <a href="https://www.nytimes.com/2018/06/07/opinion/trump-labor-capital-class-struggle.html">increased from 10.7% in 2005 to 15.8% by 2015</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/239161/original/file-20181003-52681-ru4w94.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pressure to maintain share prices and ensure profits return to shareholders have shrunk the share of company profits received by labour.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sao-paulo-brazil-march-14-2016-391295644">Alf Ribeiro/Shutterstock</a></span>
</figcaption>
</figure>
<p>Economists have been puzzled by stagnant wages and increased inequality. But as I highlighted <a href="https://www.ft.com/content/c269c3e6-c4c5-11e3-8dd4-00144feabdc0">as far back as 2007</a> and repeatedly since, the emphasis on shareholder value has contributed enormously. Management and leadership consultant and writer Steve Denning <a href="https://www.forbes.com/sites/stevedenning/2018/07/26/how-to-fix-stagnant-wages-dump-the-worlds-dumbest-idea/#2183fb441abc">wrote this year</a> that “shareholder value is the root cause of workers’ stagnant salaries”, with a corrosive effect on societal cohesion and stability – he believes the current rise of populism is one example of the fallout.</p>
<p>Demands for greater profits continue, as companies are pressured by share portfolio managers and activist investors to increase their profitability and share price. Private equity firms, which invest in companies in order to maximise returns, have expanded into many sectors of the economy. Most recently, this has seen the doctrine of maximising profits enter the <a href="https://www.nytimes.com/2015/09/29/business/dealbook/as-banks-retreat-private-equity-rushes-to-buy-troubled-home-mortgages.html">residential property and home mortgages</a> market.</p>
<h2>The pendulum swings back?</h2>
<p>Despite the stranglehold of shareholder value on corporate thinking, events suggest the pendulum may once more swing back to favour workers and other stakeholders. </p>
<p>In the US, the government’s Committee on Foreign Investment <a href="https://www.reuters.com/article/us-qualcomm-m-a-broadcom-cfius/qualcomm-takeover-battle-intervention-shows-u-s-security-panels-expanding-reach-idUSKBN1GI007">warned</a> that in its attempt to take over telecoms giant Qualcomm, Broadcomm’s private equity approach could compromise its target’s technological leading position in pursuit of value for Broadcomm shareholders. </p>
<p>In the UK, there was <a href="https://www.theguardian.com/business/2018/mar/15/airbus-warns-melrose-gkn-takeover">opposition to the takeover</a> of engineering conglomerate GKN by turnaround firm Melrose. Airbus, one of GKN’s major customers, argued that Melrose’s focus on shareholder value and short-term returns meant it might not be committed to long-term investment.</p>
<p>A chorus of voices has emerged advocating alternatives to the short-termist and shareholder-focused model of capitalism. The chief executives of investment and asset managers <a href="https://www.telegraph.co.uk/business/2018/01/28/larrys-letter-drives-charge-reimagining-global-capitalism/">Blackrock</a> (the world’s largest) and <a href="http://uk.businessinsider.com/vanguard-ceos-short-termism-bill-mcnabb-2018-3">Vanguard</a>, global engineering firm Siemens, and consumer goods giant Unilever have pursued a more stakeholder-centric model of capitalism. For example, Unilever by measuring its progress against <a href="https://www.unilever.com/sustainable-living/our-approach-to-reporting/our-metrics/">environmental and social</a> as well as financial targets, and Blackrock by investing in businesses that <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter">favour long-term investment over short-term profits</a>. Organisations such as the <a href="https://www.inc-cap.com/">Coalition for Inclusive Capitalism</a> and the <a href="http://pestakeholder.org/">Private Equity Stakeholder Project</a>, have emerged, seeking to ensure that all stakeholders in the business and their interests are included.</p>
<p>Prominent US senator Elizabeth Warren recently introduced the <a href="https://www.fastcompany.com/90223130/how-elizabeth-warrens-accountable-capitalism-act-works">Accountable Capitalism Act</a> to Congress. This would require company directors to consider the interests of all major corporate stakeholders, not just shareholders, in company decisions. It requires that workers are given a stronger voice in decision-making at large companies, such as electing 40% of company directors. As a way of addressing self-serving incentives, executives would have to retain company shares for at least five years after receiving them, or three years in the case of stock buybacks.</p>
<p>Finally, we cannot ignore that business schools played a critical role in how shareholder value emerged as the overwhelming corporate ethos – and they continue to indoctrinate new generations of students with the dogma of shareholder value today. Business school deans and faculty members should urgently revisit their curricula to ensure graduates understand the damaging impact of shareholder value on society and to emphasise alternative approaches.</p>
<p>Almost ten years ago, Jack Welch, who for many years championed shareholder value while at the helm of General Electric, <a href="https://www.ft.com/content/294ff1f2-0f27-11de-ba10-0000779fd2ac">pronounced</a> that: </p>
<blockquote>
<p>Shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy … your main constituencies are your employees, your customers and your products.</p>
</blockquote>
<p>It is past the time that business schools should smarten up, jettison this “dumb” shareholder dogma, and start teaching a version of capitalism less damaging to the interests of society.</p><img src="https://counter.theconversation.com/content/103781/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Louis Brennan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Over two centuries, capitalist ethos has swung from profit-taking for the few, to a distribution of wealth to the many, and back again. Is the pendulum poised to swing once more?Louis Brennan, Professor of Business Studies, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1023262018-09-04T10:35:52Z2018-09-04T10:35:52Z‘Pay-for-luck’: Oil and gas execs out-earn their peers<figure><img src="https://images.theconversation.com/files/234128/original/file-20180829-195313-1nyoz8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Letting it rain</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/rear-back-view-business-man-standing-497612989?src=UkaF9QPVaa6Q2J4jCm9odQ-1-73wide business man standing in front of a wall under money rain dollar banknotes">Shutterstock.com/pathdoc</a></span></figcaption></figure><p>Following a <a href="https://www.eia.gov/dnav/pet/hist/RWTCD.htm">long slump</a>, crude prices have rebounded to about <a href="https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm">US$70 per barrel</a>. That may make 2018 the <a href="https://www.forbes.com/sites/gauravsharma/2018/07/23/big-oil-set-to-reap-benefits-of-relatively-higher-crude-prices/#2e3c39324378">most profitable</a> year for oil and gas companies in at least four years.</p>
<p>Will oil and gas executives reap big rewards as well?</p>
<p>As <a href="http://scholar.google.com/citations?user=4YjEZY4AAAAJ&hl=en">energy</a> <a href="https://scholar.google.com/citations?user=QDGHI28AAAAJ&hl=en">economists</a>, we’ve wondered how much the top oil and gas executives earn, particularly when their companies are earning large profits. To spot the patterns, we analyzed data on the compensation of more than <a href="https://ei.haas.berkeley.edu/research/abstracts/abstract_wp293.html">900 U.S. oil and gas executives</a> between 1992 and 2016.</p>
<h2>What do executives do exactly?</h2>
<p>Before getting to the evidence, it is worth considering what executives do in general, and how they get compensated.</p>
<p>Chief executive officers, chief financial officers and other <a href="https://www.techopedia.com/definition/13928/c-level-executive">C-level executives</a> make important strategic decisions. If they act wisely, their companies are more likely to succeed and earn bigger profits. Oil and gas executives, for example, make critical decisions about where, when and how much to invest.</p>
<p>In many industries, the decisions executives make can also impact the prices their companies can charge.</p>
<p>For example, Apple’s ability to charge <a href="https://www.cnet.com/news/1000-galaxy-note-9-proves-iphone-and-android-prices-will-get-even-higher/">$1,000 for an iPhone X</a> reflects in part the skills of CEO Tim Cook and other Apple executives at developing a desirable product and marketing it. But in a global commodity market like oil, executives have zero control over price. No matter how talented CEOs are, or how hard they work, they can’t singlehandedly make oil prices rise.</p>
<p>In economic parlance, hiring an executive is a <a href="https://www.investopedia.com/terms/p/principal-agent-problem.asp">principal-agent problem</a>. The board of directors, the principal, hires an executive, the agent, to act on its behalf. The principal wants the agent to work hard and to make good decisions, but it is hard to measure this effort. Instead, executive compensation typically includes incentives like bonuses, stock options and other forms of pay, designed to align the interests of the executive with the interests of the company.</p>
<p>The Nobel Prize-winning economist Bengt Holmstrom <a href="https://www.jstor.org/stable/3003320">pointed</a> out, however, that it makes no sense for executive compensation to depend on what <a href="https://doi.org/10.1162/00335530152466269">other scholars</a> have since called “observable luck.” </p>
<p>Tying compensation to luck just makes compensation more volatile, which in turn makes both companies and executives worse off. Holmstrom and others have found it easy to remove luck from compensation by, for example, basing compensation on a company’s performance relative to its competitors.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/234130/original/file-20180829-195328-1spvn80.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s nice work if you can get it.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-crossed-hands-on-white-background-729281242?src=Z4mPJ8531GG4Aa6jUehCCg-1-0">Shutterstock.com/Gearstd</a></span>
</figcaption>
</figure>
<h2>Paying for luck</h2>
<p>Oil prices are the classic example of observable luck. We looked, in particular, at U.S. oil and gas production companies, because these are the ones most impacted by oil prices. We excluded companies engaged partially or exclusively in oil refining – including Valero Energy, Chevron and Exxon Mobil, because the impact of oil prices is less clear and direct on that line of business.</p>
<p>We found that a 10 percent rise in oil prices increases the <a href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a> of these oil and gas production companies by 9.9 percent – almost a 1-for-1 relationship. Perhaps in no other industry are so many companies’ fortunes driven by a single global price.</p>
<p>More surprising, however, we determined that executive compensation follows a similar pattern. In particular, a 10 percent rise in oil prices increases executive compensation by 2 percent. </p>
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<p>That is, we find strong evidence of a “pay-for-luck” dynamic, with large rewards to executives who happen to be in the industry at the right time. </p>
<p>We found this pay-for-luck pattern to be widespread across the different individual components of compensation for the top five executives at oil and gas companies. This includes not only stocks and options, but also bonuses and long-term cash incentives. </p>
<p>We also noticed that this pattern is asymmetrical.</p>
<p>Executive compensation rises more with increasing oil prices than it falls with decreasing oil prices. This is consistent with <a href="https://www.bloomberg.com/view/articles/2018-06-04/comstock-resources-a-lesson-on-oil-gas-executive-pay">anecdotal evidence</a> that the criteria used for executive compensation changes over time. And that they are more quantitative during “boom” times and more qualitative during “bust” times.</p>
<p>In other words, U.S. oil and gas executives reap big rewards, when prices go up and they aren’t punished that much when prices fall.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/234131/original/file-20180829-195301-fkdtpo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Some CEOs are luckier than others.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/high-contrast-image-casino-roulette-motion-245913085?src=yso1dwQPlyL_iHgePvd-ww-1-7">Shutterstock.com/Fer Gregory</a></span>
</figcaption>
</figure>
<h2>Why is this happening?</h2>
<p>Everyone in the industry understands that oil prices are highly variable and completely out of the control of individual executives. So why do executives earn more when oil prices go up? </p>
<p>The most likely explanation is that these CEOs and other top executives have co-opted the pay-setting process. Economists call this “<a href="https://www.aeaweb.org/articles?id=10.1257/jel.20161153">rent extraction</a>.”</p>
<p>That is, at least to some degree, executives are exercising influence over the board of directors – extracting compensation packages that exceed what would be expected in a competitive labor market. </p>
<p>And the compensation of all oil and gas executives in our sample, all told, totals almost $1 billion per year, making the money at stake substantial. </p>
<p>With median pay for U.S. CEOs nearly <a href="https://www.usatoday.com/story/money/business/2018/05/25/ceos-11-million-year-salary-just-middle-pack/643823002/">$12 million</a> per year, executive compensation has become more complicated and important to understand than ever. Understanding pay-for-luck dynamics in the oil and gas industry can also shed light on what happens in other businesses where luck plays a less obvious, but often equally important, role.</p><img src="https://counter.theconversation.com/content/102326/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Catherine Hausman's research has been funded by the Brookings Institution, the California Energy Commission, the National Bureau of Economic Research, Resources for the Future, the Sloan Foundation, and the Social Sciences and Humanities Research Council of Canada.</span></em></p><p class="fine-print"><em><span>Lucas Davis does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Paying these CEOs more when oil prices rise means they’re rewarded for having good luck.Lucas Davis, Professor at the Haas School of Business, University of California, BerkeleyCatherine Hausman, Assistant Professor of Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/854062017-10-15T10:23:43Z2017-10-15T10:23:43ZCorruption in South Africa: business leader answers questions on how bad it is<figure><img src="https://images.theconversation.com/files/190147/original/file-20171013-11677-8cn7c1.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Business Leadership South Africa new CEO, Bonang Mohale, is leading a brave fight against corruption. </span> <span class="attribution"><span class="source">Supplied by BLSA</span></span></figcaption></figure><p><em>Business Leadership South Africa, the biggest business lobby group in the country, has become increasingly <a href="https://www.ujuh.co.za/bonang-mohale-becomes-blsa-ceo-what-does-it-mean/">vocal</a> about rising levels of corruption and mismanagement of public assets. <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">Concerns</a> have been growing in the country that corrupt practices, particularly the looting of state assets, has become embedded in the way business is done. As the organisation – which represents large businesses and multinationals in South Africa – takes on a new political posture, Steven Friedman put questions to its CEO <a href="https://www.blsa.org.za/news-and-articles/media-statements/blsa-appoints-bonang-mohale-as-ceo/">Bonang Mohale</a>.</em></p>
<p><strong>How representative is Business Leadership South Africa of the country’s private sector?</strong></p>
<p>The organisation represents around 75% of the largest businesses in South Africa. Clearly their interests are not identical to those of smaller businesses. Big business, for example, is able to adapt to onerous government edicts which drive up the cost of business much easier.</p>
<p>But what we have in common is much greater than what separates us – namely the desire to have growth-fostering economic policies under the rule of law. Right now business confidence in South Africa is at a 30-year low due to factors beyond our control but also due to actions that we can control, such as government bringing more policy certainty in areas such as mining for example– this is disastrous for large and small business alike.</p>
<p>BLSA has committed its members to changing practices which might impede economic growth and inclusion. </p>
<p><strong>Are your members buying the change agenda? How do you plan to ensure that they endorse it?</strong></p>
<p>Yes they are. Business Leadership South Africa has taken a much more active role over the last year in terms of getting the voice of business better heard, shaping government policy and speaking out against corruption. We have requested significant resources to achieve this and our members have backed us. </p>
<p>They understand the critical importance of the issues we are dealing with – achieving a policy backdrop that will allow us to grow the economy, create jobs and deliver transformation. </p>
<p>In terms of endorsement, we have set out our vision in a <a href="https://www.blsa.org.za/business-believes/our-contract-with-south-africa/">Contract with South Africa</a>, and our <a href="https://www.blsa.org.za/business-believes/integrity-pledge/">integrity pledge</a>, which establishes our business values. We expect our members to honour these. If they are in breach, they cannot be members. We showcased our commitment to the contract and the pledge through the <a href="https://www.ujuh.co.za/blsa-suspends-eskom-and-transnet-membership-it-needs-to-be-consistent/">suspension</a> of three major corporations KPMG, Eskom and Transnet. </p>
<p><strong>You’ve suspended Eskom and Transnet due to what you say is behaviour at odds with the organisation’s values. What do you mean by this?</strong></p>
<p>The integrity pledge makes clear that we have a zero-tolerance policy on corruption. There is a lot of <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">prima facie evidence</a> that both of these organisations have been involved in corrupt conduct. They were not able to satisfy us that they recognised the seriousness of the charges and were determined to address them. So the suspension of their membership was appropriate.</p>
<p><strong>There is a view that Business Leadership South Africa is tougher on public sector corruption and lenient where the private sector is concerned. What’s your view?</strong></p>
<p>This is not true. Where there have been instances of bad behaviour in the private sector, accountability has followed. For example, construction industry executives involved in rigging bids around the World Cup are no longer in office. More recently there’s been the case of KPMG. The executives responsible for the decisions that landed the firm in trouble have <a href="http://ewn.co.za/2017/09/15/kpmg-sa-ceo-chair-and-6-top-staff-resign-over-gupta-scandal">left</a>. And it’s been <a href="https://mg.co.za/article/2017-09-22-blsa-hits-out-at-kpmg">suspended</a> from BLSA. </p>
<p>By contrast, in government and state owned enterprises there is no accountability. Executives behave with impunity. And while corruption is wrong wherever it occurs, we must resist the spurious symmetry of discussing public and private sector corruption as though South Africa is facing a problem of equal gravity in both. Unfortunately, we now have a government that is corrupt from top to bottom. By contrast we have a private sector that is overwhelmingly law abiding. That is a very significant difference.</p>
<p><strong>How far are you prepared to take your anti-corruption mission? Some of your members have been found guilty of abusing vulnerable consumers. Will you act against them?</strong></p>
<p>Business Leadership South Africa will act against any member whose behaviour is against its own values and damages the reputation of business. These values are encapsulated in the organisation’s integrity pledge and the contract with South Africa. Taken together, these outline a zero tolerance attitude to corruption, a belief that business should behave with courage, integrity and consistency, and a strong belief that business can be a force for good.</p>
<p>Sometimes business will make mistakes and that can be accepted provided the organisation takes suitable action to address the problem.</p>
<p><strong>Do you accept that business itself needs to change its ways of doing business if it’s going to win public confidence in its mission against corruption?</strong></p>
<p>Yes, we do. There is clearly a large “trust gap” between parts of the public and business. Some of this is down to ignorance. Some of it can be explained by the deliberate misinformation as seen in the toxic <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">White Monopoly Capital</a> campaign. As we now know this was a highly racialist narrative that sought to blame everything that’s gone wrong in South Africa on an imaginary lily white private sector. We believe this particular line of attack is being used to detract attention away from the real issue - which is increasing corruption.</p>
<p>And some of the mistrust is rooted in <a href="http://www.justice.gov.za/trc/media%5C1997%5C9711/s971110b.htm">history</a>, with business still regarded by many as having collaborated with the apartheid system and furthering its legacies. </p>
<p>But some of it is also attributable to business’s own behaviour including <a href="http://www.engineeringnews.co.za/article/construction-majors-fined-r146bn-for-collusion-2013-06-24">collusive conduct</a> in certain industries and <a href="https://www2.deloitte.com/za/en/pages/human-capital/articles/executive-compensation-report.html">inflated executive compensation</a>. </p>
<p>But business is a national asset, not the problem. So it is in everybody’s interest that the South African public improves its understanding of business, and its overall reputation. </p>
<p>Business needs to explain and demonstrate that it is part of society and does not stand apart. That it shares the same vision and goals, notably of combating the scourges of unemployment, inequality and poverty.</p>
<p>Business also needs to help society understand that the major problems the country is facing don’t just lie at its doorstep. Certainly, there are things business can do better, but the much larger problem is the havoc being wreaked by <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">state capture</a> and poor policy development and execution. </p>
<p><em>This is part of a series called Face-to-face that The Conversation Africa is running in which leading academics interview prominent individuals in the public, private and not for profit sectors.</em></p><img src="https://counter.theconversation.com/content/85406/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Business Leadership South Africa has in the recent past assumed a stinging position against public sector corruption. Bonang Mohale explains the stance taken by the lobby group.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/832792017-09-06T11:40:58Z2017-09-06T11:40:58ZCan the grim reality of published pay ratios really curb executive pay?<figure><img src="https://images.theconversation.com/files/184737/original/file-20170905-13714-xk6pjs.jpg?ixlib=rb-1.1.0&rect=17%2C17%2C5790%2C3860&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/midsection-businessman-placing-chess-pieces-on-244876792?src=UZ8lY0s5csdwM-yckAHcCg-1-81">Andrey_Popov/Shutterstock</a></span></figcaption></figure><p>There has always been something inherently grubby about the executive pay debate. Many of us are happy to accept that the responsibility of running a big business should be handsomely compensated. But many are also left with an uncomfortable feeling that too many top executives are being rewarded for greed or failure, or both. </p>
<p>The announcement <a href="https://www.gov.uk/government/consultations/corporate-governance-reform">by the UK government</a> that the largest of the UK’s listed companies should be required to publish (and explain) figures showing the ratio of CEO pay to average pay in their business is an attempt to shine a light into the darker corners of executive remuneration. But will this work and, if not, are tougher measures justified?</p>
<p>There is no doubt that the pay gap is getting wider. Among FTSE 100 companies in the UK, the ratio of CEO pay to average pay <a href="https://www.theguardian.com/business/nils-pratley-on-finance/2017/aug/03/executive-wages-pay-ratios-remuneration-transparent">in 1998 was 47:1</a>. By 2017, this gap had increased to 129:1. For comparison, the 2015 figure among CEOs in the US was 335:1. The widening of the gap was not slowed significantly by the financial crisis and shows no sign of diminishing over the next decade. This has had a mobilising effect on both campaign groups and on some investors who believe such wide dispersion is unacceptable.</p>
<p>In the UK, January 4, 2017 was dubbed “Fat Cat Wednesday” <a href="http://highpaycentre.org/blog/fat-cat-wednesday-2017">by the High Pay Centre think tank</a> because it represented the day by which a FTSE 100 CEO has earned more than the average UK worker earns in a year. In April 2016, BP shareholders staged one of the biggest recent revolts against a planned executive pay increase when the board proposed to raise CEO Bob Dudley’s pay by nearly 20%, in a year when the company had also run up a US$6.5 billion loss, cut thousands of jobs and frozen employee pay. </p>
<p>Some 59% of votes cast by shareholders went against the proposals. Under current UK rules, the vote was non-binding, but the message it sent to the board and to the City of London was unambiguous. BP <a href="http://www.telegraph.co.uk/business/2017/05/17/bp-heads-pay-revolt-huge-cuts-executive-pay/">decided it had little choice but to cut Dudley’s pay</a>.</p>
<h2>Less focus on ‘fair’</h2>
<p>So why has the gap grown to the point where even City investors are rebelling? Well, it hasn’t grown by the same rate across all sectors with lower ratios (68:1) in financial services mainly because it is a generally high-paying sector. Ratios are higher in retail, by comparison, where low pay <a href="https://www.jrf.org.uk/report/improving-pay-progression-and-productivity-retail-sector">remains an issue</a>. </p>
<p>There are exceptions, of course. Charlie Mayfield, chairman of the John Lewis Partnership, is paid 60 times the average (compared with 345:1 at Tesco <a href="http://highpaycentre.org/pubs/cipd-high-pay-centre-survey-of-ftse100-ceo-pay-packages-2016">and 191:1 at Sainsbury’s</a>). However, John Lewis is an employee-owned business and was a pioneer of the principle that a wide pay gap regarded as disproportionate can damage the fabric and <a href="http://www.managementtoday.co.uk/john-lewis-boss-andy-street-becomes-west-midlands-mayor/leadership-lessons/article/1323420">“common purpose” of the business</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184696/original/file-20170905-13766-etl674.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The leading edge of pay fairness?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/declarationend/5730844671/in/photolist-9Jq5sK-9vyvBF-pK3NQW-3Xjrj-4gYLwj-4a8pNQ-duUgfK-72yTJB-pnkTg3-WcKeSG-rzwC6A-6eMnKN-4cpqrP-9Xn3aq-5XKL63-5haRzH-fwQiBp-tYZcW-87Hjds-3Rq9TJ-6oZM5M-7jZmc1-RDB6VK-4dDvQi-orD6RZ-aGUYXM-hDsvME-bExTEC-8NgevR-XQ1u3X-dEENvt-SKExn6-7bXE5o-7BQptN-kpaM9x-8anEBG-kp9VHk-qJXuC-4EXFsT-9rQh9N-Bc3UaT-PU2S1-8pW396-PUAce-76hLbP-HW4vD-8ERUpd-pK59VH-8FB6gd-79n6J8">Andy K/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>One reason for the gap is that CEO pay is compared across sectors, while low paid retail workers never have their pay rates compared with investment bankers or offshore rig operatives. Another is that remuneration committees often attach more importance to external rather than internal comparators. This means that they worry less about having an internally coherent pay structure which feels fair to employees than one which enables them to attract a “megastar” CEO when they need one. </p>
<p>Another, slightly more technical reason, is the growing complexity of CEO reward packages. Many executives have several components to their deals so that if they are forced either by the market or by regulation to restrain one element, they seem able to make up the difference with another. This can mean that, if basic pay is kept low, then bonuses or stock options can appear <a href="http://fortune.com/2015/09/02/ceo-pay-flatter-salaries-but-bigger-bonuses/">to rise to compensate</a>.</p>
<h2>Open plan pay</h2>
<p>These kinds of concerns have prompted the UK government’s action, which echoes that of the US where the Dodd-Frank Act will also <a href="http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">require the publication</a> of pay ratios from this year. But this is more than just an issue of reporting. The hope is that CEO pay decisions will look more at internal pay relativities and the message that big rises in executive pay send to employees facing another year of pay freezes. </p>
<p>The connections between leaders and the led really matter in modern organisations. The financial crisis challenged the fragile bond of trust between bosses and employees, and widening pay gaps at a time of wage growth stagnation for most UK workers can only make things worse.</p>
<p>This makes the example of IT training company Happy Computers especially interesting. The CEO, Henry Stewart, set up a spreadsheet on the company intranet which contains both the current pay of all staff (including his) <a href="http://www.telegraph.co.uk/men/thinking-man/11587099/If-we-all-talked-about-our-salaries-would-we-earn-more.html">and their pay history</a>. Aside from creating a strong, common bond between employees and a sense of fairness and transparency, the dispersion of pay is very narrow. Stewart is very proud of this innovation and believes the company benefits enormously. When he asks other CEOs why they don’t do the same, he says the most common answer is: “Our pay isn’t fair”. </p>
<p>Not everyone agrees that a focus on pay ratios is the best way to enforce restraint. Alex Edmans of London Business School argues, <a href="https://hbr.org/2017/02/why-we-need-to-stop-obsessing-over-ceo-pay-ratios">with some justification</a>, that pay ratios can lead to perverse incentives: the temptation might be, for example, to outsource low-paid jobs in order to inflate the average pay used to calculate the ratio. The current proposals are intended as a nudge towards greater transparency, with the threat of tougher regulation if they fail to bring about restraint. </p>
<p>Unfortunately, there is no science to proportionality. The “comply or explain” approach to publishing pay ratios may slow down the rate at which the pay gap widens, and might even enforce a de facto cap, but there must be more doubt as to whether it can apply enough pressure to narrow the gap at all.</p><img src="https://counter.theconversation.com/content/83279/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Bevan receives funding from bodies such as the Office of Manpower Economics to research pay issues in the UK.</span></em></p>Workers will soon get to see just how fat the fat cats have become.Stephen Bevan, Head of HR Research Development, Institute for Employment Studies, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/810822017-07-27T20:16:21Z2017-07-27T20:16:21ZPaying CEOs with stock options doesn’t drive their business strategy: research<p>The CEO pay of the United States’ biggest corporations is seen as the world benchmark. A large part of the way these executives are remunerated is through receiving stock options in the company they direct. </p>
<p>However <a href="http://www.sciencedirect.com/science/article/pii/S092911991730144X">our research</a> shows that compensating executives in this way doesn’t necessarily lead to a higher payout of dividends to shareholders. </p>
<p>In dollar terms, average pay of CEOs of the US top 500 firms has increased from US$3 million in 1992 to US$12 million in 2016. A major contributor of this increase has been stock options. </p>
<p>For example, Thomas Rutledge, CEO of US telecommunications company Charter Communications received a US$98 million pay package in 2016. And 80% or US$78 million was in <a href="http://deadline.com/2017/03/charters-tom-rutledge-made-98-5m-2016-1202045004/">stock options</a>. </p>
<p>A stock option is a financial contract that basically allows someone the right but not the obligation to buy a certain number of company shares in the future, at today’s market price. Thus, stock options allow CEOs to benefit if the company’s stock price rises, but not lose out if the stock price falls. Because in the latter case CEOs simply walk away from the transaction as the contract is not binding. </p>
<p>The idea behind it is to give risk averse CEOs incentives to take risk, so as to increase the stock price, and therefore their remuneration. This also works out for shareholders, who benefit from an increased stock price. </p>
<p>But this may also lead CEOs to take excessive risks with their firm’s strategy in order to drive up the stock price. While choosing riskier strategies increases CEO pay, stock options provide CEOs with insurance when these policies fail. Shareholders do not have this same insurance and are therefore left to experience the pain alone. </p>
<p>In 2005, regulations were introduced that required US firms paying CEOs with <a href="https://en.wikipedia.org/wiki/Stock_option_expensing">stock options to list them</a> in financial statements. The change caused firms to think twice about using stock options. </p>
<p>Many firms decided to significantly reduce or at the extreme <a href="http://www.sciencedirect.com/science/article/pii/S0304405X12000050">no longer grant stock options</a>. Taking advantage of this change in regulation, we are able to determine if stock options are in fact a driver of the strategies of these businesses. It would seem not. </p>
<p>For example, <a href="http://www.sciencedirect.com/science/article/pii/S0304405X01000393">previous research</a>
found stock options were the reason for the demise in dividends. But <a href="http://www.sciencedirect.com/science/article/pii/S092911991730144X">we found</a>, that before and after the regulation, companies that didn’t have stock options increased diviends more than firms which did. So the stock options had no bearing on diviends.</p>
<p>Our findings also answer another question on whether a firm’s risk strategy aligns with stock options. If stock options drive the choice of riskier policies, holding less cash is certainly consistent with that. Examining the 1,500 largest US firms from 1992 to 2016, we found that <a href="https://ssrn.com/abstract=3005080">stock options have no impact on the amount of cash held by these firms</a>. </p>
<p>If stock options drive cash holdings then firms most affected by this US regulatory change should have experienced a bigger change in cash balances than firms least affected. That is, firms that were not using stock options extensively prior to the regulatory change would have been less affected than those using them extensively. By finding that the decline in cash is the same for both types of firms, we dispel the notion that stock options drive cash holdings. </p>
<p>All of this raises questions about the effectiveness of stock options as a driver of business strategy. This is quite surprising as stock options are often touted by <a href="https://hbr.org/2000/03/what-you-need-to-know-about-stock-options">numerous academics</a> as the answer to creating <a href="https://en.wikipedia.org/wiki/Pay_for_performance">pay that leads to better business performance</a>.</p>
<p>Since 2005, US firms have begun to grant their CEOs long-term incentive plans, changing the <a href="http://knowledge.wharton.upenn.edu/article/how-new-accounting-rules-are-changing-the-way-ceos-get-paid/">way companies pay their CEOs</a>. These plans may or may not be tied to the company’s share price. </p>
<p>Long term incentive plans are typically structured to include a targeted level of performance and a stretch component to reward CEOs for achieving abnormal performance. Many also contain restricted stock - shares that can only be sold, once a certain hurdle has been met, for example, when earnings per share increase by 10%. </p>
<p>Although, these long-term incentives are not stock options they nonetheless reward CEOs for good performance, but do not penalise CEOs for bad performance. So they could have a similar lack of effect on business strategy.</p><img src="https://counter.theconversation.com/content/81082/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Compensating executives with stock options doesn’t necessarily lead to more risk taking and higher dividend payouts.Sigitas Karpavicius, Senior Lecturer in Finance, University of AdelaideJean Canil, Senior Lecturer in Finance, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/789342017-06-14T20:08:59Z2017-06-14T20:08:59ZCPA in crisis: why more associations will have to disclose CEO pay<p>The wave of public discontent that’s changed how corporate Australia reports and discloses executive pay, is now moving to other types of organisations. The most recent example is professional accounting body Certified Practising Accountants of Australia (CPA), which has been subject to <a href="http://www.afr.com/business/accounting/calls-for-cpa-australias-alex-malley-to-stand-down-20170601-gwhyxl">heated member debate</a> about the remuneration of its CEO and management team. </p>
<p>CPA Australia <a href="http://www.afr.com/business/accounting/cpas-alex-malleys-pay-revealed-as-179m-chairman-stands-down-20170531-gwh0cf">ultimately disclosed</a> the individual remuneration of its executive and board after extended lobbying by members.</p>
<p>Public disclosure of executive remuneration has not always been a feature of the Australian corporate landscape. Events over time have amplified public concerns about executive pay, cementing reporting and disclosure into law. Ultimately this may lead to a trend of voluntary disclosure among professional organisations. </p>
<p>Poor pay practice is associated with large unexpected corporate collapses and is a red flag for ineffective corporate governance. At the same time, the gap between executive salaries and the average Australian wage has widened. The <a href="http://www.pc.gov.au/inquiries/completed/executive-remuneration">Productivity Commission reports</a>that the average remuneration of ASX100 company executives grew from 17 times average earnings in 1993 to 42 times in 2009. </p>
<p>In the past, member organisations like CPA Australia have only had to prove their value to members through their services but now members are calling for the disclosure of executive remuneration as a way to enhance corporate transparency and accountability. This is in the same way that public disclosures have allowed listed companies’ shareholders to better monitor the performance of their executive team.</p>
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<p>Until 1998, disclosure of the remuneration paid to individual company executives was not required from Australian listed companies. Instead, a banded disclosure showing the number of executives in each relevant salary band was required.</p>
<p>The push to disclose executive pay started in 1998, when the <a href="https://www.legislation.gov.au/Details/C2004C00969">Company Law Review Act (1998)</a> introduced the requirement for listed companies to disclose the details of the nature and amount of the salaries of each director and the five officers of the firm receiving the highest salary. </p>
<p>Listed corporations responded slowly to this requirement. One problem was the confusion over whether the term used in the legislation - “emoluments” - covered equity-based remuneration like options. To assist companies in interpreting the new requirements, in November 1998 the Australian Securities and Investment Commission (ASIC) issued a <a href="http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-68-new-financial-reporting-and-procedural-requirements/">Practice Note</a>with the intent of clarifying some of the accounting-related requirements introduced by legislation. </p>
<p>Generally, corporate disclosures about executive remuneration were of pretty <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-629X.2006.00197.x/full">low quality</a> after the legislation was introduced, especially disclosures about the value of equity-based remuneration. However, the unexpected collapse of telecommunications company One.Tel and insurance company HIH Insurance in 2001, amid concerns that poor remuneration practice was <a href="http://www.unswlawjournal.unsw.edu.au/sites/default/files/23_hill_and_yablon.pdf">partly to blame</a>, brought the issue of executive pay clearly into public focus.</p>
<p>In June 2003, ASIC issued a <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2003-releases/03-202-valuing-options-for-directors-and-executives/">media release</a> to provide unequivocal guidance about remuneration disclosures. ASIC’s chief accountant, Greg Pound, stated:</p>
<blockquote>
<p>ASIC expects all listed companies to comply with their legal obligations, and will consider action against directors if full remuneration, including option values, is not disclosed.</p>
</blockquote>
<p>Around the same time, the Australian accounting regulator, the Australian Accounting Standards Board (AASB), began to draft an accounting standard on remuneration disclosures. This was ultimately released in <a href="http://www.aasb.gov.au/Archive/pre-2005-AASB-standards.aspx">January 2004</a>. In addition to clarifying many definitional issues, the standard set out explicit and detailed remuneration reporting and disclosure guidelines, including rules for the valuation and disclosure of equity-based compensation. </p>
<p>Also in 2004, the <a href="https://www.legislation.gov.au/Details/C2004A01334">Corporate Law Economic Reform Program Act</a>introduced expanded remuneration disclosures as well as a non-binding shareholder vote on remuneration.</p>
<p>The need for all these regulations became even clearer as poorly designed remuneration played a role in the 2008 global financial crisis. The remuneration practices of overseas financial institutions was <a href="http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2009/025.htm&pageID=003&min=wms&Year=&DocType=0">heavily criticised</a>for encouraging excessive risk taking in the lead up to the crisis. </p>
<p>Concerns over executive remuneration ultimately led to a Productivity Commission inquiry into executive pay in Australia. Published in <a href="http://www.pc.gov.au/inquiries/completed/executive-remuneration">2009</a>, the commission’s report recommends (among other things) the implementation of the current “two-strikes rule” for shareholder voting on remuneration. The two-strikes rule was introduced as law in 2011.</p>
<p>This historical path to the current rules on remuneration demonstrates that regulating in this area is fraught with difficulties. </p>
<h2>What this means for professional bodies</h2>
<p>Organisations like CPA Australia are not required to prepare a detailed remuneration report or to disclose the remuneration of individual directors or executives. Likewise the individual pay of key executives of government supported organisations such as Australia Post or the Australian universities is not a compulsory disclosure.</p>
<p>Along with CPA Australia, the professional accounting body Chartered Accountants Australia New Zealand (CAANZ) disclosed CEO Lee White’s 2017 remuneration in response to inquiries from the <a href="http://www.afr.com/business/accounting/accounting-body-boss-reveals-600000-salary-20170314-guxmk7">Australian Financial Review</a>. Similarly, the Tax Institute revealed the remuneration of its <a href="http://www.afr.com/business/accounting/accounting-body-boss-reveals-600000-salary-20170314-guxmk7">CEO Noel Rowland</a>. However, a third Australian accounting body, the Institute of Public Accountants (IPA), has not disclosed individual executive remuneration. </p>
<p>When it comes to how these professional bodies usually report remuneration, a total remuneration figure for the executive team or providing a banded remuneration disclosure (which shows the number of individuals within each relevant salary band above a specified minimum salary) is usually common practice. For example, the Australian Institute of Company Directors (AICD) revealed the collective remuneration of its 12 person executive team but not <a href="http://aicd.companydirectors.com.au/about/annual-reports">individual pay</a>. Australian universities generally provide a banded remuneration disclosure but also reveal individual vice chancellor pay levels in response to media inquiries. </p>
<p>There is murkiness around the clear disclosure of executive pay outside of the public company sector. Individual remuneration is generally not disclosed to members or to the public but can be revealed at the discretion of the organisation concerned if inquiries are made. </p>
<p>It’s clear from the scenario unfolding around CPA Australia that members expect disclosure of individual executive and director pay as part of the transparency and accountability owed to them by their professional body. There’s also an argument for a similar duty to disclose to stakeholders for government owned or funded organisations. </p>
<p>Further regulation may not be needed to extend remuneration reporting requirements outside of the corporate sector. However, this may be the start of a trend in voluntary remuneration disclosure, as an act of accountability to stakeholders. After all, sunlight is said to be the best disinfectant.</p><img src="https://counter.theconversation.com/content/78934/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In the past, Julie Walker has received research funding from Chartered Accountants Australia New Zealand (CAANZ). She is currently chair of the CAANZ Education Board, a role which carries zero remuneration.</span></em></p>The amplified public concerns about executive pay that led to the cementing of reporting and disclosure into law, may start trend of voluntary disclosure among professional bodies.Julie Walker, Associate Professor in Accounting, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/779412017-05-22T19:59:38Z2017-05-22T19:59:38ZThe science of business decision making: giving out perks doesn’t necessarily lead to results<figure><img src="https://images.theconversation.com/files/170065/original/file-20170519-12260-1h0p2on.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Office perks like slides down stairs may not be the best way to motivate good behaviour</span> <span class="attribution"><span class="source">Scott Beale/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p><a href="https://books.google.com.au/books/about/Drive.html?id=A-agLi2ldB4C&redir_esc=y">Research shows</a> that when it comes to cognitive tasks, like decision making, paying people more can lead to worse outcomes. If we want to get the best out of our executives, the ideal amount to pay them is “enough to take money off the table”. </p>
<p>Anything extra might excite them, but not in a way that makes them better executives. Put simply, giving a CEO one, two or three million dollars might motivate them. But it doesn’t necessarily follow that they will work any harder if offered four, five or six million. </p>
<p>That’s because they don’t really need the sixth million. It does not provide upside motivation, and could have the reverse effect. Research shows when you have enough money then you value the next dollar less, and may not work as hard for it.</p>
<p>There are other motivations that drive performance, such as the prestige of a particular company or job. Paying someone less may lead to better outcomes when they are motivated by these other factors.</p>
<p>In practice, if we want the best decision making, this means we should pay executives enough so they feel rewarded for their efforts, but no more than others would take to do the same job, says associate professor Prabhu Sivabalan. </p>
<hr>
<p><em>Hear more on what professor Prabhu Sivabalan has to say on decision making, also what Game Theory has to say about the decisions that lie behind where businesses set up shop with academic Stephen Woodcock, in this edition of Business Briefing.</em></p><img src="https://counter.theconversation.com/content/77941/count.gif" alt="The Conversation" width="1" height="1" />
Research shows paying people more can actually lead to worse decisions. Getting the best results from executives requires understanding our complex motivationsJenni Henderson, Section Editor: Business + EconomyJosh Nicholas, Deputy Editor: Business + Economy, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/727382017-02-10T03:41:59Z2017-02-10T03:41:59ZAustralia Post salary scandal highlights our nation’s growing wage inequality<figure><img src="https://images.theconversation.com/files/156297/original/image-20170210-8651-u2uvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia Post CEO Ahmed Fahour earned $5.6 million in 2015-16.</span> <span class="attribution"><span class="source">AAP/Tracey Nearmy</span></span></figcaption></figure><p>How much more than an average worker should a CEO earn? Research shows Australians <a href="https://hbr.org/2014/09/ceos-get-paid-too-much-according-to-pretty-much-everyone-in-the-world">believe</a> CEOs should earn eight times more. It is perhaps unsurprising, then, that revelations about the salary of Australia Posts CEO Ahmed Fahour have caused a public furore this week.</p>
<p>Fahour’s pay is <a href="https://www.theguardian.com/australia-news/2017/feb/09/posting-a-profit-how-does-the-australia-post-ceos-pay-compare-with-other-executives">estimated at</a> up to 119 times that of a postal worker, and 73.5 times that of the average earnings in the transport, postal and warehousing industry. </p>
<p>In 2015-16, <a href="http://www.abc.net.au/news/2017-02-07/australia-post-senior-executive-salaries-revealed/8249728">he earned</a> A$5.6 million – made up of A$4.4 million in salary and superannuation, and a A$1.2 million bonus. This has – at least for now – rightly put wage inequality on the national political agenda. </p>
<h2>Questions of transparency</h2>
<p>It’s not just that it’s a lot of money. Australia Post has, until this week, been able to keep Fahour’s salary top secret. It adamantly did not want us to know, even trying to gag the <a href="http://www.smh.com.au/business/senate-committee-denies-australia-post-attempt-to-keep-ahmed-fahours-salary-secret-20170207-gu7n05.html">Senate committee</a> it was required submit the information to in 2016. </p>
<p>Australia Post protested that revealing the size of the managerial swag-bag might mean people would <a href="http://www.smh.com.au/business/senate-committee-denies-australia-post-attempt-to-keep-ahmed-fahours-salary-secret-20170207-gu7n05.html">“become targets for unwarranted media attention”</a>. It <a href="http://www.abc.net.au/news/2017-02-08/australia-post-ceo-salary-not-reasonable-international-peers/8251028">also griped</a> that making the bulging pay packets public could “lead to brand damage for Australia Post”. </p>
<p>This is corporate double-speak writ large. Brand damage for sure. But the reason is that the top-six Australia Post executives earn the same as <a href="http://www.businessinsider.com.au/half-of-australia-posts-36-million-profit-last-year-went-to-just-six-executives-2017-2">half of the business’ total profits</a>. Customers and citizens might rightly think this is just wrong – and, in the end, the customer is the one who is paying. </p>
<h2>Executive pay comparisons</h2>
<p>There is a rule of thumb in business ethics called the <a href="https://businessethicsblog.com/2010/12/08/business-ethics-and-the-new-york-times-rule/">“New York Times Test”</a>. It states that a business should not do anything that it would not want to see reported on the front page of the newspaper. Australia Post has not only failed this test, but it has deliberately tried to avoid being subject to it by its insistence on secrecy.</p>
<p>Australia Post is especially sensitive because it is a government-owned corporation. So, while it can still earn profits, there are no shareholders it is accountable to. Ultimately, Australia Post is answerable to the government.</p>
<p>Overindulgent executive salaries are usually rationalised with vague arguments that eschew responsibility. Managers and their PR minions harp on about the need to compete for global talent. Australia Post joined the chorus, very specifically defending the salaries of its chiefs because they were <a href="http://finance.nine.com.au/2017/02/09/12/03/australia-post-in-damage-control-over-6m-executive-pay">“in line with market practice”</a>.</p>
<p>The poverty of this argument is palpable. Australia is leading the way internationally on this executive salary creep. And top postal executives in other countries earn a fraction of <a href="http://www.abc.net.au/news/2017-02-08/australia-post-ceo-salary-not-reasonable-international-peers/8251028">what is paid here</a>. Britain’s postal boss does well, earning the equivalent of A$2.5 million. Fahour’s US counterpart takes home just A$543,616. In Canada, the salary is A$497,000. </p>
<p>The public has responded to news of Fahour’s salary with justified indignation. Even <a href="http://www.smh.com.au/federal-politics/political-news/malcolm-turnbull-says-56-million-salary-of-australia-post-boss-ahmed-fahour-is-too-high-20170207-gu7t06.html">Prime Minister Malcolm Turnbull</a> chimed in, saying he thinks Fahour’s salary is excessive. </p>
<p>As exorbitant as Fahour’s salary might be, it is just the tip of the iceberg when it comes to executive pay in Australia. It even looks relatively modest when <a href="http://edge.alluremedia.com.au/uploads/businessinsider/2016/08/10-highest-paid-CEOs-on-asx-100.jpg">compared to the sums</a> taken home by CEOs in the corporate sector. </p>
<p>Peter and Steven Lowy at Westfield share A$25 million in realised pay. Seek’s Andrew Bassat yields just under A$20 million, and Nick Moore at Macquarie Group scrapes in over A$16 million. </p>
<p>These salary extravagances seem tame if you think that the top 1% of Australians <a href="http://www.sbs.com.au/news/article/2017/01/16/aussie-billionaires-richer-bottom-fifth-population">have as much wealth</a> as the bottom 70%. Gina Rinehart and Harry Triguboff alone own more that the bottom 20%.</p>
<h2>Missing the broader point</h2>
<p>The real point of all of this has been totally missed in the rush to side-step political accountability. </p>
<p><a href="http://www.afr.com/news/politics/malcolm-turnbull-says-ahmed-fahours-pay-is-too-high-20170207-gu7un4">For Turnbull</a>, it was just another <a href="http://www.huffingtonpost.com.au/2017/01/29/malcolm-turnbull-wont-join-global-trump-criticism-it-is-not-my-job/">“not my job”</a> moment. The Australia Post board responded in a similarly dismissive way, with a promise to have <a href="http://www.theage.com.au/business/australia-post-to-look-into-ceos-ahmed-fahours-pay-but-no-formal-review-20170208-gu8qvu.html">“a discussion”</a> the best it could muster. </p>
<p>At least the Senate had the nerve to call Australia Post chairman John Stanhope to publicly justify its executive wage bill at Senate Estimates <a href="http://www.abc.net.au/news/2017-02-09/australia-post-john-stanhope-to-front-senate-over-salaries/8255958">later this month</a>. </p>
<p>Meanwhile, the cost of living for average Australians and its relationship to wages and penalty rates remain <a href="http://www.9news.com.au/national/2017/02/06/11/45/hot-issues-in-australian-politics">key political issues</a>. This is quite right, given the way that people are rewarded by corporations is a <a href="http://amr.aom.org/content/41/2/324.short">key determinant of income inequality</a>.</p>
<p>No doubt the earnings of Australia Post’s top brass will fade from the headlines. What won’t fade so quickly is the way the gaps between the earning of those executives and rest of the Australian population keeps getting bigger. </p>
<p>This cannot be dismissed with facile arguments about the “politics of envy”. Instead, we need to take heed of research that clearly shows inequality is <a href="http://evatt.org.au/news/wealth-nation.html">continuing to widen in Australia</a>, and that this rising inequality is <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674430006">harmful to economic and social stability</a>.</p><img src="https://counter.theconversation.com/content/72738/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s not just that Ahmed Fahour earns a lot of money. Australia Post had, until this week, been able to keep its CEO’s salary top secret.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/694222016-12-11T19:08:22Z2016-12-11T19:08:22ZAustralia is ripe for shareholder activism<p>Compared to other developed financial markets, Australia’s conditions favour shareholders when it comes to engaging with the companies they invest in. This is not only because of the rules in <a href="http://asic.gov.au/for-business/running-a-company/members-of-a-company/">Australia’s Corporations Act of 2001,</a> but also because of the large and growing pool of superannuation savings.</p>
<p>Like many other countries, shareholders in Australia vote on executive remuneration reports, commonly known as “say on pay”. This is helped by an increased amount of quality information disclosed to shareholders and companies prioritising shareholder engagement before annual general meetings. </p>
<p>Shareholder activism is done mainly in meetings closed to the general public. Information is only made public if it’s strategically beneficial to someone in the meeting. So it’s hard to verify the exact role shareholder activists play. </p>
<p>According to <a href="http://www.fticonsulting.com/about/newsroom/press-releases/fti-consultings-global-shareholder-activism-map-revealsincreased-shareholder-activism-around-the-globe">FTI Consulting</a>, Australia ranks third in the world on the “activism threat level”.</p>
<h2>Australia’s investing conditions</h2>
<p>The greater power afforded to shareholders partly comes down to the <a href="http://asic.gov.au/for-business/running-a-company/members-of-a-company/">Corporations Act of 2001</a>. </p>
<p>The first power is the two-strike rule, which allows just 25% of shareholders to vote down a company’s remuneration proposal and ultimately spill the boards of directors. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876925">According to a study</a> based on 4,145 say-on-pay votes between 2011 and 2013, 306 (7.4%) firms received first strikes, of which 51 (16.7%) received second strikes. This resulted in 12 board spills, with all but 8 directors returned to office. </p>
<p>The study also showed that directors’ accountability increased as shareholders were allowed to vote on remuneration. However, the market considers this type of action, especially when shareholders vote against remuneration, as destroying some of the value of the company. This is reflected in a negative market reaction. </p>
<p>Another measure that affords shareholders some power is the relatively low threshold of 5% of issued shareholdings that’s required to call an extraordinary general meeting. These meetings are used to convey shareholders’ dissatisfaction and demand a change in board composition, or to force strategic business decisions, such as closing down an unprofitable business unit.</p>
<p>One more aspect of Australia’s financial landscape that makes it attractive to shareholder action is its pension savings pool. It’s <a href="https://www.australianshareholders.com.au/news/shareholder-activism-australia-seen-equity-magazine">the fourth largest in the world</a>, at approximately A$2 trillion (forecast to be about A$6 trillion by 2035). These super funds have the voting power to exert influence on board decisions and, given their long-term investments, they have genuine interest in the success of the firm. </p>
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<h2>Active shareholders in Australia</h2>
<p>Many of Australia’s shareholder activist groups or individuals, such as Sandon Capital, Sir Ron Brierley and Thorney Opportunities, are short-term investors. This means they target companies to change the board composition, business strategy and restructure capital.</p>
<p>For example, <a href="http://www.sandoncapital.com.au/site/images/pdfs/1506_Sandon_BSL_AU_presentation.pdf">after publicly releasing</a> an analysis of BlueScope in mid-2015, Sandon Capital worked with other shareholders and the company to restructure its operations. Sandon proposed mothballing the Port Kembla mill, to enable it to pay dividends, save costs and improve performance.</p>
<p>Sandon Capital also campaigned for substantial board changes in mid-2015 at biotech company <a href="http://www.couriermail.com.au/business/sandon-capital-seeks-to-turf-out-biotech-alchemia-founder-tracie-ramsdale-and-chairman-tim-hughes/news-story/174485ccb58faaa1a963475dd08a8f26">Alchemia</a> when it accumulated a loss of A$145 million. This resulted in the retirement of Tim Hughes as chairman of the board and the appointment of Sandon’s proposed Ken Poutakidis as a board director.</p>
<p>Shareholder activity is also concentrated around firms with small to medium-sized market capitalisation. Between 2013 and 2016,
<a href="https://www.abl.com.au/Shareholder-activism-1">86%</a> of the activists targeting Australian companies were from small domestic funds with a maximum of around A$6 billion to invest.</p>
<p>Recently added to this list of activists are long-term investors such as UniSuper, Australian Super and the Australian Council of Superannuation Investors (ACSI). The ACSI represents industry funds such as Cbus, HESTA and Hostplus. </p>
<p>In November, more than 25% of shareholders including these super funds voted down the remuneration proposal at Commonwealth Bank. This is an unprecedented event in the history of Australian markets. It signalled a new era of activism from passive super funds. </p>
<p>The three largest US-based passive funds - BlackRock, Vanguard and State Street – are also shoring up their presence in Australian companies. </p>
<p>According to <a href="http://www.smh.com.au/business/markets/blackrock-vanguard-state-street-are-not-passive-on-corporate-governance-20161030-gseb74.html">Morningstar research</a>, BlackRock owns 5% or more of 43 companies on the ASX, including Bendigo and Adelaide banks, CSL, Rio Tinto, Suncorp and Transurban. State Street Global Advisors holds 5% or more of nine companies, mostly REITs, while Vanguard sits on 32 companies including Tabcorp, Aristocrat Leisure and Mirvac. </p>
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<img alt="" src="https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=652&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=652&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=652&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=819&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=819&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149555/original/image-20161211-31379-1u3mzx1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=819&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">Author provided</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Australian regulatory and institutional environments favour more active shareholder engagements. There isn’t much evidence, though, of any long-term benefits to all shareholders from this type of activism by short-term investors in Australia. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2656325">Evidence</a> from around the world on this is at best mixed. </p>
<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2505261">Other research suggests</a> the growing power of super investors, with the accumulation of retirement savings in superannuation, will translate into more engagement with the companies they invest in. This also increases the value for other shareholders of the company, its corporate governance and performance. </p>
<p>If we’re looking to the future as to what this trend will bring, perhaps superannuation funds should consider strategically expending the regulatory “tools” afforded to them as shareholders, to add value to companies they invest in with a long-term, rather than short-term, focus.</p><img src="https://counter.theconversation.com/content/69422/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shams Pathan receives funding from 2013-2016 Australian Research Council Discovery Early Career Research Award (ARC DECRA) # DE140100253. </span></em></p>Australia’s rules on how investors engage with companies, coupled with the clout of superannuation investor groups, means there’s potential for more shareholder activism.Shams Pathan, Senior Lecturer, Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/697592016-12-07T15:41:35Z2016-12-07T15:41:35ZBritain’s battle over executive pay will be a futile stomp over old ground<figure><img src="https://images.theconversation.com/files/149049/original/image-20161207-3992-6k3mmk.jpg?ixlib=rb-1.1.0&rect=175%2C161%2C4163%2C2694&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-521200432/stock-photo-man-offering-batch-of-hundred-dollar-bills-hands-close-up-venality-bribe-corruption-concept-hand-giving-money-united-states-dollars-or-usd-hand-receiving-money-from-businessman.html?src=YLnmvW4f43xr0wocask0ag-1-44">bluedog studio/Shutterstock</a></span></figcaption></figure><p>Theresa May has made tackling corporate excess one of her key priorities in government. In a <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/573438/beis-16-56-corporate-governance-reform-green-paper-final.pdf">Green Paper on Corporate Goverance</a> reform she promised shareholders a binding vote on executive pay and proposed that companies publish pay ratios between the highest and lowest paid staff. In truth, this recent focus of attention is not new – we’ve all been here before.</p>
<p>The Prime Minister’s proposed reforms will not be effective in either reducing the headline figure of executive pay (if indeed that is their objective), nor in making executives any more accountable. Unfortunately, May seems to have misunderstood the problem and is proposing measures which might be great politics, but are nowhere near radical enough to lead to substantive change.</p>
<p>We are used to headline-grabbing controversies about the corporate elite. This has been going on for decades. In 1995, for example, the British Gas AGM lasted six hours as the CEO, Cedric Brown, had his 75% pay rise voted down while a <a href="http://www.cityam.com/207544/executive-pay-why-i-long-restrained-days-cedric-pig">live pig called Cedric</a> was paraded to display unions’ discontent with executive “snouts in the trough”. These scandals helped to spark a series of major interventions in corporate governance. </p>
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<img alt="" src="https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/148402/original/image-20161202-25677-nu4k85.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The growing divide between executive pay and the rest.</span>
<span class="attribution"><span class="source">Income Data Service</span>, <span class="license">Author provided</span></span>
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<h2>Get the party started</h2>
<p>Business leaders such as <a href="http://www.icaew.com/-/media/corporate/files/library/subjects/corporate-governance/financial-aspects-of-corporate-governance.ashx?la=en">Sir Adrian Cadbury</a>, <a href="http://www.ecgi.org/codes/documents/greenbury.pdf">Sir Richard Greenbury</a> and <a href="http://www.ecgi.org/codes/documents/hampel_index.htm">Sir Ronnie Hampel</a> were invited to self-regulate. By 1997, it seemed self-regulation had done the trick. Left-leaning columnist Polly Toynbee triumphantly declared that finally, <a href="http://www.independent.co.uk/voices/lets-have-some-change-from-bt-1262416.html">the party was over</a>. The party, however, was only just beginning for the corporate elite. </p>
<p>The system companies use to determine levels of executive pay is based on the recommendations of a 1995 committee headed by Greenbury, the former CEO & Chairman of Marks & Spencer. Their efficacy is rarely questioned despite ongoing controversies and the fact they are now more than 20 years old. Greenburys’ reforms were designed, among other things, to link pay and performance, so the pay of the executive team was in some way reflective of the value they bought to shareholders. </p>
<p>However, there is a mass of empirical data produced by academics and policy centres alike, which indicates this relationship is malfunctioning. Research conducted at Newcastle University and <a href="http://highpaycentre.org/files/state_of_pay.pdf">confirmed elsewhere</a> shows that the link between pay and performance was actually markedly stronger in the period before Greenbury. </p>
<p>Critics will point to the <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/abmi/pn2">large increase in UK GDP since 1995</a> as a mitigating factor in that, but clearly this suggests that the system adopted before Sir Richard published his report in 1995, actually represented a better system for remunerating top executives. In fact, LSE visiting Professor and Financial Times contributor, John Kay <a href="https://www.johnkay.com/2010/04/28/when-a-bonus-culture-is-just-a-poor-joke/">has suggested</a> there is little evidence to support the view that bonuses, LTIPs (Long Term Incentive Plans) or share options increase corporate performance at all. <a href="http://centaur.reading.ac.uk/24831/1/IRFpaperJuly11.pdf">Research</a> has suggested it is organisational size, not performance, which is the key determinant of executive pay.</p>
<h2>Design issues</h2>
<p>The Prime Minister is simply focusing on the wrong issues. It is the foundations of the Greenbury-inspired system which are the problem, not the rules built on this flawed base. Research on voting patterns and shareholder engagement supports this assertion. First, if we look at shareholder engagement, there is evidence that shareholders are simply not holding boards of directors to account (on this issue and others). </p>
<p><a href="https://www.researchgate.net/profile/Graham_Sadler/publication/227795148_Shareholder_Voting_and_Directors'_Remuneration_Report_Legislation_Say_on_Pay_in_the_UK/links/00b7d5294f15076398000000.pdf">In a study</a> analysing UK shareholder voting on pay, less than 7% of shareholders were found to either abstain from, or vote against, the director’s remuneration report resolution which effectively rubber-stamps pay deals. <a href="http://eprint.ncl.ac.uk/pub_details2.aspx?pub_id=189086">Research by Anna Tilba</a> at Newcastle University Business School illustrates that such involvement by pension funds – the de-facto owners of swathes of shares – was “more assumed than demonstrated in practice”.</p>
<p>In other words there is a large question mark over the ability of the owners of capital to hold their agents to account in the traditional model of corporate accountability proposed by May. Sir Ferdinand Mount, a former advisor to her predecessor, David Cameron, wrote:</p>
<blockquote>
<p>We pretend that the shareholders possess powers that they effectively lost long ago, and we imagine that the behaviour of the corporation is disciplined by an array of checks and balances that are often no more than decorative today.</p>
</blockquote>
<h2>Ownership of fools</h2>
<p>One of the reasons for this lack of engagement is that the nominal ownership of our top companies is becoming more diffuse; Professor Kay has called this the era of “<a href="http://www.nytimes.com/2015/10/11/books/review/other-peoples-money-by-john-kay.html?_r=0">financialisation</a>”. What does this mean? Well, the <a href="http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp171778_327674.pdf">Office of National Statistics reported in 2012</a> that close to 60% of UK shares were held in nominee accounts and that just 10% were registered to private individuals. Shareholders who hold shares in nominee accounts are not listed on company share registers. These shares are held by institutions and as such the beneficial owner is not allowed to vote directly on matters such as pay. </p>
<p>The key problem with this is that institutions can tend to act in very different ways than most shareholders would expect, or desire. The likelihood is that these shares are traded or loaned without the owner’s explicit consent. Investment firms might “churn” in this way <a href="https://books.google.co.uk/books?id=JzkD_ooCNlYC&pg=PA162&lpg=PA162&dq=institutional+investor+churn+rates%5D%23&source=bl&ots=s2Z910jrcb&sig=_6zzqmReNf2hsnFEqJsT1nK4bPw&hl=en&sa=X&ved=0ahUKEwjdtr6DleLQAhUMIMAKHV37BGAQ6AEILDAE#v=onepage&q=institutional%20investor%20churn%20rates%5D%23&f=false">about 60% of their portfolios</a> on average over a year. Just as <a href="https://www.bloomberg.com/news/articles/2015-11-30/expobank-to-buy-rbs-s-russian-assets-as-foreign-banks-retreat">your bank</a> can make questionable investment decisions with your savings, your shares could actually be used to <a href="https://theconversation.com/explainer-what-is-short-selling-9337">short sell</a> the same company you’re invested in, completely without your knowledge. This symptom of financialisation epitomises the view that it has long been more profitable in the UK to make money, than make things. </p>
<p>It is the system which is broken not its rules. It is surely now time to admit that self-regulation is dead, along with the assumptions we’ve attached to the ownership of our companies. The corporate elite have tried and failed to self-regulate, now it’s time for a different approach. For instance, the idea of two tier boards, <a href="http://www.thesundaytimes.co.uk/sto/public/Appointments/article391767.ece">championed by Sir Richard himself,</a> should be revisited. May has instead <a href="http://www.telegraph.co.uk/business/2016/11/21/theresa-may-backtracks-on-putting-workers-on-company-boards/">backtracked on her suggestion to put workers on boards</a>, and in doing so has made the mistake of being far too conservative. Instead of wheeling out a broken system and expecting different results this time around, surely now is the moment to be radical.</p><img src="https://counter.theconversation.com/content/69759/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Price does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The last 20 years of failure to tackle boardroom excess should prompt a more radical approach.Michael Price, Research associate, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/689642016-11-20T23:14:52Z2016-11-20T23:14:52ZViewpoints: should Australian companies set executive pay to a US benchmark?<p><em>It’s the time of the year when company boards and executives face their shareholders at annual general meetings. Boards will be asked to explain the pay packages of executives. Already some have been called into question.</em> </p>
<p><em>Some Australian companies <a href="http://www.smh.com.au/business/comment-and-analysis/goodman-group-boss-must-be-better-than-good-for-a-16-million-bonus-20161114-gsotb6.html">cite the need to rely</a> on the United States as a benchmark when it comes to setting remuneration. We asked two experts to discuss the evidence for and against this idea.</em></p>
<p><em>Julie Walker argues that Australian companies should look to the US to set executive pay because it’s an effective yardstick and helps attract overseas talent. Reza Monem argues that Australian firms operate in different conditions to those in the US, so a different measure should be applied.</em></p>
<hr>
<p><strong>Julie Walker:</strong></p>
<p>The Commonwealth Bank was the latest large Australian corporate to bear the wrath of shareholder outrage about executive remuneration <a href="http://www.abc.net.au/news/2016-11-10/cba-remuneration-report-voted-down/8012454">when, in November, the bank’s shareholders voted “no”</a> to accepting CEO Ian Narev’s remuneration package. </p>
<p>Clearly executive pay is a controversial issue in Australia and <a href="https://theconversation.com/two-strikes-law-for-shareholders-but-will-it-curb-executive-pay-3912">the two strikes legislation</a> gives shareholders a voice in this matter. But isn’t it time that we used an objective and meaningful benchmark to set the pay of Australian CEOs? It could help to avoid some of the shareholder angst about pay that unfolds in every Australian reporting season.</p>
<p>Looking globally, and particularly at the US, to benchmark Australian CEO pay makes economic sense. <a href="https://www.jstor.org/stable/3592881?seq=1#page_scan_tab_contents">Research warns against</a> “entrenched” CEOs who are appointed from within a company and “capture” the board of directors, allowing them to effectively set their own remuneration. </p>
<p>This is a particular concern in Australia where the executive labour market is small. According to an <a href="https://acsi.org.au/publications-1/research-reports.html">ACSI research paper</a>, which looked at CEO appointments at 50 of the largest ASX listed companies between 2003 and 2007, almost 60% of new CEO appointments were internal appointments.</p>
<p>Benchmarking executive pay against relevant overseas countries like the US puts these arrangements in context and gives investors an objective yardstick against which to assess the reasonableness of Australian executive pay. </p>
<p>Australian companies also need the capability to compete globally. Unless executive salaries are on a par with overseas competitors, there’s a risk that our corporations will attract lower quality executive talent to the top jobs. </p>
<p><strong>Reza Monem:</strong></p>
<p>The trouble with using an external benchmark, such as US CEO pay, is there are no standards as to how objective and meaningful it can be.</p>
<p>First of all, CEOs are not paid for their hours. They are paid for the talent, leadership, business acumen, and strategy skills they bring to the firm. </p>
<p><a href="https://cas.hse.ru/data/986/481/1225/Oct%2021%20Corporate%20governance,%20chief%20execu..pensation,%20and%20firm%20performance.pdf">Extensive research suggests</a> that the drivers of CEO pay include firm size, firm complexity, profitability, firm risk, ownership concentration and governance quality. US firms are much larger than Australian firms. </p>
<p>Today, an average S&P 500 firm has a <a href="http://siblisresearch.com/data/total-market-cap-sp-500/">market capitalisation of about US$36.8 billion</a>. By contrast, the ASX 300 firms have an average <a href="https://www.asx300list.com/">market capitalisation of only A$5.2 billion</a>. </p>
<p>Besides, Australia and the US vastly differ in ownership concentration and governance structure. For example, in Australia, CEOs of <a href="http://www.sciencedirect.com/science/article/pii/S1815566913000027">small or less-profitable firms</a> are often also chairman of the company’s board. In the US, it’s <a href="http://www.sciencedirect.com/science/article/pii/S0304405X0700181X">usually only large and more profitable firms</a> that have a CEO who is also a chairman. </p>
<p>Australian firms are usually less profitable compared to a typical US firm. More importantly, there is not a lot of evidence to suggest that the US CEO pay structure is best practice in the world. The US has its fair share of controversy over CEO pay.</p>
<p>Moreover, using an external benchmark is not going to solve the CEO entrenchment problem. How a CEO behaves is a complex mix of variables, including their personal and professional goals, their bargaining power, the regulatory environment, ownership structure and internal governance of the company they work in. A CEO who delivers performance surely would demand greater control of the firm. </p>
<p>Yes, Australian firms need to compete globally and they need to attract talented CEOs. But talent is only a single component of CEO pay. It’s not in the interests of anyone for a firm to pay its CEO beyond the firm’s means. </p>
<p><strong>Julie Walker:</strong></p>
<p>Benchmarking Australian CEO pay against their US counterparts will not necessarily lead to higher remuneration for Australian executives. Benchmarking is a comparative process and, as Reza points out, there are good reasons why some CEOs are paid more than others (firm size, complexity, profitability). </p>
<p>These reasons can and should be factored into the comparison. Many Australian corporations already track counterpart companies’ performance, as a basis for performance based remuneration. Benchmarking to US executive salaries is just another small step and completely consistent with current remuneration practice.</p>
<p>If Australian business wants talented, innovative business leaders, then the remuneration offered must be sufficiently attractive to retain and reward the individuals concerned. </p>
<p>If Australian investors want more assurance that CEO remuneration packages are commensurate with remuneration offered overseas, then benchmarking against US executive remuneration will help to provide that assurance. </p>
<p><strong>Reza Monem:</strong></p>
<p>If Australian CEOs were under-paid, we would have seen our top CEOs going overseas and taking leadership of larger, better firms. Australia would have been a country that exports CEOs. </p>
<p>But statistics show quite the contrary. In ASX 200 firms, 80% of the CEOs <a href="http://www.news.com.au/finance/work/leaders/why-arent-australians-getting-australias-top-jobs/news-story/7c3c313d22d8b6589">are either born or educated overseas</a>. So we import talent.</p>
<p>Tracking counterpart firms’ performance might be a good idea in setting CEO pay, but if the counterpart firm operates in a different market where the institutional environment is different, then finding the right firm to compare with might be elusive. </p>
<p>This is where the problem lies. If a firm wishes to find a counterpart, ideally it should find one within the same market and within the same industry. To what extent the US market for executives is similar or comparable to the Australian market is really the big question.</p><img src="https://counter.theconversation.com/content/68964/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Reza Monem is affiliated with "Reflections on Development and Governance", an independent think tank.</span></em></p><p class="fine-print"><em><span>Julie Walker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Two experts debate whether or not Australian executive pay should be benchmarked against that of US companies.Julie Walker, Associate Professor in Accounting, The University of QueenslandReza M. Monem, Associate Professor & Discipline Head of Accounting, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/669382016-10-17T14:37:27Z2016-10-17T14:37:27ZInside the machine: how two Nobel winners taught us how companies tick<figure><img src="https://images.theconversation.com/files/141806/original/image-20161014-30272-42kxgz.jpg?ixlib=rb-1.1.0&rect=58%2C243%2C5464%2C3329&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-263090813/stock-photo-vintage-watch-movement-close-up-showing-cogs-wheels-and-jewels.html?src=LeMOYMx8zmq4ZMH0hcm_WA-1-28">Alex Yeung/Shutterstock</a></span></figcaption></figure><p>One of the most notable evolutions in economic theory is the change in how we look at companies. No longer do we see a black box which uses some process or technology to turn inputs into outputs. These days <a href="http://www.sciencedirect.com/science/article/pii/0304405X7690026X">we think of a business</a> as a nexus of contracts among <a href="http://www.jstor.org/stable/1815199">different stakeholders</a> – shareholders, creditors, managers, workers, customers, suppliers and so on. </p>
<p>This evolution has led us to look at corporate governance through the design of contracts between those stakeholders. Oliver Hart and Bengt Holmström have laid the foundation to enable us to do that. The 2016 <a href="https://theconversation.com/why-contract-theory-won-hart-and-holmstrom-the-nobel-economics-prize-64011">Nobel prize in Economics</a> went some way to acknowledging this contribution. </p>
<p>While contracts are commonplace, they are generally not simple. They might be designed at times when the objectives of stakeholders differ (the so-called “<a href="http://www.jstor.org/stable/1837292">agency problem</a>”). For example, shareholders may want to maximise a company’s profits, while managers may want to build an empire through mergers and acquisitions. </p>
<p>There is also something called “<a href="http://www.investopedia.com/terms/a/asymmetricinformation.asp">asymmetric information</a>”, where the actions of one set of stakeholders are not visible to other stakeholders in the company. Everyone can read the financial statements, but shareholders cannot directly see how much effort the managers put in to drive profits.</p>
<p>Shareholders can, however, enter into a contract with a company’s leaders that would give the managers an incentive to work in the interest of the shareholders. Pay can be linked to observable measures of a company’s performance. Similarly, shares and stock options may be included. <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2016/press.html">In the Nobel citation</a>, Holmström, a Finnish professor working at the Massachusetts Institute of Technology, was credited with demonstrating how shareholders should design an optimal contract for a CEO whose actions they would not be able to fully monitor.</p>
<p>Contracts can also be incomplete. It is either not possible or too expensive to write contracts that take into account <a href="http://www.jstor.org/stable/1122818">all possible future outcomes</a>. It is precisely the incompleteness of contracts that provides a <a href="http://www.jstor.org/stable/2235027">rationale for corporate governance</a>. This follows from research <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2016/press.html">carried out by Hart</a>, a British professor working at Harvard.</p>
<h2>Hart of the matter</h2>
<p>Consider, for example, a simple executive pay scheme in a company where shareholders own the company but control lies with the management. The relationship offers both an agency problem and asymmetric information. As mentioned earlier, one option for shareholders would be to write a contract that <a href="http://dx.doi.org/10.1016/S1573-4463(99)30024-9">links the compensation of the managers</a> to an observable outcome such as revenue or profit. </p>
<p>But profits can be affected by factors out of a manager’s control, and a contract that takes into account all combinations of managerial effort and external factors is impractical. Managers generally act in groups and so it may also prove difficult to assign an outcome to one person. You can write contracts that penalise the group if a product fails or a plant proves inefficient, of course, but Holmström argued that uncertainty about the causes of such failures would mean that monitoring would be necessary and hence the associated <a href="http://www.jstor.org/stable/3003457">costs are unavoidable</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/141796/original/image-20161014-30236-bebw06.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Market leading managers?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-133681769/stock-photo-a-woman-is-overwhelmed-with-the-wide-range-in-the-supermarket-when-shopping.html?src=ZpqF57aX-IKzqQOkD2pflg-1-15">Lisa S/Flickr</a></span>
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<p>You could judge the performance of managers against that of their peers to decide compensation (a supermarket CEO might cheer that sales are up 10%; shareholders less so if other stores are up 12%). But this approach would still only work if you can successfully remove the influence of common external factors affecting how managers perform. </p>
<p>In this case, where simple contracts may not be easy to design or enforce, we need a mechanism – corporate governance – that ensures that the interests of non-managerial stakeholders are not undermined. Hart views <a href="http://www.jstor.org/stable/1122818">corporate governance</a> as a mechanism to allocate rights to control a company’s non-human assets among the stakeholders.</p>
<h2>Credit due</h2>
<p>An interesting implication of this perspective on corporate governance is <a href="http://www.jstor.org/stable/2297860">a rationale for debt</a>. Suppose the shareholders of a firm are mainly interested in short-term profits, while managers prefer grandiose empire building that brings private perks and benefits. Any contract that attempts to address this conflict is likely to be incomplete, unable to account for every influence over the company’s future profits. </p>
<p>This opens up the possibility of a significant dispute between the shareholders and the managers about the latter’s compensation. Managers might claim low profits came despite their best efforts, rather than because of their poor efforts or judgement.</p>
<p>How can debt help in this case? A debt contract can enable the creditor to enforce liquidation of a firm if it cannot meet its repayment obligations. If the firm performs well and can meet these obligations, control over the assets of the company remains with the managers. If, on the other hand, the company performs poorly and cannot repay the creditors then it can be liquidated. At the time of liquidation, after the creditors have been repaid, the residual (or remaining) rights over the company’s assets are with the shareholders – the managers have no rights over these assets any more. </p>
<p>In other words, where contracts between shareholders and managers are incomplete, debt taken on for whatever reason can force an alignment of objectives. In the words of <a href="http://www.nber.org/chapters/c4434.pdf">Hart and Sanford J Grossman</a>: “managers can avoid losing their positions only by being more productive.” Productive managers are precisely what shareholders want. A company’s capital structure can, therefore, be used to both discipline managers and give <a href="http://www.jstor.org/stable/2118355">outsiders (creditors) an incentive</a> to enforce the discipline. Hart and Grossman also examined how control is exerted in <a href="http://www.nber.org/papers/w2347">work on voting rights</a>. </p>
<p>Holmström and Hart do not provide all the answers to resolve the problems associated with weak corporate governance. They do, however, induce us to think about a firm as a microcosm of the society in which we live, where stakeholders with different objectives compete for power and control. Their work has helped us to move away from one-size-fit-all rules about things such as financial structure and pay and has led us to focus on making contracts and mechanisms that work. That is a transforming contribution to corporate governance research.</p><img src="https://counter.theconversation.com/content/66938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I am a (joint) recipient of a UKIERI grant to undertake research on financial sector development and corporate governance in India.
I am a member of the University and College Union.</span></em></p>Hart and Holmström changed the way we think about corporate governance.Sumon Bhaumik, Chair in Finance, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/661132016-09-28T20:11:44Z2016-09-28T20:11:44ZWe need to change more than pay for executives to do better<p>The pay of executives of a company, whether in salary, bonuses or other types of remuneration, is usually justified as an incentive to improve the financial performance of a company. This has led to ever more complex performance packages with increasing percentage of variable, <a href="https://www.ft.com/content/9265406a-eaaf-11e4-96ec-00144feab7de">performance-based payments</a>.</p>
<p>But what is increasingly evident is that this definition of a role of an executive needs to change, as do the incentives, to act not only in the best financial interests of the company but to focus on how it serves the wider community.</p>
<h2>How executive pay changed for the worst</h2>
<p>Executives payments are <a href="https://theconversation.com/australia-should-compare-ceo-and-average-worker-pay-like-the-us-and-uk-65898">in the spotlight in Australia</a> and <a href="https://www.theguardian.com/business/2016/sep/16/legal-general-warns-firms-over-bonuses-executive-pay">overseas</a>, yet again as companies report this information. </p>
<p>As the market for top executives is global, there is a limited talent pool. In essence, if an Australian company is not prepared to pay the going rate, the talent will go elsewhere in the world to where a company is prepared to pay. </p>
<p>The design of executive pay in Australia has undergone significant change since the mid 1990s, when executive pay began to pick up. A smaller percentage of an Australian executive’s reward package was subject to performance incentives 20 years ago. A majority were on fixed pay or with short-term bonuses payable when they reached a specific measurable target. Today, the variable component of executive pay is much higher.</p>
<p><a href="https://www.ahri.com.au/resources/reports-and-white-papers/2009_pay_check_executive_remuneration.pdf">Findings from a survey</a> on executive remuneration by the Australian Human Resource Institute shows that within Australia, executive pay is typically comprised of three components: fixed remuneration and short and long-term incentives. </p>
<p>This three-part structure is endorsed by the human resource profession as it acknowledges not only the skill and experience an executive brings to a role (fixed remuneration) but the effort an individual executive makes to change performance and culture leading to better financial performance (short-term incentive) and improvement to shareholder returns (long-term incentives). </p>
<p>However, an increasing number of studies show these type of performance schemes <a href="http://highpaycentre.org/files/_hpc_Essays_FINAL_04_%281%29.pdf">do not lead to better organisational performance</a> and <a href="https://hbr.org/2016/02/stop-paying-executives-for-performance">actually have dangerous outcomes</a>. This is because it incentivises executives’ risk-taking and short-term orientation and <a href="https://dash.harvard.edu/handle/1/12025608">can lead to disastrous outcomes</a>, such as the Bear Stearns and Lehman Brothers collapses. </p>
<p><a href="http://www.psa.asn.au/Oldsite/news/files/The_Buck_Stops_here.pdf">A 2003 Australian study</a> shows that performance-based executive remuneration has not lead to increased performance by Australian companies. Current executive remuneration focuses heavily on short-term financial performance ignoring other success factors, such as customer satisfaction. </p>
<p>For example, Commonwealth Bank CEO Ian Narev is one of the <a href="https://theconversation.com/australia-should-compare-ceo-and-average-worker-pay-like-the-us-and-uk-65898">highest paid executives in Australia in 2016</a> despite a series of recent <a href="http://www.smh.com.au/business/banking-and-finance/comminsure-scandal-to-hit-cba-brand-again-20160308-gndj4y.html">scandals that shook the bank</a>.</p>
<p>Another distortion created by finance based incentives is the temporary effects of executive payment packages. BHP CEO Andrew Mackenzie’s pay was halved due to the company’s loss and he was <a href="http://www.theaustralian.com.au/business/opinion/terry-mccrann/bhp-and-chief-andrew-mackenzie-get-raw-deals/news-story/dd34539799c35597d92e0120b4fb98ec">left to deal with decisions made by his predecessor</a>. The former CEO, Marius Kloppers, walked away with a sizeable pay package in large part due to his term coinciding with very favourable economic conditions for mining and the fact that he could vest both his short and long-term incentives before leaving.</p>
<p>These limitations of current performance-based payment schemes have led to the proposal of payment packages that enable executives to <a href="http://www.law.harvard.edu/faculty/jfried/How%20To%20Tie%20Equity%20Compensation%20to%20Long%20Term%20Results.pdf">sell only a fraction of shares awarded to them each year</a>. This includes a specified number of years after retirement, combined with limitations on unwinding. </p>
<p>Such schemes still reward executives for improving companies’ performance but do not lead to short-term thinking and risk-taking. Unfortunately, changes to performance payment schemes are still rare. </p>
<h2>The alternatives</h2>
<p>While some companies in the US have started to bind performance payments to long-term results, such as Goldman Sachs, Procter & Gamble and Morgan Stanley, companies in Australia still haven’t followed suit. One Australian organisation that has made changes to address the above challenges in executives’ remuneration is fund management agency <a href="http://www.futurefund.gov.au/news-room/2016/05/23/Long-term-investing-as-an-agency-problem">the Future Fund</a>.</p>
<p>There are more radical suggestions such as completely <a href="https://hbr.org/2016/02/stop-paying-executives-for-performance">abolishing pay-for-performance</a>. The suggestion to abolish performance payment is aligned with the concept of stewardship. </p>
<p>Stewardship is about placing others’ long-term interests ahead of personal goals that serve an individual’s self interests. According to stewardship theory, executives are custodians of their organisations and are intrinsically motivated to contribute to their welfare and prosperity. It’s their personal beliefs and intrinsic motivation that drives their performance, not performance-based payments.</p>
<p>Revising performance structures is just one measure to increase stewardship among executives. Stewardship is based on fundamentally different assumptions about human nature than financial performance incentives. It emphasises the <a href="https://www.bkconnection.com/static/Stewardship_2nd_EXCERPT.pdf">social orientation and profession-like behaviour of managers</a>. </p>
<p>However you can’t rely on human nature alone, other measures are needed to change the <a href="http://highpaycentre.org/files/_hpc_Essays_FINAL_04_(1).pdf">institutional context in which businesses operate</a>. </p>
<p>These include changing the laws to reflect that the role of business in society goes beyond financial performance. Another measure is <a href="http://press.princeton.edu/titles/8463.html">changing business education</a> to cultivate future business leaders in moral judgement and accountabilities.</p>
<p>The recruiting process can also change to select candidates with demonstrated long-term orientation and care for all stakeholders, <a href="http://www.forbes.com/sites/joeltrammell/2015/02/09/what-are-the-right-criteria-for-selecting-a-new-ceo/#374de4ad381b">rather than based on the current focus on past financial performance</a>. Another measure is introducing external remuneration committees with employee representation and excluding current directors.</p>
<p>Such changes to the institutional context require a significant rethink of current business and economic practices and government policies. Despite calls for such changes <a href="http://www.psa.asn.au/Oldsite/news/files/The_Buck_Stops_here.pdf">in Australia</a> and <a href="http://www.highmeadowsinstitute.org/about/our-perspective/">overseas</a>, there is little we can be optimistic about at the moment.</p><img src="https://counter.theconversation.com/content/66113/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Studies show performance-based incentives for CEOs do not lead to better organisational performance.Natalia Nikolova, Senior Lecturer in Management, University of Technology SydneyRobyn Johns, Senior Lecturer in Human Resource Management and Industrial Relations, University of Technology SydneyWalter Jarvis, Course Director, Master of Management; Lecturer in Managing, Leading & Stewardship, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/636852016-08-12T13:29:42Z2016-08-12T13:29:42ZThe murky politics of boardroom pay<figure><img src="https://images.theconversation.com/files/133916/original/image-20160812-16333-uc4x74.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>During her leadership campaign for prime minister, Theresa May described the gap between boardroom and worker pay as “<a href="http://www.ft.com/cms/s/0/0d2170ae-49ae-11e6-8d68-72e9211e86ab.html#axzz4GkfH3YXt">irrational, unhealthy and growing</a>”. Her call for listed companies to publish the ratio between CEO and average worker pay reflected concerns across the political spectrum that the pay gap between rich and poor has become unsustainably wide. </p>
<p>Between 1949 and 1979, the share of income going to the top 0.1% of earners actually <a href="http://highpaycentre.org/img/High_Pay_Commission_More_for_Less.pdf">fell from 3.5% to 1.3%</a>. But since then the trend has reversed. Pay differentials between CEOs and their employees provide a vivid illustration of this. According to the High Pay Centre, the average FTSE 100 CEO was <a href="http://highpaycentre.org/blog/ftse-100-bosses-now-paid-an-average-143-times-as-much-as-their-employees">paid 47 times more than the average employee</a> in 1998 – by 2015 this had risen to <a href="http://highpaycentre.org/pubs/10-pay-rise-thatll-do-nicely">129 times</a>.</p>
<p>The growing pay gap in UK companies takes effect against an unprecedented decline in average workers’ real wages, which have fallen <a href="http://blogs.lse.ac.uk/politicsandpolicy/real-wages-and-living-standards-the-latest-uk-evidence/">by around 8-10% since 2008</a>. It is the stagnant wages of ordinary workers in the UK that has led to high rates of pay in the corporate sector <a href="http://pdf.pwc.co.uk/time-to-listen.pdf">assuming greater political significance</a>. </p>
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<p>Surveys consistently report public concerns that <a href="https://www.cipd.co.uk/binaries/The-view-from-below_2015-what-employees-think-CEO-pay-packet%20.pdf">CEO pay in the UK is too high</a> and that <a href="https://www.ippr.org.uk/publicationsandreports/publication.asp?id=820">political intervention is warranted</a> to reduce the gap between high and low earners. If wage differentials continue along their current trajectory, the UK will have <a href="http://highpaycentre.org/img/High_Pay_Commission_More_for_Less.pdf">returned to Victorian levels of income inequality by 2030</a>. The key question, however, is how did we get here? </p>
<p>Explanations for the inequality in pay must take account of both structural issues, such as the <a href="http://davidcard.berkeley.edu/papers/union-wage.pdf">reduced influence of collective bargaining</a>, which explain poor wage growth for average workers, and the various drivers of inflation-busting increases for high-earning executives. </p>
<p>Research on the reasons for the growth in executive pay is <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582232">notoriously contradictory</a>. The standard economic approach of executive pay – known as the optimal contracting model – maintains that firms design the most efficient compensation packages possible in order to attract, retain and motivate executives. This contrasts with the <a href="http://www.law.harvard.edu/faculty/jfried/Executive_comp_Agency_%20Prob.pdf">managerial power model</a>, which suggests that boards and compensation committees connive with CEOs to agree excessive compensation packages that are neither justified by market fundamentals nor CEOs’ market power.</p>
<p>Documents made publicly available <a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/">as a result of litigation in the US</a>, however, suggest that both models ignore the extraordinary collusion among major UK company chairs in bringing about widening pay differentials. </p>
<h2>The Chairmen’s Club</h2>
<p>In 1982, senior officers from major UK-based companies, including Boots, the Beecham Group (now part of GlaxoSmithKline), Rio Tinto and Unilever, came together at Imperial Chemicals House to discuss boardroom pay. The Chairman’s Club, as it was described in <a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=fmfl0196">one document</a>, had convened at the request of Sir John Harvey-Jones, then chair of Imperial Chemicals Industries. The <a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=gnfw0199">minutes of its first meeting</a> indicate that those present unanimously agreed that the remuneration of executive directors and senior management in the UK was “too low on any international comparison” and that most felt that this “was not rational nor acceptable”. </p>
<p>The consensus was that there was “a need for a cohesive drive on [the] issue”, despite the obvious political difficulties involved in driving up the pay of top management while “<a href="http://legacy.library.ucsf.edu/tid/hgt30a99">trying to persuade employees at large to accept moderate pay settlements</a>”. This difficulty was reported to be “<a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=gnfw0199">well understood around the room</a>” and led to “<a href="http://legacy.library.ucsf.edu/tid/hgt30a99">a strong emphasis on some kind of bonus or payment by results system which would be far less controversial</a>”. To counteract public disquiet, Sir Graham Wilkins, chair and chief executive of the Beecham Group, suggested that they approach the Institute of Economic Affairs to produce a written rationale <a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=fmfl0196">supporting a trend towards higher remuneration</a>.</p>
<p>It is unclear from the limited documents available how the club evolved or what actions it subsequently took. The minutes of the first meeting indicate that the chairs planned to meet regularly in the first instance and then annually “<a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=gnfw0199">once procedures had been established</a>.”</p>
<p>There is no contemporary evidence of the club meeting and collectively discussing pay. Nonetheless, the documents highlight the intensely political nature of top pay and even report that the chairmen had previously been “<a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=gnfw0199">too fearful about union and political reaction to high remuneration</a>”. More to the point, the initiative also seems to have had a profound effect in resetting the market for corporate pay.</p>
<h2>The power of collective action</h2>
<p>Accurate data prior to the 1990s is limited. But there is a measure of consensus that both <a href="http://highpaycentre.org/img/High_Pay_Commission_More_for_Less.pdf">large increases in executive pay</a> and <a href="http://highpaycentre.org/files/academic_literature_review_FINAL.pdf">stock-based compensation</a> as a significant feature of executive pay first emerged in the 1980s. It is stock-based compensation that now typically accounts for <a href="http://www.vlerick.com/en/research-and-faculty/research-for-business/governance-ethics/executive-remuneration-research-centre/our-research-output">much of senior executives’ rewards</a>. Executive pay in the UK is also now significantly higher <a href="http://www.vlerick.com/en/research-and-faculty/research-for-business/governance-ethics/executive-remuneration-research-centre/our-research-output">than that in comparable European countries</a>.</p>
<p>The justification for the initiative is also fascinating. The club <a href="https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/#id=gnfw0199">noted</a> that “competition for management talent [was] growing internationally”, that senior executives in major UK companies were “insufficiently trained and professional”, and that “performance [had] been inadequate by international standards”. </p>
<p>The idea of an international market for CEOs has since been used ad nauseam <a href="http://review.chicagobooth.edu/magazine/fall-2013/are-ceos-overpaid">to justify high CEO pay</a>. But there is <a href="http://fortune.com/2013/04/16/is-there-really-such-thing-as-a-global-ceo/">little evidence to support it</a>. </p>
<p><a href="http://highpaycentre.org/files/CEO_mobility_final.pdf">One recent study</a> found that 80% of CEO appointments in the Fortune Global 500 were internal promotions and only four CEOs had been poached while they were CEOs of another company in a foreign country. There is some evidence to suggest that this makes economic sense. CEOs promoted from within <a href="http://irrcinstitute.org/wp-content/uploads/2015/09/Executive-Superstars-Peer-Benchmarking-Study1.pdf">seem to perform better than external recruits</a>.</p>
<p>Whether UK senior management has improved relative to their international counterparts since the 1980s is a moot, and untestable, point. The Chairmen’s Club does, however, appear to have been successful in ensuring that the lion’s share of improvements in company value and productivity have gone to those at the top. The irony is that this seems partly a consequence of elite collective action – which when practised by conventional trade unions is claimed <a href="http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/">to price their members out of work</a>.</p>
<p>Wage inequality not only undermines the consumption of core goods and services, which keeps the economy on an even keel, it also de-legitimises the very system that rewards the rich. The logical conclusion is that the government should use everything at its disposal to control excessive pay: regulation, the tax system and further lobbying reform. Perhaps it might start by ignoring the pleas of <a href="https://www.ft.com/content/f69c1ce2-5c92-11e6-bb77-a121aa8abd95">various business groups currently lobbying</a> against the planned increase to the UK’s minimum wage.</p><img src="https://counter.theconversation.com/content/63685/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Fooks is a member of the Labour Party.</span></em></p><p class="fine-print"><em><span>Kevin Farnsworth is a member of the Labour Party.</span></em></p><p class="fine-print"><em><span>Karen West does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The ever-widening gap between CEO and average worker pay has its roots in collective action by executives.Gary Fooks, Senior Lecturer in Sociology and Public Policy, Aston UniversityKaren West, Senior Lecturer in Public Policy, Aston UniversityKevin Farnsworth, Reader in International Social Policy, University of YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/544962016-02-17T14:40:09Z2016-02-17T14:40:09ZPay ratios could curb excessive CEO pay and counter inequality<p>Google CEO Sundar Pichai has earned an eye-popping pay rise. He was awarded US$199m in shares, according to a recent filing with the <a href="http://www.sec.gov/Archives/edgar/data/1534753/000112760216039906/xslF345X03/form4.xml">US Securities and Exchange Commission</a>. It makes him the highest-paid chief executive in the US and though he sits at the top of the pile, news of his or any CEO’s big pay rise will come as little to surprise to many.</p>
<p>CEO compensation has grown at an alarming rate over the last three decades. In 1980 most CEOs at major British companies earned around 15 times <a href="http://highpaycentre.org/files/Cheques_with_Balances.pdf">the average salary</a>. By 1998 the ratio of CEO to average worker pay was 47:1. In 2014 it had ballooned <a href="http://highpaycentre.org/files/The_Pay_Today_draft.pdf">to roughly 183:1</a>. </p>
<p>In the US, the ratio is even higher. According to the <a href="http://www.aflcio.org/Corporate-Watch/Paywatch-2015">AFL-CIO</a>, a federation of labour organisations, the salary of a typical S&P 500 company CEO in 2014 was 373 times the salary of an average rank-and-file worker – that’s US$13.5m compared to US$36,000. </p>
<h2>How did we get here?</h2>
<p>Some commentators aim to justify high pay on the grounds of company performance and that the efforts of these highly-skilled individuals is pivotal for a company’s success. These claims, however, are not supported by <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=316590">the research</a>. CEO skill has been found to have more influence over captive corporate boards, not-so-independent remuneration committees and beholden compensation consultants in the ratcheting up of CEO pay. And the runaway train that is excessive compensation, shows no sign of slowing down.</p>
<p>CEO pay began to increase following calls for pay to be more closely pegged to a company’s performance. But if the intent was for growth in pay to keep pace with growth in firm performance, this hasn’t been achieved. The reality is that growth in CEO pay has continuously outpaced company performance – as measured by revenues and profits – even <a href="http://www.telegraph.co.uk/comment/columnists/robert-colvile/11158607/Yes-CEOs-are-ludicrously-overpaid.-And-yes-its-getting-worse.html">outpacing the FTSE 100 index itself</a>.</p>
<p>These days the typical CEO’s pay packet comprises a salary, an annual bonus, and an equity-based component – usually in the form of long-term incentive plans and other short-term awards in the shape of company stocks and shares, as Pichai received. In this regard, the 1980s were a <a href="http://highpaycentre.org/files/academic_literature_review_FINAL.pdf">watershed period</a>, largely due to the introduction of share-based schemes, which are partly responsible for the explosion in CEO pay levels. The same has not happened for average wages, yet the benefits of increasing them extend beyond the employee, and have the <a href="http://www.livingwage.org.uk/sites/default/files/BAR_LivingWageReport%20cropped%2021%2001.pdf">potential to benefit businesses, as well as individuals</a>.</p>
<h2>Pay ratios are the way forward</h2>
<p>Making it mandatory for companies to publish their pay ratios is one way to curb excessive growth of executive pay and income inequality. This is a solution Jeremy Corbyn, leader of the Labour Party in the UK, put forward <a href="http://www.independent.co.uk/news/uk/politics/jeremy-corbyn-announces-plans-to-ban-senior-executives-from-receiving-vastly-higher-salaries-than-a6815261.html">in a recent speech</a> and – perhaps more powerfully than a suggestion made by a left-leaning leader of an opposition party – is being introduced in the US. </p>
<p>The Securities and Exchange Commission, the main Wall Street regulator, <a href="http://www.nytimes.com/2015/08/06/business/dealbook/sec-approves-rule-on-ceo-pay-ratio.html?_r=0">voted in favour of the rule last year</a> and it will become mandatory for most public companies to regularly reveal the ratio of CEO pay to that of employees as of 2017.</p>
<p>Although UK companies are <a href="http://www.legislation.gov.uk/ukdsi/2013/9780111100318/schedule">currently required to disclose CEO compensation</a> as it compares with their employees, they are not required to disclose long-term pay incentives, such as shares, which are a large component of current executive pay packets. And they are only required to compare the amount of CEO compensation with the pay of a select group of employees, not that of every worker.</p>
<p>The publication of pay ratios will likely help to reduce pay inequality as a result of the outrage that ratios would produce. In their <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674022287">book on executive pay</a>, Harvard and Berkeley academics Lucien Bechuk and Jesse Fried, outline some of the problems with how pay is determined. They emphasise the importance of “outrage” when it comes to reversing the trend of CEOs setting their own, inflated compensation packages. </p>
<p>Flaws in the way that companies are governed mean that CEOs are largely constrained by the reaction of outsiders when it comes to setting their compensation arrangements. This reaction could range from mere criticism of pay arrangements to fully-fledged outrage in the vein of the Occupy Wall Street movement. Only when outrage is high enough does it function as an effective deterrent.</p>
<p>A mandatory rule requiring the publication of top-to-bottom pay ratios could therefore have two potential effects. It may force corporate boards to rethink excessive CEO pay and would hopefully force an increase in the pay offered to lower-level employees as well.</p><img src="https://counter.theconversation.com/content/54496/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tobore Okah-Avae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The gap between CEO pay and average wage has sky-rocketed in the last 20 years. It’s not just unfair, it’s bad for business.Tobore Okah-Avae, PhD Candidate in Corporate Law, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/479972015-10-05T05:30:08Z2015-10-05T05:30:08ZWhy we should worry less about rising CEO pay<figure><img src="https://images.theconversation.com/files/97030/original/image-20151002-23109-1oakwvm.jpg?ixlib=rb-1.1.0&rect=27%2C121%2C965%2C495&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Seeing behind the headlines on executive pay.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/clagnut/252185030/in/photolist-ohvPL-5x36Z9-ixnTLX-3GNAaJ-xjqR25-hHWY5-w5q9AF-9LEdpf-oj1RWf-6kHJo-w3Hm3B-x6dV5i-8hr8dA-ueKhdm-w6bQTd-eJGgtA-8ho2Bc-vLMYhw-9bzek-94LJf8-9t7S2k-a5V7mw-9kCUM6-3etAfy-89rjL5-631vA6-8kQ176-eJAbmc-4MJ4x2-osu4h-6sagEr-eJGhwQ-6senuS-duufdB-8eHERD-65zBt-6sarSX-6sasGB-6sav1K-6saiiX-4RB5mX-6sewCo-6sanvn-4WPUPT-nbdZ-38xjWP-6sa8BH-8h5Agq-96G9rv-6segbU">Richard Rutter</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Rising CEO pay has become one of the prickliest issues in the wake of the global downturn. How can steep increases be justified in terms of the actual financial performance of firms? How do we justify the growing divergence of CEO pay and average employee pay growth? These are valid concerns over equity of pay, but very little detailed attention has been given to other factors that could have played their part – and continue to have an impact – on the increases for senior executives. It’s too easy to reduce the situation to a matter of greed.</p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/ecca.12163/abstract">We looked at data</a> from 2,755 US firms between 1993 and 2011, tracking levels of remuneration against reports of CEO dismissals from licensed databases and news reports. This shows a significant relationship between levels of risk of dismissal and pay. The more “risky” the position is – in other words, the more likely it is to be a short-lived and highly pressurised role – then the more that pay goes up. More specifically, based on our formula, each percentage point increase in risk leads to a 3% premium in pay.</p>
<h2>Merger mania?</h2>
<p>Various theories have been put forward to explain the growth in CEO pay in recent decades. <a href="http://economics.mit.edu/files/1769">Some studies suggest</a> that recent growth in CEO pay may be attributed to the growth in average US firm size. <a href="http://www.law.harvard.edu/faculty/jfried/Executive_comp_Agency_%20Prob.pdf">Some others</a>
highlight the possibility that CEOs can influence their own CEO pay. <a href="http://onlinelibrary.wiley.com/doi/10.1111/manc.12086/abstract">The results of our study</a> suggest that the rise in CEO pay is partially due to compensation for an increase in the risk of dismissal. This result is suggestive of a more efficient pay design for CEOs than we conventionally like to believe. There have been <a href="http://fortune.com/2014/06/20/a-rogues-gallery-of-troublesome-chief-executives/">high-profile cases</a> of rampant abuse of the governance mechanism by greedy CEOs, but it is still far from being the norm.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/97035/original/image-20151002-23101-o68r2i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Winging it. CEOs are motivated to take risks.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/smudge9000/2567684863/in/photolist-4UU4fF-6bCCkE-8Dmvwa-ahv3ch-ahsiCD-ahv2pA-ahsikr-ahv5Fm-ahv3t5-ahv5k5-ahshpV-EbrAb-6HfT5T-kRUAgZ-cvAGf5-8jrk9X-8juyNf-EMbFy-w5NCYB-aa37ws-6hJk3a-6y1n6M-nVDpKC-osNPdk-5hCEgA-a6mnaX-6PVCfA-5hyfCH-6UPgEj-6y5wpY-6y5vuj-eXKbuA-e2dYas-7tVBMP-7vTSeF-57Y7fn-8Qy6Po-8QuJfT-8Qudz4-8Qurcv-8QxscQ-gkaQbR-a1t7Vj-5ab48B-8i63WT-6K6vLb-5hCAXE-p39Gt3-5hyhGn-5hCBsy">Smudge 9000</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Another stylised belief is that CEOs are typically <a href="https://theconversation.com/merger-madness-rarely-pays-off-so-why-do-firms-still-make-these-deals-26130">hungry for acquisitions</a> to build their empire. A larger firm, generates both pecuniary and non-pecuniary rewards for the CEO – even at the cost of returns for shareholders. One way to increase the firm size is to undertake acquisitions and the theory goes that this may encourage a CEO to pursue a deal which may not be in the interests of the shareholders. There is another motivation too from the fact that a completed acquisition serves as a signal of managerial ability and may have an impact on the long-term earnings of the CEO. </p>
<p>Consistent with the above hypothesis, some studies have found that the CEOs of acquiring firms enjoy a post-acquisition pay premium. <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2007.01227.x/full">One reports</a> that the CEO of an acquiring firm receives a 10.5% pay premium compared to a CEO in a comparable firm not undertaking an acquisition. On the contrary, our research has highlighted that CEOs are more likely to be punished <a href="http://onlinelibrary.wiley.com/doi/10.1111/ecca.12163/abstract">as a result of “bad” takeovers</a>.</p>
<h2>Punishment</h2>
<p><a href="https://carlyforpresident.com/">A case in point is Carly Fiorina</a>, a Republican Candidate for 2016 US Presidential Election. During her tenure as the CEO of Hewlett Packard (HP), Fiorina pushed through <a href="http://fortune.com/2011/08/21/why-carlys-big-bet-is-failing-fortune-classics-2005/">a deal to acquire Compaq in 2002</a>, despite strong opposition from board member Walter Hewlett. HP struggled with the acquisition, profits fell sharply in the immediate aftermath, and Fiorina was <a href="http://fortune.com/2015/09/21/carly-fiorina-hp-ceo-business-record/">eventually dismissed in January, 2005</a>.</p>
<p>The narrative of M&A being something of a fool’s errand is not without evidence. We can assess how a merger announcement is received by tracking the response of the stock market over a seven day period, and working out the “abnormal” returns by comparing it to the rest of the market. The results reveal that just 38% of the acquisitions in a sample of 932 firms making acquisitions over 13 years had positive abnormal returns. The remaining 62% were associated with negative abnormal returns.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/97036/original/image-20151002-23058-140zm5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">For the chop?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/cogdog/8593669333/in/photolist-e6oNuD-dGDdbk-8TE6rC-6uLwpb-5XLpf-dXu1qi-Fch3-49Gg35-dFHuUS-4iGfTD-bpWoHF-6XbeEt-33fGbC-6qQPeD-8xmznf-bNjQRV-ar9tj6-4MMNVh-rZcCy-g7eden-8FqQqR-4opPMV-8HKpPE-4apbSA-iFAuHu-dTLhCx-aNnaya-9dg9rX-jiedz1-7pQB4R-nXDVqy-cggxPC-t5tYoE-ft6jqn-dzuSZ8-t3p9n3-j1WD27-gyied3-gX317V-7wFxFD-5sh2Ft-qmcDwK-6fopfB-9dg9s2-9dg9rP-9dg9rV-4F55HQ-fFSg5Z-ojcuKM-g1gyu">Alan Levine</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>It is telling that of those 932 firms, some 46% dismissed their CEO (compared with 18% among the other organisations) within two years of an acquisition. Now, if we ignore the likelihood of a CEO being fired, the acquisition pay premium was around 4%. But our research shows that CEOs are 35% more likely to lose their job post-acquisition, and taking that into account using an instrumental variable approach, the actual acquisition pay premium for CEOs is just 1.6%. But that’s only when the acquisition is a “good” one as defined by the market reaction above. There is a penalty of a 2.1% reduction in earnings for “bad” acquisitions, rising to 3% over the longer-term. These figures are similar for measures of pay with and without bonuses.</p>
<p>International, cross-border acquisitions, which might be considered to be more high-profile and adventurous, had no impact on the level of pay awards. Nevertheless, they were more likely to lead to a CEO dismissal.</p>
<h2>Risky business</h2>
<p>Notwithstanding the above results, we can’t simply conclude that incentives for CEOs are well balanced and efficient. Bosses routinely undertake risky and value-destroying acquisitions, which can have profound impacts on employment, production, and competition within the industry. These impacts are often not factored in the calculations of value-destroying acquisitions. Our research implies that the incentives for undertaking acquisitions can be for motivations other than pay increases, such as CEO hubris, strategic advantages, or simply imperfect decision making. </p>
<p>Public discourse is rife with controversy on CEO pay, but it is reductionist in approach. It implicitly assumes that CEOs do not face strong retribution for their greed and ignores that their pay necessarily incorporates this. Our research shows that (at least in two circumstances), CEOs can be and are disciplined through the mechanism of dismissal. If bad decisions are still being made with this sanction in place then discussions on executive pay must take note of this as we evolve new and more effective governance policies.</p><img src="https://counter.theconversation.com/content/47997/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Swarnodeep Homroy does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is too easy to blame naked greed for rising CEO pay. New research signals that bosses are being compensated for the risk of the chop.Swarnodeep Homroy, Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/462612015-08-21T02:53:00Z2015-08-21T02:53:00ZCEO pay is high, but it’s inequity that warrants attention<p>Excesses of CEO pay make headlines during annual company reporting season, particularly at a time where pay increases for the general population have been fairly static. Yet CEO pay levels in Australia have yet to reach the astronomical “eye-popping” levels experienced in the United States. </p>
<p>While <a href="http://money.cnn.com/gallery/news/companies/2015/05/16/top-paid-ceos/index.html">CNN has identified</a> 15 CEOs who are picking up salaries between $156 million and $40 million, here in Australia, our outrage is unlikely to prevent any CEO pay increases being turned back by shareholders using the “two-strike” rule. We are a pretty tolerant lot. Expect however there to be some discussions regarding income inequity.</p>
<p><a href="http://www.theage.com.au/business/banking-and-finance/commonwealth-bank-of-australia-chief-executive-ian-narev-paid-832m-in-2015-20150817-gj0o4s.html">CEO Ian Narev earned $8.32 million</a> in the 2015 financial year, an increase of nearly 5%. Or as the <a href="http://www.heraldsun.com.au/business/cba-chief-ian-narev-is-paid-twice-as-much-in-a-week-as-most-australians-get-in-a-year/story-fni0dcne-1227486815552">Herald-Sun</a> (pay-walled) puts it, Narev earned double the average annual Australian wage every week over the past year. </p>
<p>Departing Woolworths CEO, Grant O’Brien’s very generous package has already <a href="http://www.smh.com.au/business/cbd/the-long-kiss-goodbye-will-be-a-sweet-one-for-woolworths-boss-grant-obrien-20150617-ghpwvp.html">featured</a> in media reporting - O’Brien doesn’t formally finish until July 2016, enabling him to access his defined benefit superannuation entitlement of a percentage of his $2.35 million base salary for the rest of his life. </p>
<p>And although former Telstra CEO David Thodey stepped down on 30 April, Telstra’s annual report revealed his base salary as $2.65 million, plus a short term cash bonus of $3.4 million and $7.5 million in long term bonuses linked to share price. <a href="http://www.smh.com.au/business/comment-and-analysis/ceo-pay-in-spotlight-as-telstra-boss-pockets-163-times-average-workers-wage-20150813-giyduc.html">Fairfax</a> reports this as 163 times the average full time earnings for a worker in that sector.</p>
<p>Thodey doesn’t attempt to <a href="http://www.theage.com.au/business/i-cant-defend-my-high-salary-says-telstra-ceo-david-thodey-20150430-1mwtby.html">justify his salary</a> – on retiring he stated “there’s a real issue with income disparity”. Australia Post CEO Ahmed Fahour is another highly paid executive - in 2014, his $4.6 million pay packet was <a href="http://www.theaustralian.com.au/business/ahmed-fahour-maintains-pay-despite-fall-in-australia-post-earnings/story-e6frg8zx-1227097391372">criticised</a> amid large scale redundancies taking place at Australia Post.</p>
<p>In 2014, there were <a href="http://www.afr.com/business/salary-survey-2014--meet-australias-bestpaid-ceos-20141209-123pii">slightly fewer than 100 CEOs </a> earning $3 million or more, which is 88 times more than the minimum wage and 38 times the average full time earnings. David Gyngell from Nine Entertainment led the pack at $19.5 million. Fellow media CEO Robert Thompson from News Corporation came in third with a package of $13.2 million.</p>
<p>But consider the other end of the scale. In Australia the minimum wage is currently <a href="http://www.fairwork.gov.au/about-us/policies-and-guides/fact-sheets/minimum-workplace-entitlements/minimum-wages">$17.29 per hour</a> or approximately $34,000 per annum. The full time adult average weekly total earnings are around <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0">$1500</a> or approximately $78,000 per annum. </p>
<p>As John Wright <a href="https://theconversation.com/do-australians-still-believe-in-the-fair-go-views-on-pay-suggest-not-32552">pointed out last year</a>, Australians have a greater degree of tolerance for CEO pay inequity than do those in the United States, France, Germany and Japan. (Interestingly the US Securities and Exchange Commission in August is about to introduce a requirement that companies start <a href="http://www.natlawreview.com/article/sec-adopts-final-rules-ceo-pay-ratio-disclosure">disclosing the pay gap</a> between their top executive and workers, in response to the Dodd-Frank reforms.)</p>
<p>Partly that is because Australians grossly underestimate CEO pay levels. Notwithstanding, Australian tolerance may be because pay inequity is less extreme in Australia than in the US, where the CEO-to-worker compensation ratio has bloomed from 20-to-1 in 1965 to <a href="http://www.epi.org/publication/top-ceos-make-300-times-more-than-workers-pay-growth-surpasses-market-gains-and-the-rest-of-the-0-1-percent/">303-to-1</a> in 2014. (It peaked at 376-to-1 in 2000). </p>
<p>Transparency of CEO pay has been tackled by “Say on Pay” (SoP) rules, giving shareholders the right to have a say on executive pay have been adopted in non-binding and binding formats in countries including the UK, US, Belgium, the Netherlands, Norway, and Denmark. In 2011, Australia adopted a binding “Say on Pay” rule. This gives shareholders the right to vote for or against executives’ remuneration packages. </p>
<p>If at two consecutive meetings over 25% of shareholders vote against the remuneration packages, there is a “spill” of directors who have to stand for election again in 90 days – the so-called “two-strike” rule. Writing in The Conversation in 2013 Julie Walker <a href="https://theconversation.com/executive-pay-pain-wont-go-away-18696">pointed to evidence</a> elsewhere that companies with a first strike improved their pay-performance linkages. </p>
<p>Ricardo Correa and Ugur Lel’s 2013 <a href="http://www.federalreserve.gov/pubs/ifdp/2013/1084/ifdp1084.pdf">analysis of SoP laws</a> with 100,000 firm-year observations over 39 countries found:</p>
<blockquote>
<p>SoP laws are associated with 1) a lower level of CEO compensation, which partly results from lower CEO compensation growth rates and is related to CEO power, 2) a higher pay for performance sensitivity suggesting that SoP laws have the greatest effects on firms with poor performance, 3) a lower portion of total top management pay awarded to CEOs indicating lower pay inequality among top managers and 4) a higher firm value, which is related to whether the CEO’s share of total top management pay was relatively high before the laws are passed.</p>
</blockquote>
<p>Rejection of bonuses (or donating them to worthy causes) may ease some of the embarrassment of CEO pay but there are other more practical ways of addressing income disparity. </p>
<p>In April 2015, Dan Price, co-owner of Gravity Payments in Seattle, US, announced he <a href="http://www.theage.com.au/business/workplace-relations/pay-rise-backfires-on-gravity-payments-ceo-dan-price-20150802-gipmgh">would take a personal pay cut </a>(from his million dollar salary), reduce company profits at Gravity Payments and use these funds to increase the company’s minimum wage to $70,000 per annum over three years. </p>
<p>His move was met with <a href="http://www.nytimes.com/2015/04/20/business/praise-and-skepticism-as-one-executive-sets-minimum-wage-to-70000-a-year.html?_r=1">praise and scepticism</a>. In the three months since the announcement, Gravity Payments has seen a variety of unanticipated (by Price) consequences: customers have left claiming his move was political or socialistic or because they feared he would ultimately increase his charges to users (apparently most have since been attracted back). </p>
<p>Valued staff have left as their margins for skill and experience evaporated; his company’s co-founding brother sued; the attention led to an influx of emails, phone calls and media requests which required the hiring of new staff to expedite. He did however gain some new business - and a heap of job enquiries (and apparently some marriage proposals).</p>
<p>In the remaining days of the current company reporting season here in Australia, be braced for the usual outrage over executive pay. Expect this to be tempered by the occasional CEO declining their entitled performance pay as they alleviate their embarrassment of riches. But don’t expect to see a rush of CEOs taking pay cuts to reduce income disparity in their organisation.</p><img src="https://counter.theconversation.com/content/46261/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Raymond Harbridge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Earnings season highlights the disparity between our highest paid executives and those on minimum wages.Raymond Harbridge, Research Fellow, Centre for Workplace Leadership, Faculty of Business and Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/363422015-02-05T23:35:32Z2015-02-05T23:35:32ZWhy do people hate bankers? No, really…<figure><img src="https://images.theconversation.com/files/69606/original/image-20150121-29751-yf8a3h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Unfair?</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>In survey after survey bankers <a href="http://cuffelinks.com.au/public-hate-us/">rank poorly on ethics and honesty</a>. It’s not hard to find entire websites dedicated to bank hatred. And Bank of America consistently rates in the top 10 <a href="http://www.digitaltrends.com/mobile/sony-uber-sprint-worst-companies-america/">most hated companies</a> in the US.</p>
<p>Recent Australian <a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12081/abstract">research</a> looks to some of the potential reasons for Australian bank hate. Ameeta Jain and her co-researchers ask three questions in their research:</p>
<p>Do banks make excess profits? Are bank executives overpaid? Do banks pay their share of taxes?</p>
<p>Their work finds the answer is “no” to each of these questions.</p>
<h2>Excess profits?</h2>
<p>On the issues of size of profitability, Jain finds that the return to bank shareholders is about average for Australian companies. Banks are less profitable than telcos, health care companies, and non-bank financial institutions, but more profitable than companies which produce consumer staples, resources or energy. The work does report that bank returns are more stable over time than those of other sectors, but over the last decade have been consistently in the middle of the pack.</p>
<p>Jain speculates that public concern may well be focused on the absolute size of profits rather than on profitability. Size also plays a role in the debate about salaries.</p>
<h2>Silly salaries?</h2>
<p>The paper’s findings about salaries come to a stronger conclusion. Executive salaries appear to be lower than one might expect given the overall salary bills of the banks. In fact, it is the lowest of the sectors analysed. Relatively the best paid executives are in the energy sector, followed by materials companies. Banks rank last. The result is derived from a regression equation which explains salary by reference to the size, profitability, stock returns and firm risk. This result appears robust as the authors test a number of alternative measures but come up with the same findings.</p>
<h2>Tax dodgers?</h2>
<p>The findings on taxes are even more startling when put in an international context. Australian banks over the period 2003-2009 paid a median tax rate of 29.95%. By comparison Canadian banks paid 19.11%, German banks 16.41% while US banks never paid more than 11.86% in any year and UK banks never paid more than 9.50%. Looking at the Australian evidence Jain finds that the banks pay amongst the highest tax rates, just slightly below consumer staples.</p>
<p>So if Australian banks do not seem to make excessive profits, pay their share of taxes, and do not have excessive salaries, how do we explain the level of public concern?</p>
<p>At the same time, bank customers seem increasingly at ease with their banks. Over the last decade the banks have made a significant effort to reverse some of the negative public perception. The overall level of customer satisfaction with banks has risen sharply. </p>
<p>The most recent Roy Morgan survey found that “The satisfaction level of the personal customers of banks reached 81.6% in January, a marginal increase from 81.5% in December, but enough to achieve the highest level in the 18 years of this survey”. The gains are sizeable: a decade ago customer satisfaction scores were at about 65%. The big banks are still rated lower than the small banks but the gap has narrowed sharply.</p>
<h2>Too big to like</h2>
<p>One explanation for negative perceptions might be size. There are people who are concerned about big business in general, and the major Australian banks are big businesses. As a society we have institutions like the ACCC, APRA and ASIC whose function it is to prevent bad behaviour by these large organisations. Clearly they are not perfect and they have to act within their legislative briefs. Interestingly a number of the recent cases for which banks have been criticised were actually failures of investment companies or brokers.</p>
<p>There is also a group in society which is suspicious of business in general and for which the banks look like an easy target to express their doubts. While important to the public debate it is not clear where this tendency leads in Australia’s mixed economy. Government banks have been tried many times and failed many times. Governments are not very good at running businesses and that includes banks.</p>
<p>History, both ancient and modern, also helps shape attitudes. There has been an historical animosity between banks and the ALP arising from events in the depression of the 1890s, the Great Depression, and from Labor’s failed attempt to nationalise the banks after the Second World War. The experience of the 1990s, when branches were closed and the quality of customer service reduced, sustained and reinforced many public concerns about the banks. And recent concerns about financial advice have served to further reinforce scepticism about banks.</p>
<p>The research published in Economic Papers is helpful. To the extent criticism of banks is rational, we now have to look to factors other than profitability, salaries, and taxation contribution to explain the ongoing negative public perception of banks.</p><img src="https://counter.theconversation.com/content/36342/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock has no current affiliation with or shareholding in any financial institution. He has in the past worked in academia, in the public service and as a bank executive. His current research is focussed on financial sector regulation.</span></em></p>In survey after survey bankers rank poorly on ethics and honesty. It’s not hard to find entire websites dedicated to bank hatred. And Bank of America consistently rates in the top 10 most hated companies…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/325912014-10-07T05:15:15Z2014-10-07T05:15:15ZWhat corporate jets can tell us about a company’s fortunes<p>The news that Tesco took delivery of a £31m executive jet, bringing its <a href="http://www.theguardian.com/business/2014/oct/03/tesco-corporate-jet-gulfstream-supermarket">fleet of such aircraft to five</a>, brought fresh embarrassment to the troubled supermarket. Ordered in early 2013 under the aegis of the former CEO, it has rapidly been put up for sale by the new one. But given the company’s recent poor performance and admission of accounting irregularities, the purchase of a new airborne chariot for its executives has gone down like a lead balloon.</p>
<p>Buying a new executive jet during a moment of deep corporate crisis may seem like a quirk, but it seems to be a surprisingly common move. In July last year, Blackberry <a href="http://www.nytimes.com/2013/09/21/technology/blackberry-plans-to-cut-4500-jobs.html?_r=0">took delivery of a US$20m jet</a>. This happened almost precisely when the company rapidly lost market share to Samsung and Apple, had seen its share price tank, issued profit warnings and announced plans to fire 40% of its global workforce. </p>
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<a href="https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60931/original/22t4f6rx-1412608766.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Tesco bought a Gulfstream 550 last year.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/levien66/8532173916/in/photolist-dZXC3Q-5VesR7-cNxp8E-fsAGtW-55B6kW-mF7QSs-mF7NBA-bDxrCh-bSsb3i-bDxrMC-fsACFS-doVdm2-ejZ3J6-fUFR7m-bk1a1T-bR8Xca-j1yAxp-c25dwu-dMYN7R-cnnQsh-bMCHSk-dMYMW8-efVQ3n-eeoULS-ejZ3Ze-dN8QFd">RHL images</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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</figure>
<p>The decision to splash out on such a luxury when the company is floundering inevitably raises questions about how these businesses are being run. The actual cost of a jet is relatively small compared to Tesco’s recently announced <a href="http://www.theguardian.com/business/live/2014/sep/22/tesco-launches-inquiry-after-overstating-profit-forecasts-by-250m-business-live">billion-dollar losses</a>. But the decision screams that senior managers seem to be more interested in comfortable executive travel than getting their company in order.</p>
<p>One defence that has been mustered was that the decision was made in better times. Others have pointed out that executive jets are vital business tools that allow overstressed executives to use their time in the <a href="http://faculty.chicagobooth.edu/raghuram.rajan/research/papers/perks.pdf">most efficient and productive way</a>. </p>
<p>Perhaps the most generous interpretation is that the new jet was needed in the global mission to divest in many of its far-flung foreign operations. But to most it looks like evidence that the executive team were not focusing on crucial issues. Instead they seemed more interested in enjoying a comfortable ride while the company crashed.</p>
<h2>Part of the CEO package</h2>
<p>The revelation throws light on the wider issue of corporate jet ownership. Corporate jets were once the preserve of senior executives at only the largest companies. Now they are widely seen as a standard part of any CEO package. Corporate ownership of jets has actually soared following the financial crisis. In the US, corporate jet ownership was at a low of about 500 jets in the mid-1990s and <a href="http://edge.marginalq.com/corpJet.pdf">went up to about 1,800 in 2010</a>. </p>
<p>Proponents of the corporate jet suggest this is a good idea because it makes the best use of precious executive time and energy. The argument goes that the cost of running a fleet is insignificant when compared to the value that a fresh and focused CEO can provide. Supporters point out that CEO time is one of the most precious commodities in a corporation, and private jets help to make the most use of it. </p>
<p>Others have pointed out that executive jets are a relatively good way to incentivise CEOs. The cost of running a jet that a team of executives share is relatively small when compared to the hefty cost of many senior executive compensation packages.</p>
<h2>Bad for business</h2>
<p>But recent evidence indicates that corporate jets may do more to destroy shareholder value. Ownership of an executive jet actually seems to be <a href="https://faculty.fuqua.duke.edu/corpfinance/papers/2004.Yermack.pdf">linked with a company’s share price underperforming the market by about 4%</a>. When firms announce the purchase of an executive jet, their share price dips by 1.1%. </p>
<p>Corporate jets also tend to be more prevalent when the owners of the firm <a href="http://edge.marginalq.com/corpJet.pdf">do not closely monitor the business</a>. Privately owned firms, which tend to be more closely monitored by their owners, tend to have fewer executive jets than similar firms which are publicly listed. When publicly listed firms are privatised and become subject to closer owner scrutiny, the number of jets owned by firms tends to plummet. </p>
<p>This suggests that executives take advantage of the fragmented ownership and relatively lax attention given by owners of publicly listed firms to award themselves perks such as executive jets. And, if you were in any doubt that executive jets are just an efficient business tool, one final fact about executive jet ownership might be interesting. It seems that if the CEO has golf club memberships far from the headquarters, then <a href="https://faculty.fuqua.duke.edu/corpfinance/papers/2004.Yermack.pdf">use of the executive jet skyrockets</a>. </p>
<h2>What jets can tell investors</h2>
<p>Executive jets might enrage investors, employees and the broader public, but recent research suggests that by paying attention to where these jets travel may provide investors with some <a href="http://lsr.nellco.org/cgi/viewcontent.cgi?article=1298&context=nyu_lewp">forewarning of big news announcements</a>. A study by David Yermack, professor of finance at New York University, found that executives frequently use their jets not just for business trips, but also for vacations. </p>
<p>By tracking these vacations, it seemed that CEOs tended to fire up the executive jet and head to their vacation home just after they had announced favourable news to the market. Then, when on holiday, the companies tend not to release much news to the market. When the company jet collects them and returns the refreshed CEO to the office, the volatility of the company share price increases. It seems that CEOs, like the rest of us, are less likely to go on holiday when they have a greater stake in the company or the weather at their chosen destination is bad. </p>
<p>In an age when corporations are under continued pressure to not only return value to shareholders, but also show their merits to the wider public, it seems that executive jets are not such a smart choice.</p><img src="https://counter.theconversation.com/content/32591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The news that Tesco took delivery of a £31m executive jet, bringing its fleet of such aircraft to five, brought fresh embarrassment to the troubled supermarket. Ordered in early 2013 under the aegis of…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.