tag:theconversation.com,2011:/us/topics/ceo-pay-12522/articlesCEO pay – The Conversation2024-02-05T13:31:44Ztag:theconversation.com,2011:article/2224832024-02-05T13:31:44Z2024-02-05T13:31:44ZWhy Elon Musk’s ‘self-driving’ of Tesla’s board and its decision to pay him $56B collided with the law – and what happens next<p><em><a href="https://www.bloomberg.com/news/articles/2024-02-02/elon-musk-meets-his-match-in-shakespeare-quoting-delaware-judge?sref=Hjm5biAW">Delaware Chancery Court Judge Kathaleen St. Jude McCormick</a> has <a href="https://corpgov.law.harvard.edu/2024/02/01/tesla-musk-case-post-trial-opinion/">blocked Elon Musk’s US$55.8 billion pay package</a>, which <a href="https://abcnews.go.com/Business/wireStory/court-rejected-elon-musks-558b-pay-package-worth-106846409">Tesla’s board of directors approved in 2018</a> through a process she found to be “deeply flawed.”</em> </p>
<p><em>No CEO of a publicly traded U.S. company has ever been <a href="https://www.wsj.com/business/elon-musks-55-billion-tesla-pay-package-struck-down-by-judge-3e619f53?mod=hp_lead_pos9">paid this much</a> for one year’s work, according to Equilar, which tracks corporate leadership data. Pay for the 10 highest-paid executives, including Google’s Sundar Pichai and Apple’s Tim Cook, reportedly <a href="https://www.cnbc.com/2023/07/05/heres-how-much-the-10-highest-paid-us-ceos-earn.html">maxed out at around $250 million</a> in 2022.</em> </p>
<p><em>The Conversation asked <a href="https://www.udel.edu/faculty-staff/experts/justin-p-klein/">Justin P. Klein</a>, the director of the Weinberg Center for Corporate Governance at the University of Delaware, to explain McCormick’s reasoning.</em></p>
<h2>Why did the judge block Musk’s pay package?</h2>
<p>McCormick’s opinion began with a good question: “Was the richest person in the world overpaid?”</p>
<p>She concluded, in this reference to Musk – whose <a href="https://www.bloomberg.com/billionaires/profiles/elon-r-musk/">fortune was estimated to be worth $205 billion</a> before the ruling and consists largely of his <a href="https://www.washingtonpost.com/technology/2024/02/01/elon-musk-wealth-net-worth-companies/">Tesla shares and stock options, along with his SpaceX stake</a> – that he was. </p>
<p>This legal defeat may have <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">knocked Musk out of his perch</a> atop the Forbes list of the world’s richest people, making him the second-wealthiest, the <a href="https://www.forbes.com/real-time-billionaires/#1e2714563d78">media outlet calculated</a>. </p>
<p>McCormick ruled against Musk in <a href="https://www.theguardian.com/business/nils-pratley-on-finance/2024/jan/31/three-cheers-for-the-delaware-judge-who-stood-up-to-elon-musk">Tornetta v. Musk</a>, a lawsuit filed on behalf of an investor who owned only nine Tesla shares – and by extension virtually all of the company’s stockholders. Ultimately, she determined that Musk’s compensation plan was considered and approved by a board of directors that was <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">not sufficiently independent or objective</a>.</p>
<p>The compensation plan was subject to a vote by the rest of Tesla’s shareholders. But the information they received left out key details and contained inaccurate statements.</p>
<p>This pay package deserved close scrutiny because of its enormity, McCormick observed. She called it the “largest potential opportunity ever observed in public markets by multiple orders of magnitude.”</p>
<h2>What was wrong with Tesla’s board?</h2>
<p>McCormick concluded that many of Tesla’s board members, including <a href="https://www.sec.gov/Archives/edgar/data/1318605/000156459018009339/tsla-def14a_20180606.htm">his brother Kimbal Musk</a>, had close financial and social relationships with Elon Musk and that they were beholden to him due to these ties.</p>
<p>The board approved this compensation plan without <a href="https://corpgov.law.harvard.edu/2020/03/19/compensation-committee-guide-2020/">following commonly accepted norms</a>, according to the ruling. Further, McCormick found that the directors allowed Musk to control the process for approving the compensation plan, dictating the terms, amount and timing.</p>
<p>Board members apparently made no efforts to benchmark the plan as compared to <a href="https://ceoworld.biz/2023/05/26/the-highest-paid-tech-ceos-in-the-united-states/">compensation paid to executives of comparable companies</a>, a critical and typical step in any situation like this.</p>
<p>Musk was in control of Tesla, <a href="https://www.investopedia.com/articles/stocks/07/executive_compensation.asp">a publicly traded company</a>, that should have standard protocols in place regarding its compensation practices.</p>
<p>There was no negotiation between Musk and the compensation committee or the board regarding the amount and terms of the plan, the chancellor found. This is both inconsistent with widely accepted <a href="https://www.huntonak.com/en/insights/six-key-considerations-executive-contract-negotiations.html">compensation setting practices</a> and striking due to the scale of the pay package. </p>
<p>“Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” McCormick wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A large low-lying building with a vast parking lot." src="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/573203/original/file-20240203-19-w8ldss.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>
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<span class="caption">Tesla corporate headquarters, in Travis County, Texas.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/in-an-aerial-view-the-tesla-corporate-headquarters-is-seen-news-photo/1454072958">Brandon Bell/Getty Images</a></span>
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<h2>What factors are boards supposed to consider in setting CEO pay?</h2>
<p>In deciding what CEOs should earn, boards or compensation committees should consider the <a href="https://www.investopedia.com/managing-wealth/guide-ceo-compensation">company’s performance under the leadership of the CEO</a> and the executive’s own personal performance. They should also review what comparable companies take into consideration when making decisions about their own CEO’s compensation.</p>
<p>Other metrics or considerations may be taken into account, too. These may include whether the company has made <a href="https://worldatwork.org/resources/publications/workspan-daily/how-dei-will-shape-executive-compensation-in-changing-legal-climate">progress in terms of diversity, equity and inclusion</a>, <a href="https://link.springer.com/article/10.1007/s11846-022-00538-4">employee retention</a>, <a href="https://hbr.org/2023/02/linking-executive-pay-to-sustainability-goals">sustainability and environmental performance</a>, worker safety practices, risk management and <a href="https://www.hrpolicy.org/insight-and-research/executive-compensation/executive-pay-legislation-and-regulation/">compliance with laws and regulations</a>.</p>
<p>Around the time of this compensation decision, Musk was the subject of a <a href="https://www.foxbusiness.com/technology/elon-musk-says-420-price-tesla-buyout-tweet-not-joke-testimony">Securities and Exchange Commission probe</a> over alleged fraud stemming from what the SEC said were <a href="https://www.sec.gov/files/litigation/complaints/2018/comp-pr2018-219.pdf">misleading statements</a> regarding his plans to take Tesla private at $420 per share – a part of a tweet widely regarded as a cannabis joke.</p>
<p>The <a href="https://www.sec.gov/news/press-release/2018-226">settlement Musk reached with the SEC</a> forced him to pay a $20 million fine and step down as the company’s chairman for at least three years. It also required the appointment of two new independent Tesla board members and a requirement that he preclear certain public statements.</p>
<p>The company was not taken private.</p>
<p>In 2023, a <a href="https://electrek.co/2023/02/03/elon-musk-found-not-guilty-in-the-tesla-420-take-private-case/">jury found Musk not liable</a> for <a href="https://www.cnn.com/2023/02/03/cars/musk-tesla-tweet-lawsuit-jury/index.html">related losses by Tesla investors</a> who sued over the incident. Tesla shares closed at $187.91 on Feb. 2, 2024, far below that $420 price that unleashed litigation. The company’s share prices closed at <a href="https://www.morningstar.com/news/dow-jones/202401297494/tesla-on-pace-for-worst-month-since-december-2022-data-talk">$409.97 in November 2021</a> – the highest point to date.</p>
<p>The board could have considered this incident a negative factor when making its decisions about Musk’s compensation.</p>
<h2>What process are boards supposed to follow in setting CEO pay?</h2>
<p>In setting CEO compensation, all members of boards or <a href="https://www.pwc.com/us/en/services/governance-insights-center/library/compensation-committee.html">compensation committees</a> should be truly independent and objective, with no interest in the outcome.</p>
<p>They should consider engaging compensation experts and benchmark or seek information on executive compensation at comparable companies.</p>
<p>These decisions require careful consideration of all components of the CEO’s compensation and how the pay package should be structured. That includes how much of the pay should be provided as cash, <a href="https://www.investopedia.com/terms/r/restrictedstock.asp">restricted stock</a>, which may not be sold for a period of time, and <a href="https://www.investopedia.com/terms/s/stockoption.asp">stock options</a>, which provide the right to purchase stock at a predetermined price before a particular time in the future. </p>
<p>When stock prices rise a great deal, stock options soar in value. That’s <a href="https://www.nytimes.com/2024/01/30/business/elon-musk-tesla-pay-package.html">what happened with Musk’s colossal pay package</a>.</p>
<h2>What happens now?</h2>
<p>Musk may decide to appeal to the Supreme Court of Delaware. On the other hand, Musk could ask Tesla’s board, its compensation committee – or both of them – to revisit and revise his compensation plan, taking into account the objections spelled out in the ruling.</p>
<p>That would include both the amount – $55.8 billion – and the process by which it was set.</p>
<p>Musk, however, <a href="https://whyy.org/articles/delaware-elon-musk-wants-tesla-to-vote-on-switching-corporate-registration-to-texas/">appears to be seeking a third option</a>. “Tesla will move immediately to hold a shareholder vote to transfer (the) state of incorporation to Texas,” <a href="https://twitter.com/elonmusk/status/1752922071229722990">he posted on X</a>, his social media platform previously known as Twitter.</p>
<p>Even if Musk were to prevail and change Tesla’s jurisdiction of incorporation, it would not be likely to affect this decision.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1752922071229722990"}"></div></p>
<h2>Is Delaware particularly tough on corporate leaders?</h2>
<p><a href="https://www.cnbc.com/2023/03/13/why-more-than-60percent-of-fortune-500-companies-incorporated-in-delaware.html">Delaware is the corporate home</a> of more than 60% of Fortune 500 companies even though it’s the country’s second-smallest state.</p>
<p>One reason for its popularity with businesses of all kinds is that Delaware’s courts are quite experienced, with a great deal of expertise in considering business matters and cases of this kind. Musk’s court case was heard in its <a href="https://www.law.cornell.edu/wex/chancery">Court of Chancery</a>, a system that primarily decides <a href="https://courts.delaware.gov/chancery/jurisdiction.aspx">corporate legal matters</a>.</p>
<p>Although Musk <a href="https://twitter.com/elonmusk/status/1752455348106166598?s=20">suggested that standards in Delaware are overly strict</a> in another message he posted on X after the ruling, this kind of case is very rare.</p>
<p>One of few similar lawsuits was filed <a href="https://www.nytimes.com/2005/08/10/business/media/ruling-upholds-disneys-payment-in-firing-of-ovitz.html">against former Disney CEO Michael D. Eisner</a> over his $140 million severance package. In 2005, Chancellor William B. Chandler III of the Delaware Chancery Court let it go, while acknowledging the apparent impropriety of paying an executive so much.</p>
<p>“Despite all the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom,” <a href="https://casetext.com/case/in-re-walt-disney-co-derivative-litigation">Chandler wrote</a>, “I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith.”</p><img src="https://counter.theconversation.com/content/222483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin P. Klein directs the advisory board of the Weinberg Center for Corporate Governance. Chancellor Kathaleen McCormick is an ex officio member of that center's advisory board.</span></em></p>Musk can’t dodge this ruling by moving Tesla’s incorporation to Texas.Justin P. Klein, Director of the Weinberg Center for Corporate Governance, University of DelawareLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2171452023-11-10T15:20:07Z2023-11-10T15:20:07ZShareholder activists can inadvertently raise CEO pay – here’s how to help make pay rises more equal for all<figure><img src="https://images.theconversation.com/files/558308/original/file-20231108-23-mh28g3.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C9387%2C6207&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-candidate-imbalance-comparison-money-leverage-2036243690">Andrey_Popov/Shutterstock</a></span></figcaption></figure><p>Activist investors or shareholders can be a powerful force in the corporate world, capable of driving significant change within companies. Their influence can be a force for good. It can extend beyond financial decisions to advocate that a company makes important societal, ethical and, increasingly, <a href="https://www.npr.org/2023/04/09/1168446621/businesses-face-more-and-more-pressure-from-investors-to-act-on-climate-change">environmental changes</a>. </p>
<p>Recently, shareholder collaboration initiatives like <a href="https://sayonclimate.org/">Say on Climate</a> have led investors to influence companies’ environmental policies and practices. But investors are also speaking out on social issues such as <a href="https://www.unpri.org/research/why-and-how-investors-can-respond-to-income-inequality/3777.article#Public_policy_760481">income inequality</a>. </p>
<p>As rising CEO compensation contrasts with stagnant employee pay, the resulting CEO-to-worker pay disparities can fuel income inequality and cause employee unrest. In the US, for example, the United Auto Workers (UAW) union recently declared a strike against auto giants such as Ford and Stellantis, demanding a 40% employee pay rise after double-digit jumps in their <a href="https://www.bbc.co.uk/news/business-66847747">CEOs’ pay packets</a>.</p>
<p>Such large pay disparities can have negative consequences including lowering morale and productivity among employees, and eroding CEO accountability to shareholders. They can also affect a company’s reputation, influence customer loyalty and undermine shareholder confidence. This could impair a company’s overall performance and long-term sustainability.</p>
<p>Companies are required to show how much their managers get paid compared to their employees in their financial reports. In the <a href="https://www.sec.gov/news/press-release/2015-160">US</a>, for instance, financial regulator the Securities and Exchange Commission mandates the reporting of the CEO-to-worker pay ratio. In the <a href="https://www.gov.uk/government/news/new-executive-pay-transparency-measures-come-into-force">UK</a>, a similar rule has been introduced by the Department for Business, Energy and Industrial Strategy. </p>
<p>Disclosing the CEO-to-worker pay gap is seen by regulators as a way to reinforce corporate accountability. It gives more information and control to shareholders over the fairness of compensation practices. But it’s <a href="https://hbr.org/2017/02/why-we-need-to-stop-obsessing-over-ceo-pay-ratios">still not fully understood</a> how such disclosures actually affect CEO-to-worker pay disparities.</p>
<h2>How shareholder activism affects CEO pay</h2>
<p>We <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2866">recently investigated</a> how shareholders affect CEO-to-worker pay ratios and their influence on CEO compensation. We studied companies listed on the <a href="https://www.investopedia.com/terms/r/russell_3000.asp">Russell 3000 Index</a>, which tracks the largest 3,000 US companies by market capitalisation. We wanted to better understand how shareholders might influence pay disparities and also whether regulatory initiatives aimed at reducing them actually work.</p>
<p>As the pay gap between CEOs and workers gets larger, we found that shareholders are more likely to vote against the CEO’s pay package. This suggests that shareholders are paying more attention to CEO pay and are concerned about the negative effects that large pay disparities can have on employees. In theory, this heightened vigilance should deter executive excess.</p>
<p>However, we also found that when shareholders voice their concerns about pay disparities, CEO compensation can increase. Why? The votes of shareholders may prompt remuneration committees that decide what CEOs should get paid to revisit the CEO pay package. </p>
<p>But instead of decreasing CEO compensation, we found that remuneration committees are inclined to change how CEOs are paid to make it more closely linked to performance. This action, in turn, could result in increased CEO compensation in cases where the CEO performs well.</p>
<p>And so, the remuneration committee may use shareholder dissent votes to justify paying CEOs more. But this typically only happens if CEOs meet their performance targets. This delicate balance underscores the complexity of shareholder influence on CEO pay and raises questions about whether the new rules designed to make pay more equal actually work.</p>
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<img alt="Group of people in suits with raised hands, man in suit pointing to himself." src="https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&rect=0%2C11%2C7940%2C4773&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=362&fit=crop&dpr=1 600w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=362&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=362&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/558301/original/file-20231108-21-626r1r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&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">Sometimes the pay gap widens after shareholders highlight CEO-to-employee wage disparities.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/audience-raised-their-hands-ask-question-1998393134">Party people studio/Shutterstock</a></span>
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<h2>What can be done about excessive CEO pay?</h2>
<p>Of course, governments and politicians have a role to play in reducing the CEO-to-worker pay ratios. They could <a href="https://www.bbc.com/worklife/article/20210610-the-push-to-penalise-big-corporations-with-huge-pay-gaps">impose penalties</a> on corporations with excessively large pay gaps. The city of Portland in Oregon already <a href="https://www.portland.gov/policies/licensing-and-income-taxes/fees/lic-502-pay-ratio-surtax">imposes such a tax</a>. </p>
<p>At a national level, US Senator Bernie Sanders has introduced the <a href="https://www.congress.gov/bill/117th-congress/senate-bill/794/text">Tax Excessive CEO Pay Act of 2021</a>. If passed, it would set higher tax rates for corporations with disproportionate pay ratios. Non-governmental organisations (NGOs) already report pay disparities, but they could also <a href="https://www.theguardian.com/global-development/poverty-matters/2012/mar/13/ngos-need-third-way-collaboration">push harder for change</a> by advocating for reforms and championing transparency.</p>
<p>You can also play a role. If you work, consider joining a union to fight for fairer wages and more transparent compensation practices. Employees can use unions to collectively voice concerns about pay disparity and ensure their interests are <a href="https://aflcio.org/paywatch/company-pay-ratios">adequately represented</a> in compensation discussions. Collective bargaining can exert significant pressure on corporations and help <a href="https://www.ilo.org/infostories/Stories/Labour-Relations/Can-Collective-Bargaining-Create-a-Fairer-Economy#right-to-be-heard/collective-bargaining-inequality">reduce income inequality</a>.</p>
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Read more:
<a href="https://theconversation.com/recent-pay-rises-suggest-that-collective-bargaining-may-be-on-the-way-back-199436">Recent pay rises suggest that collective bargaining may be on the way back</a>
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<p>As a consumer, you could also vote with your feet. Use your <a href="https://www.ethicalconsumer.org/ethicalcampaigns/boycotts">purchasing power</a> to support companies with fairer compensation practices and shun those that perpetuate income inequality.</p>
<p>In the ongoing battle against income inequality, enhancing shareholder engagement to reduce CEO-to-worker pay disparities is essential. It is also important to consider the unintended consequences – the effect on employee morale and productivity, for example – that may result in increased CEO compensation. These actions will help shape a more equitable and responsible corporate landscape.</p><img src="https://counter.theconversation.com/content/217145/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>Research shows that when shareholders complain about pay gaps between CEOs and their employees widening, it can cause even more disparity.Etienne Develay, Lecturer in Sustainability Accounting and Finance, Nottingham Trent UniversityStephanie Giamporcaro, Associate Professor, ESG and Sustainable Finance, Nottingham Trent UniversityYan Wang, Associate Professor in Accounting and Finance, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag: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/2120882023-08-25T13:31:50Z2023-08-25T13:31:50ZWhy CEOs and footballers attract different levels of outrage about high pay<figure><img src="https://images.theconversation.com/files/544743/original/file-20230825-25-84xz4b.jpg?ixlib=rb-1.1.0&rect=38%2C86%2C6361%2C4179&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/multiethnic-youth-protesting-decent-work-life-2331480595">Lomb/Shutterstock</a></span></figcaption></figure><p>The average pay of FTSE100 CEOs rose by 16% from £3.38 million in 2021 to £3.91 million in 2022, according to the latest figures from thinktank the <a href="https://highpaycentre.org/ftse-100-ceos-get-half-a-million-pound-pay-rise/">High Pay Centre</a>. In the same week this was reported, UK political figure Nigel Farage called outgoing NatWest boss Alison Rose’s £2.4 million payout “<a href="https://www.theguardian.com/business/live/2023/aug/23/uk-minister-kemi-badenoch-india-trade-talks-intensify-pmi-pwc-markets-sterling-pound-economy-ftse-business-brexit-live?page=with:block-64e5f55f8f08319ad416c2ce#block-64e5f55f8f08319ad416c2ce">a sick joke</a>”. She recently resigned for leaking private financial information about him to the BBC. </p>
<p>On the other hand, senior NHS doctors are embarking on <a href="https://www.bma.org.uk/news-and-opinion/consultants-launch-second-round-of-strikes">a second round of strikes</a> in response to recent pay erosion and <a href="https://healthmedia.blog.gov.uk/2023/07/14/government-accepts-recommendations-from-nhs-pay-review-bodies/">a “final” pay offer of 6%</a> from the government. In the last two months, teachers have agreed to <a href="https://neu.org.uk/campaigns/pay-campaign/teachers-pay-update/how-offer-funded">settle for 6.5%</a>. <a href="https://news.stv.tv/scotland/train-drivers-with-aslef-union-reject-scotrail-pay-deal-amid-soaring-food-fuel-and-energy-costs">Train drivers</a>, <a href="https://www.rcn.org.uk/news-and-events/news/uk-nhs-pay-rise-2022-23-announced-below-inflation-insult-to-nursing-190722">nurses</a> and <a href="https://www.bbc.co.uk/news/education-59415694">university lecturers</a> are also among a growing list of employees for whom proposed pay increases are failing to beat inflation.</p>
<p>It’s difficult to reconcile these contrasting rates of pay progression, which just seem morally wrong to many people. But understanding some of the nuances surrounding CEO pay can help draw conclusions about what is and is not appropriate when it comes to pay – even if only to calibrate outrage levels. </p>
<p>CEO rewards are set within a global rather than a local market. As with sports stars, it’s necessary to pay at or above the global market rate to attract talent. Other countries, most notably <a href="https://academic.oup.com/rfs/article/24/2/402/1581556">the US</a>, tend to pay CEOs more than the UK, which drives up international norms. These international market forces do not operate in many other areas of the UK labour market, although they’re reportedly making it <a href="https://www.itv.com/news/anglia/2023-07-13/uk-is-effectively-training-doctors-for-australia-and-canada-union-warns">increasingly difficult</a> for the NHS to retain doctors and nurses.</p>
<p>Boards often seek independent advice on CEO pay from “<a href="https://www.icaew.com/-/media/corporate/files/technical/research-and-academics/executive-remuneration-factors-influencing-consultants-advice.ashx#:%7E:text=',-Page%205&text=There%20is%20no%20legal%20requirement,experts%20in%20this%20complex%20area.">compensation consultants</a>”, but these consultants typically recommend paying above average <a href="https://journals.sagepub.com/doi/10.1177/0148558X1002500407">to attract the best candidate</a>.</p>
<figure class="align-right ">
<img alt="Man in cap with white sign printed with ceo pay: the 1% and worker's pay: the 99%." src="https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/544744/original/file-20230825-26-4v4rcf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A protester holds a sign that compares workers pay to CEO pay during the march to Union Square from Bryant Park at Occupy Wall St ‘May Day’ protests on May 1, 2012 in New York.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-may-1-protester-holds-101575360">Glynnis Jones/Shutterstock</a></span>
</figcaption>
</figure>
<p>Another particularly important consideration is that a large fraction (often over 70% according to the <a href="https://highpaycentre.org/wp-content/uploads/2023/08/Copy-of-CEO-pay-report-2023-1-1.pdf">High Pay Centre</a>) of a CEO’s total annual pay is variable. For example, bonuses and long-term incentives linked to company performance measures such as share price. This means that CEOs, at least in principle, bear significant compensation risk.</p>
<p>Economic theory argues this risk-bearing should be rewarded, which means <a href="https://academic.oup.com/rfs/article/24/2/402/1581556">expected pay levels</a> rise as compensation risk increases. This is the price we pay for insisting that CEO pay is pegged to performance. This insight also tilts the debate away from a simple discussion of pay levels to a more meaningful conversation about the appropriate strength of the link between pay and performance. </p>
<h2>CEO pay versus performance</h2>
<p>It may seem easier to accept generous pay growth in line with exceptional company performance that benefits a wider stakeholder group including shareholders, other employees, and the broader economy. But much of the unease surrounding CEO pay reflects a structural asymmetry – executives can benefit from positive performance while apparently being <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12311">insulated when performance is weak</a>. This leads to claims of <a href="https://money.cnn.com/2016/04/21/investing/executive-pay-reward-for-failure/">rewards for failure</a>. Just how much (downside) compensation risk CEOs bear can vary across individuals, companies and industries. </p>
<p>But even when high pay reflects exceptional company performance, inequality persists. The average FTSE100 CEO currently earns 118 times the median UK employee according to the High Pay Centre (remarkably, this ratio has fallen compared with pre-pandemic levels). For example, the ratio stood at 149:1 in 2016 according to <a href="https://www.cipd.org/globalassets/media/knowledge/the-people-profession/latest-updates/7571-ceo-pay-in-the-ftse100-report-web_tcm18-26441.pdf">other research</a>). Meanwhile campaign group ShareAction reports that <a href="https://shareaction.org/news/paying-workers-a-real-living-wage-is-more-important-than-ever">only 50%</a> of FTSE100 companies pay the living wage. </p>
<p>But there is also an argument that society is guilty of double standards when corporate bosses are singled out for special pay outrage while pay extremes in other spheres are condoned.</p>
<h2>Soaring soccer pay</h2>
<p>Eye-watering pay inequity is also commonplace in professional sport. Manchester City’s <a href="https://www.dailymail.co.uk/sport/sportsnews/article-11287753/Erling-Haaland-earns-865-000-WEEK-Man-City.html">Erling Haaland</a> reportedly earns £850,000 a week gross (excluding other income from sponsorship and image rights deals) – that’s 1,328 times <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2022">median UK gross weekly pay</a> in 2022. French <a href="https://news.sky.com/story/kylian-mbappe-laliga-criticises-scandalous-deal-to-make-psg-star-worlds-highest-paid-footballer-12618564">football superstar Kylian Mbappé’s</a> contracted gross salary at Paris Saint-Germain is estimated at close to £1 million per week (not including image rights deals), or 1,562 times median UK gross pay.</p>
<figure class="align-center ">
<img alt="Man in blue uniform running, blurred crowd in the background." src="https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/544745/original/file-20230825-17-byibkj.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">Kylian Mbappe during the Ligue 1 football match between FC Lorient and Paris Saint Germain (PSG) on April 30, 2023 at Parc des Princes stadium in Paris, France.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/kylian-mbappe-during-ligue-1-football-2300548681">Victor Velter/Shutterstock</a></span>
</figcaption>
</figure>
<p>These superstars and the clubs that employ them attract limited public criticism, despite doing more than their fair share to foster pay inequity. Fans seem only too eager for their clubs to sign such statement players despite, even amid <a href="https://www.mirror.co.uk/sport/football/football-clubs-slammed-taking-advantage-27275646">increasing ticket prices</a>.</p>
<p>So why the apparent inconsistency in the scale and focus of moral outrage? One explanation is that we just don’t recognise the job corporate bosses do as being that remarkable. As a result, we’re not willing to accept high levels of pay inequity between CEOs and the rest of us. In contrast, even the most narcissistic football fan is probably willing to accept that they can’t replicate what Haaland and Mbappé do for their respective teams.</p>
<p>This outrage contradiction could indicate fundamental unfairness, but it may also reflect what we, as a society, choose to value and prioritise in the world of work.</p><img src="https://counter.theconversation.com/content/212088/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Young receives funding from Economic & Social Research Council and the Financial Reporting Council. He is affiliated with CCLA through a research collabortation (not funded). </span></em></p>CEO pay often attracts more outrage than footballers’ record wages – what does this say about the value we place on different jobs and skills?Steven Young, Professor of Accounting, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1927092022-11-09T10:40:10Z2022-11-09T10:40:10ZStrikes: why soaring CEO pay could help explain UK’s recent industrial action<figure><img src="https://images.theconversation.com/files/492322/original/file-20221028-61541-8q7gv4.jpg?ixlib=rb-1.1.0&rect=0%2C2%2C1000%2C663&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Lower earners are counting the cost of a growing wage gap.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/compare-wage-gap-tax-differences-equal-1997565632">Andrey_Popov / Shutterstock</a></span></figcaption></figure><p>The pay gap in UK business is eye-watering. Bosses of the largest UK companies earn <a href="https://www.financialfairness.org.uk/en/media-centre/media-centre-news-article/pay-ratios-2022#:%7E:text=Across%20the%2069%20companies%20that,2021%2C%20at%2034%3A1.">around 100 times more</a> than the lowest-paid employees in their organisations, according to some estimates. This year, chief executives from the top 100 UK companies saw their pay rise by nearly a quarter on average, <a href="https://www.pwc.co.uk/press-room/press-releases/executive-pay-at-ftse-100-firms-recovers-to-pre-pandemic-levels.html">research from PwC</a> shows. This is at a time when many employees are being offered <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/october2022#:%7E:text=The%20rate%20of%20annual%20pay,outside%20of%20the%20pandemic%20period.">below-inflation pay rises</a>.</p>
<p>The sense of unfairness about this among workers is intensifying. We have seen this during the “<a href="https://speakerpolitics.co.uk/strikes-set-to-continue-as-unions-meet-at-tuc-congress/">summer of strikes</a>” this year, which has continued into the colder months and does not look likely to let up <a href="https://www.theguardian.com/uk-news/2022/nov/05/nurses-across-uk-vote-to-strike-in-first-ever-national-action">any time soon</a>.</p>
<p>The average gross salary in the UK at the moment is £38,131 for a full-time role, according to data from the <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/latest">Office for National Statistics</a>. Not bad, you might think. But this figure obscures the dramatic variations in pay among UK workers in different industries and at various company levels. Indeed, the UK has <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-7484/#:%7E:text=International%20comparisons,than%20in%20the%20United%20States.">a higher level of income inequality</a> than many other developed countries.</p>
<p>The size of the pay gap varies with firm size. For the largest UK companies, such as those listed in the FTSE 100, the median CEO-to-employee pay ratio in 2020/21 was 67:1, while CEOs earned <a href="https://www.financialfairness.org.uk/en/media-centre/media-centre-news-article/pay-ratios-2022#:%7E:text=Across%20the%2069%20companies%20that,2021%2C%20at%2034%3A1.">93 times more</a> than employees on the lowest levels of pay.</p>
<h2>A growing gap</h2>
<p>As stark as these ratios are, they might actually understate the magnitude of pay inequality. </p>
<p>First, the figures above fail to account for low-paid workers such as contractors or staff on zero hour contracts. A recent <a href="https://www.financialfairness.org.uk/docs?editionId=1ed52299-9fee-4245-b20f-ac2b47c87bce">High Pay Centre</a> analysis of 69 company reports in the first quarter of 2022 calculates that a CEO at the average UK company earns 117 times more than their lowest-paid employees when these so-called “indirectly employed” workers are taken into account.</p>
<p>Second, the above analysis reveals that median CEO to employee pay ratios almost doubled from 34:1 to 63:1 between 2021 and 2022. This indicates a significant pandemic rebound in top-level pay is widening the gap further. But even before the pandemic, the gap was widening, if at a slower pace. During the ten-year period to the end of the 2021 financial year, median incomes for the poorest fifth of the UK population have <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2021#:%7E:text=Median%20household%20disposable%20income%20in,(ONS)%20Household%20Finances%20Survey">stayed broadly the same</a>, versus a 9.1% increase in average pay for the richest fifth of the population.</p>
<p>Interestingly, the size of the gap is not constant across the spectrum of wages (or the income distribution) paid to people in the UK. It is wider towards the top, which means a very small fraction of individuals are earning a disproportionately large fraction of total pay in the UK.</p>
<p><strong>Annual UK full-time gross pay by occupation, April 2022</strong></p>
<iframe height="603px" width="100%" src="https://www.ons.gov.uk/visualisations/dvc2189/beeswarm/index.html"></iframe>
<h2>Why is the pay gap so wide?</h2>
<p>There are a number of reasons why we see such large and persistent differences in pay within UK companies, particularly at this upper end. First, an <a href="https://www.jstor.org/stable/1830810#metadata_info_tab_contents">economic theory</a> called tournament models argues that “winner-takes-all” pay arrangements – where CEO pay exceeds all other employees (including the next highest paid executive) by a large multiple – create the strongest incentives for leaders. This is the same principle used to justify offering massive lottery jackpots rather than multiple smaller wins.</p>
<p>Second, variable pay structures such as bonuses and options linked to company share prices, are more common for company executives. Established <a href="https://www.sciencedirect.com/science/article/pii/0165410185900266">corporate governance</a> codes <a href="https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-uk-corporate-governance-code-final.pdf">recommend</a> that salaries with large variable elements – typically, a low salary paired with a large performance-related component such as a bonus – incentivise performance. </p>
<p>But this means executives bear additional pay risk (that they may not make much of a bonus one year), and so are compensated for that with higher expected pay when performance conditions are met. In other words, when pay is directly linked to performance via a bonus, your level of remuneration will typically be higher.</p>
<p>Other factors could reinforce disproportionately high pay for senior executives, such as weak (too easy) performance conditions in executive pay contracts. Also, the labour market for executive talent tends to be more competitive than for other employees because it draws on a smaller talent pool. Pay is driven up when companies have to compete harder to attract potential candidates. </p>
<p>These competitive effects are magnified because consultants tend to advise that CEOs must receive above-median pay to be competitive, which leads to <a href="https://www.jstor.org/stable/4166216#metadata_info_tab_contents">pay ratcheting</a>. The <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/genderpaygapintheuk/2022">gender pay gap</a> may also play a role: men consistently earn more than women (even when holding roles constant) and men are disproportionately <a href="https://www.bbc.com/worklife/article/20220222-proof-verus-potential-problem">more likely</a> to hold senior executive positions.</p>
<figure class="align-center ">
<img alt="A cardboard sign held up at a strike says: " src="https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492319/original/file-20221028-44561-ostww3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Workers in many UK industries have been striking for pay rises recently.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-29th-july-2020-nhs-1787843108">John Gomez / Shutterstock</a></span>
</figcaption>
</figure>
<p>It is often said that sunlight is the best disinfectant. And with this in mind, UK companies with more than 250 employees have been subject to rules on pay ratio reporting <a href="https://www.gov.uk/government/news/new-executive-pay-transparency-measures-come-into-force#:%7E:text=Pay%20ratio%20regulations%20will%20apply,relate%20to%20wider%20employee%20pay.">since January 2019</a>. This means that pay inequity is now more visible and so the debate should now be more informed. </p>
<p>But a potential consequence of a more informed debate is more conflict with employees. In the prevailing economic climate this could fuel pressure for strikes. But it’s hard to argue that keeping the scale of pay inequity in the shadows to reduce strike pressure is a better alternative. Increased conflict (in the form of debate) is almost certainly a necessary step on road to change.</p><img src="https://counter.theconversation.com/content/192709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Young receives or has previously received funding from the Economic & Social Research Council, Finance Reporting Council, Financial Conduct Authority, CFA Society UK, Pensions & Lifetime Savings Association, Institute of Chartered Accountants in England & Wales, The Leverhulme Trust, The European Commission, and RailPen. </span></em></p>The pay gap is growing in UK, which has seen increased strike activity this year.Steven Young, Professor of Accounting, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1819222022-05-15T10:44:48Z2022-05-15T10:44:48ZTo reduce corporate emissions, CEOs need to be bold risk takers<figure><img src="https://images.theconversation.com/files/462893/original/file-20220512-23-kmtyni.jpg?ixlib=rb-1.1.0&rect=8%2C24%2C5504%2C3644&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Carbon-emitting companies are significant contributors to the climate crisis.</span> <span class="attribution"><span class="source">(AP Photo/Charlie Riedel)</span></span></figcaption></figure><p>Climate change is widely recognized as one of the most profound challenges ever to face the human race and life on Earth. Among the different factors identified by climate scientists, greenhouse gas emissions — <a href="https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data">which have doubled since 1990</a> — are the main contributors to global climate change.</p>
<p>As <a href="https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions">significant contributors to the climate crisis</a>, carbon-emitting companies are under <a href="https://www2.deloitte.com/us/en/insights/topics/strategy/impact-and-opportunities-of-climate-change-on-business.html">increasing regulatory and social pressure</a> to reduce their carbon footprints. Long-term climate change results can only be achieved by identifying why certain firms are still emitting <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/causes.html">such high amounts of greenhouse gases</a> and addressing those underlying causes.</p>
<p>As a society, we are prone to reactionary, not preventative, approaches when it comes to addressing the environmental harms done by corporations. The Canadian federal government’s proposed <a href="https://thenarwhal.ca/carbon-capture-credit-ipcc/">tax credit for investing in carbon capture, storage and removal</a> is one recent reactionary example. If we want to meet our climate goals, we need to use more preventative approaches.</p>
<figure class="align-center ">
<img alt="A man sitting at a table with technological equipment on it" src="https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=396&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=396&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=396&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=497&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=497&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462898/original/file-20220512-20-6krkt7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=497&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The federal government is a supporter of carbon capture technology, like the foam bioreactor pictured here alongside Carlo Montemagno, the former director of the University of Alberta’s Ingenuity Lab.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jason Franson</span></span>
</figcaption>
</figure>
<h2>Risk taking and climate change</h2>
<p>In a <a href="https://doi.org/10.1007/s10551-021-05031-8">recently published paper</a>, my colleagues and I examined whether a CEO’s risk aversion influenced corporate carbon emissions. Risk aversion is the extent to which CEOs “play it safe” when it comes to decision-making. A risk-averse CEO, for example, will not make risky investments — even if those investments have the potential to be profitable in the long term.</p>
<p>Our research confirmed our initial hypothesis that risk-averse CEOs were more likely to lead firms with higher carbon emissions. They were unwilling to take the bold steps necessary to invest in greener projects to reduce their carbon footprints. Instead, they usually made immoral, yet rational, decisions that prioritized profit over sustainability.</p>
<figure class="align-right ">
<img alt="Office building with Maple Leaf logo on the front" src="https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462896/original/file-20220512-14-wig8qc.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">Maple Leaf Foods president and CEO Michael McCain committed to taking the company carbon neutral in 2019.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>From an economic perspective, it’s rational for CEOs to invest in sectors that increase carbon emissions, if those sectors make them money. However, investing in those sectors is also immoral because of the <a href="https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas-emissions-drivers-impacts.html">detrimental impacts carbon emissions have</a> on the environment and people’s lives.</p>
<p>Ultimately, bold and risk-seeking CEOs are the ones responsible for the drastic changes needed to reduce corporate emissions. For example, Maple Leaf Foods president and CEO Michael McCain <a href="https://www.saltwire.com/nova-scotia/business/sylvain-charlebois-behind-maple-leaf-foods-bold-call-to-become-carbon-neutral-374081/">made the bold move take his company carbon neutral</a> in 2019. Other CEOs should follow suit.</p>
<h2>Enticing CEOs with better pay</h2>
<p>CEOs are the strategic leaders of corporations and, often, their pay is the only leverage their companies have on them. Because of this, one of the most effective ways to reduce a firm’s carbon footprint over the long run is to <a href="https://www.cnn.com/2021/08/12/perspectives/climate-carbon-emissions-ceo-pay/index.html">entice CEOs with monetary compensation</a>.</p>
<p>While there may be <a href="https://financialpost.com/investing/climate-change-the-opportunities-and-risks-for-investors">short-term repercussions for investing in carbon footprint reductions</a>, such as lower profitability, cash depletion or increased debt, this should not impact CEO pay. Instead of punishing CEOs for implementing environmentally friendly policies, they should be compensated. </p>
<p>There is a chance that corporations and investors might have to take the hit in the short-term, but <a href="https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2021/10/04/how-sustainability-can-be-profitable-for-your-business/?sh=5484ae56592a">in the long run it will pay off</a>. Consumers share the same environment as corporations, which means that doing right by the environment results in buy-in from sustainability minded consumers — now the <a href="https://f.hubspotusercontent20.net/hubfs/4783129/An%20EcoWakening_Measuring%20awareness,%20engagement%20and%20action%20for%20nature_FINAL_MAY%202021%20(1).pdf">majority of the consumer base</a>. </p>
<figure class="align-center ">
<img alt="Man opening an envelope at a desk" src="https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462894/original/file-20220512-21-f7jbk8.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">One of the most effective ways to reduce a firm’s carbon footprint over the long run is to entice CEOs with monetary compensation.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Similarly, CEOs should be penalized for not achieving certain carbon reduction goals. Naysayers may state that some of those <a href="https://fortune.com/2020/12/03/climate-change-nestle-ceo-net-zero-carbon-emissions/">carbon emissions are not within the control of the CEO</a> and they cannot change it overnight. While this is correct, CEOs can still take steps to lower emissions in the long run, without pay cuts and job losses.</p>
<h2>CEOs need to take risks</h2>
<p>Our findings illustrate that not only are overly risk-averse CEOs hesitant to take steps to reduce carbon emissions, but that <a href="https://www.theguardian.com/environment/2022/feb/16/oil-firms-climate-claims-are-greenwashing-study-concludes">carbon-emitting firms use greenwashing</a> to cover up their environmental harms. Greenwashing corporations have large carbon footprints but portray themselves as environmentally friendly to investors.</p>
<p>To effectively reduce carbon emissions, CEOs and their companies must take bold, risky steps, like divesting from current profitable ventures that have higher carbon emissions, <a href="https://doi.org/10.1016/j.enpol.2010.06.064">in favour of investing in green technology</a>, which may or may not succeed.</p>
<p>Policymakers at all levels of government, industry regulators and institutional investors like the <a href="https://www.otpp.com/en-ca/about-us/news-and-insights/2021/ontario-teachers-pension-plan-commits-to-net-zero-emissions-by-2050/">Ontario Teachers’ Pension Plan</a> must team up and mandate that corporations provide CEOs with financial compensation for reducing carbon footprints. CEOs will listen carefully when their bread and butter is at stake.</p><img src="https://counter.theconversation.com/content/181922/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ashrafee Tanvir Hossain receives funding from Social Sciences and Humanities Council of Canada. </span></em></p>Policymakers, industry regulators and investors must team up to mandate that corporations provide CEOs with financial compensation for reducing carbon footprints.Ashrafee Tanvir Hossain, Associate Professor, Faculty of Business Administration, Memorial University of NewfoundlandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1623342021-09-03T12:37:44Z2021-09-03T12:37:44ZSlavery was the ultimate labor distortion – empowering workers today would be a form of reparations<figure><img src="https://images.theconversation.com/files/418876/original/file-20210901-16-nd6f8p.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4308%2C2360&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Labor violations disproportionately affect Black Americans.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/labor-groups-and-workers-including-john-beard-with-the-la-news-photo/567385215?adppopup=true">Katie Falkenberg/Los Angeles Times via Getty Images</a></span></figcaption></figure><p>The conversation about reparations for slavery entered a new stage earlier in 2021, with the U.S. House Judiciary Committee <a href="https://www.npr.org/2021/04/14/986853285/house-lawmakers-advance-historic-bill-to-form-reparations-commission">voting for the creation of a commission</a> to address the matter.</p>
<p>The bill, <a href="https://www.congress.gov/bill/117th-congress/house-bill/40">H.R. 40</a>, has been introduced every Congress since 1989 by Reps. Sheila Jackson Lee and John Conyers, <a href="https://www.npr.org/2019/10/27/773919009/john-conyers-jr-who-represented-michigan-for-5-decades-dies-at-90">until his death in 2019</a>. But this year marks the first time that its request to study and develop reparation proposals for African Americans has cleared the committee stage. </p>
<p>Calls to redress the lasting impact of slavery and racial discrimination have been amplified recently following further evidence of the impact of systemic racism – both through the <a href="https://covidtracking.com/race">disproportionate effect of COVID-19 on the Black community</a> and the deaths of George Floyd, Breonna Taylor and others at the hands of U.S. police.</p>
<h2>Disruption of labor relations</h2>
<p>To many, the question going forward is not so much whether or not reparations are in order, but what kinds of reparations might be appropriate.</p>
<p>Most of the conversation to date has focused on reparations in terms of payouts of some form. Prominent author <a href="https://www.theatlantic.com/magazine/archive/2014/06/the-case-for-reparations/361631/">Ta-Nehisi Coates</a>, in a powerful argument for reparations, said payments must be made by white America to Black America – much as <a href="https://qz.com/1915185/how-germany-paid-reparations-for-the-holocaust/">Germany started paying Israel in 1952</a> to compensate for the persecution of Jews by the Nazis.</p>
<p>As a <a href="https://divinity.vanderbilt.edu/people/bio/joerg-rieger">scholar who has written on economic justice and the labor movement</a>, I agree that reparations must have economic substance, because the impact of racism is inherently linked with power and money. But my <a href="https://chalicepress.com/products/unified-we-are-a-force">research suggests another model</a> for reparations: If one of the most significant aspects of slavery – even if not the only one – was a massive disruption of labor relations, then a crucial part in the reparations discussion could involve reshaping the labor relationship between employers and employees today. </p>
<p>I believe such a reshaping of the labor relationship would substantially benefit the descendants of enslaved people in the United States. Labor, as my research has argued, has implications for all aspects of life and labor reform would, I believe, address many of the problems of structural racism as well. In addition, reshaping the labor relationship would also have positive effects for all working people, <a href="https://www.globalslaveryindex.org/2018/findings/country-studies/united-states/">including those who still experience enslavement today</a>. </p>
<h2>Growing racial wage gap</h2>
<p>Labor relations can be considered “distorted” when one party profits disproportionally at the expense of another. In other words, it is a departure from a “<a href="https://www.gutenberg.org/files/26159/26159-h/26159-h.htm">fair day’s pay for a fair days’s work</a>” – a concept that forms a bedrock demand of the labor movement, alongside good working conditions.</p>
<p>This is not just a matter of money but also of power. Under the conditions of slavery, the distortion of labor relations was nearly complete. Slave owners pocketed the profits and claimed absolute power, while slaves had to obey and risk life and limb for no compensation.</p>
<p>Black Americans continue to be disadvantaged in the labor market today. As CEO compensation <a href="https://www.epi.org/publication/ceo-compensation-surged-14-in-2019-to-21-3-million-ceos-now-earn-320-times-as-much-as-a-typical-worker/">soars</a>, the number of Black CEOs remains remarkably low – there were just <a href="https://fortune.com/longform/fortune-500-black-ceos-business-history/">four Black CEOs at Fortune 500 companies</a> as of March 2021. In general, the wage gap between Black and white employees <a href="https://www.epi.org/blog/black-white-wage-gaps-are-worse-today-than-in-2000/">has grown in recent years</a>. Fueling these disparities, as well as building on them, is the structural racism that reparations could be designed to address.</p>
<p>Unionization can be a tool to rebalance labor relations and can <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4300995/">diminish this racial gap</a>, <a href="https://cepr.net/report/black-workers-unions-and-inequality/#five">studies have shown</a>. But union membership in general – and among Black workers in particular – has <a href="https://www.washingtonpost.com/business/2020/01/22/workers-are-fired-up-union-participation-is-still-decline-new-statistics-show/">declined in recent decades</a>. And a weaker labor movement is associated, studies show, with <a href="https://doi.org/10.1086/663673">greater racial wage disparity</a>. </p>
<figure class="align-center ">
<img alt="Black members of the Domestic Workers Union Members march down a road in protest." src="https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=471&fit=crop&dpr=1 600w, https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=471&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=471&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=592&fit=crop&dpr=1 754w, https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=592&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/418983/original/file-20210901-13-vcj2s3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=592&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Unionization can help reduce the racial wage gap.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/domestic-workers-union-members-picketing-news-photo/534275792?adppopup=true">Joseph Schwartz/CORBIS/Corbis via Getty Images</a></span>
</figcaption>
</figure>
<p>Another tool to rebalance labor relations is worker-owned cooperatives, which have a <a href="http://johnjay.jjay.cuny.edu/newsroom/7396.php">long tradition in African American communities</a> as <a href="https://www.jjay.cuny.edu/faculty/jessica-gordon-nembhard">economist Jessica Gordon Nembhard</a> has noted. From early on, she points out, “African Americans realized that without economic justice – without economic equality, independence and stability … social and political rights were hollow, or actually not achievable.” Gordon Nembhard’s work also shows that such cooperatives were often fought and ultimately destroyed because they were so successful in empowering African American communities. </p>
<h2>A ‘more permanent’ solution</h2>
<p>Some in the labor movement are beginning to link reparations with union rights. Labor <a href="https://dsgchicago.com/">lawyer Thomas Geoghegan</a> has suggested that the proposed Protecting the Right to Organize Act, a bill before Congress that would strengthen workers’ rights and weaken anti-union right-to-work laws, should be viewed as “a practical form of Black reparations.” He argued in <a href="https://newrepublic.com/article/160530/labor-law-reform-racial-equality-protecting-right-organize-act">an article for The New Republic</a> that wealth redistribution through union membership is “more permanent and lasting than a check written out as Black reparations, however much deserved, and far more likely to get a return over time.”</p>
<p>While there is considerable disagreement about the profits employers should be able to make from the labor of their employees, there is little disagreement about the wrongness of practices like outright <a href="https://www.epi.org/publication/employers-steal-billions-from-workers-paychecks-each-year/">wage theft</a> – which today takes the form of employers not paying part or all promised wages or paying less than mandated minimum wage. Even those who rarely worry about employers making too much profit would for the most part likely agree that wage theft is wrong. Agreement on this matter takes us back to slavery, which might be considered the ultimate wage theft.</p>
<p>Addressing the ongoing legacy of slavery and systemic racism requires not only economic solutions but also improving labor relations and protecting workers against wage discrimination, disempowerment at work, and violations such as wage theft that <a href="https://www.epi.org/publication/employers-steal-billions-from-workers-paychecks-each-year/">disproportionately affect workers of color</a>.</p>
<p>Reparations that fail to pay attention to improving labor relations may not achieve economic equality. The reparations paid to Israel by Germany, for instance, have not helped to achieve economic equality – the Israeli economy is still, alongside the U.S.’s, among the <a href="https://money.cnn.com/2015/05/21/news/economy/worst-inequality-countries-oecd/">most unequal in the developed world</a>, with the richest 10% of each country’s population earning more than 15 times that of the poorest.</p>
<p>Simple monetary payouts are not, I believe, sufficient to solve the problem of racial inequality. Wage theft can again serve as the example here. While repaying stolen wages – as <a href="https://apnews.com/article/76a9403fe9dc4c2daf8a52c38e16284c">New York state did in 2018</a> by returning $35 million to workers – is commendable, repaying stolen wages does not in itself change the skewed relationships between employer and employee that enable wage theft in the first place. Greater empowerment of working people is needed to do that.</p>
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<h2>Benefiting others as well</h2>
<p>So while redistributing money can be part of the solution, it may not go far enough.</p>
<p>Tying reparations to the improvement of labor relations – which can happen through the empowerment of working people or the promotion of <a href="http://www.usworker.coop/home">worker-owned cooperatives</a> – would not only help those most affected by wealth and employment gaps, Black Americans, it would also <a href="http://www.co-opsnow.org">benefit others who have traditionally been discriminated against</a> in employment, such as women, immigrants and many other working people. </p>
<p>Improving labor relations would address systemic racial discrimination where it is often most destructive and painful: at work, where people spend the bulk of their waking hours, and where the economic well-being of families and by extension entire communities can be decided.</p>
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<p class="fine-print"><em><span>Joerg Rieger is supporting the work of worker cooperatives, including the Southeast Center for Cooperative Development, which is hyperlinked at the end of the piece. He is not on any of their boards and he is not receiving any remuneration.</span></em></p>Rebalancing labor relations so that workers are empowered would be an effective way to address racial wealth disparities and atone for the legacy of slavery, a scholar argues.Joerg Rieger, Professor of Theology, Vanderbilt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1629812021-07-27T12:03:33Z2021-07-27T12:03:33ZKeeping nonprofit CEOs out of the room when boards decide what to pay them yields good results<figure><img src="https://images.theconversation.com/files/412013/original/file-20210719-19-borf4k.jpg?ixlib=rb-1.1.0&rect=294%2C168%2C5313%2C3110&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's hard for boards to make good decisions about what to pay someone who has a seat at the table.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/business-team-gathered-in-meeting-room-royalty-free-image/678259751">Shannon Fagan/The Image Bank via Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em></p>
<h2>The big idea</h2>
<p>Keeping <a href="https://www.councilofnonprofits.org/tools-resources/executive-compensation">nonprofit chief executive officers</a> out of meetings when members of their boards discuss or vote on compensation can lead to these CEOs making less money and working harder.</p>
<p>This is a key finding from a <a href="https://dx.doi.org/10.2139/ssrn.3777576">study of nonprofit pay</a> <a href="https://scholar.google.com/citations?user=xLGhTGMAAAAJ&hl=en">I recently completed</a> with two fellow finance scholars, <a href="https://scholar.google.com/citations?user=qRcp1kAAAAAJ&hl=en">Benjamin Bennett</a> and <a href="https://scholar.google.com/citations?user=FxLybk0AAAAJ&hl=en&oi=ao">Rik Sen</a>. We reached this conclusion after reviewing data for more than 14,700 nonprofits across the country from paperwork most nonprofits must file with the Internal Revenue Service every year, known as <a href="https://www.irs.gov/forms-pubs/about-form-990">Form 990</a>, and the associated <a href="https://www.irs.gov/forms-pubs/about-schedule-j-form-990">Schedule J</a>, which includes compensation.</p>
<p>We zeroed in on 1,698 nonprofits located in New York to see if their CEO pay changed after <a href="https://ag.ny.gov/press-release/2013/ag-schneidermans-nonprofit-revitalization-act-signed-law">new regulations took effect</a> in 2013. Since then, New York has prohibited nonprofit officers from being present at meetings where their pay is being discussed.</p>
<p>We found that compensation was an average of 2%-3% lower than expected by comparing pay for nonprofit CEOs in New York with pay in other states. We also compared the change in CEO pay with compensation changes for other executives’ pay at the same nonprofits – since they weren’t affected by this legislation.</p>
<p>We also found that many nonprofits changed how they handled executive compensation. That is, they were more likely to set up compensation committees, perform an independent compensation review or adjust pay to be in line with similar organizations. Nonprofit CEO bonuses also became more correlated with the growth of an organization’s budget – a strong indicator of overall performance.</p>
<p>And we found that, despite earning less than they might have expected, nonprofit CEOs spent about 2% more time working – without any additional turnover.</p>
<p>Interestingly, we also determined that by some measures, the nonprofits became better-run after the legislation took effect. For example, 2% more people chose to volunteer, and funding from donations and grants grew by 4%.</p>
<h2>Why it matters</h2>
<p>High CEO pay is a <a href="http://dx.doi.org/10.2139/ssrn.2992287">hotly debated topic</a>.</p>
<p><a href="https://www.salary.com/research/salary/posting/chief-executive-officer-ceo-non-profit-organization-salary">Nonprofit CEOs</a> make considerably less money than <a href="https://apnews.com/article/ceo-pay-rises-again-b1d87eb36ac921a159268a6b830fc308">corporate CEOs</a> and have experienced a slower wage growth over the last decade. Based on our estimates, corporate executives saw their annual pay grow by 54% from 2009 to 2017 to an average value of US$3.2 million, while nonprofit executives experienced a 15% increase in pay, reaching an average value of $396,000 in 2017 – the most recent year for which we obtained IRS data.</p>
<p>Nevertheless, <a href="https://www.venable.com/insights/publications/1999/10/the-difference-between-nonprofit-and-taxexempt-sta">because mosty nonprofits are exempt from income tax</a> and <a href="https://blog.joangarry.com/nonprofit-salaries/">many accept donations</a>, it’s only natural that the government and funders would not want to waste their money on excessive compensation. For example, food bank donors might prefer to see nonprofits spend more of their dollars on feeding the hungry as opposed to perks and big pay packages.</p>
<p>In recent years, some alarming accounts of <a href="https://www.charitywatch.org/charity-donating-articles/charitywatch-hall-of-shame">exorbitant CEO pay and self-dealing practices at nonprofits</a> have come to light. These include the scandals that have rocked the <a href="https://nypost.com/2016/03/04/wounded-warrior-project-rocked-by-fundraising-scandal/">Wounded Warrior Project</a> and the <a href="https://www.npr.org/2020/08/06/899712823/new-york-attorney-general-moves-to-dissolve-the-nra-after-fraud-investigation">National Rifle Association</a>.</p>
<h2>What’s next</h2>
<p>One possible reason why nonprofit CEO pay is growing much more slowly than for-profit CEO compensation is that nonprofit leaders are committed to specific causes and have more motives aside from money to excel at their work than their corporate counterparts. Other possibilities could be that nonprofits face pressure from donors to avoid high executive pay or that nonprofit CEOs have little leverage.</p>
<p>We hope that our future research will answer this question.</p>
<p>[<em>Over 109,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/162981/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ilona Babenko 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>Since New York mandated new executive compensation rules in 2013, the state’s nonprofit CEOs have been getting paid less than expected while working more.Ilona Babenko, Associate Professor of Finance, Arizona State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1458262020-09-23T17:24:55Z2020-09-23T17:24:55ZHow good governance can stop toxic ‘bro behaviour’ at companies<figure><img src="https://images.theconversation.com/files/359161/original/file-20200921-14-mrogpr.jpg?ixlib=rb-1.1.0&rect=0%2C154%2C4493%2C2782&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In this 2019 promotional photo from McDonald's, then CEO Steve Easterbrook, fourth from the left, celebrates the 50th anniversary of the Big Mac with family members of the McDonald's employee who invented the popular sandwich. Easterbrook has since been dismissed from McDonald's for inappropriate behaviour.
</span> <span class="attribution"><span class="source">(Peter Wynn Thompson/AP Images for McDonald's)</span></span></figcaption></figure><p>In 2019, the board of directors of McDonald’s Corp. took the unusual but bold and moral decision <a href="https://www.bbc.com/news/business-50283720">to dismiss its CEO Steve Easterbrook</a> after he revealed he’d had a consensual relationship with a co-worker.</p>
<p>McDonald’s had a policy forbidding managers from having “intimate interactions” with direct or indirect employees. Easterbrook readily admitted the relationship and cited his desire to adhere to the company’s code of conduct as motivating his admission.</p>
<p>In an email to all employees after the board announced his dismissal, <a href="https://www.nytimes.com/2019/11/03/business/mcdonalds-ceo-fired-steve-easterbrook.html">he wrote</a>: “This was a mistake. Given the values of the company, I agree with the board that it is time for me to move on.”</p>
<p>The dismissal of a CEO is never something that boards take lightly, especially when it is sudden — and when the CEO is wildly successful.</p>
<p>Under Easterbrook’s leadership, McDonald’s updated its menus and restaurants to reflect contemporary tastes, expanded delivery and mobile payments and otherwise evolved into a more modern organization. The market rewarded these efforts by doubling the share price during his tenure. Easterbrook was also rewarded with compensation in the tens of millions of dollars annually.</p>
<h2>Impacts shareholder wealth</h2>
<p>Easterbrook’s dismissal was seen by some as a triumph of morality and judgment — albeit at the expense of shareholder wealth. <a href="https://markets.businessinsider.com/news/stocks/mcdonalds-stock-price-billions-wiped-from-value-on-fired-ceo-easterbrook-2019-11-1028654817">McDonald’s shares went down by as much as three per cent</a> (US$4 billion value) shortly after the announcement.</p>
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<img alt="The McDonald's golden arches logo is pictured on a brick wall at one of the fast food chain's restaurants." src="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.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">
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<span class="caption">McDonald’s share prices took a hit in the fallout of the departure of CEO Steve Easterbrook.</span>
<span class="attribution"><span class="source">(AP Photo/Gerry Broome)</span></span>
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<p>The board’s dismissal without cause was deemed appropriate by media and investors under the circumstances and Easterbrook <a href="https://www.foodbusinessnews.net/articles/16592-mcdonalds-sues-former-ceo-to-recover-severance#:%7E:text=fired%20Stephen%20Easterbrook%2C%20then%20chief,executive%20compensation%20experts%20at%20Equilar">walked away with a severance package</a> worth about US$42 million.</p>
<p>Fast forward to 2020. <a href="https://www.businessinsider.com/mcdonalds-slams-ex-ceo-steve-easterbrook-motion-to-dismiss-lawsuit-2020-8">The board’s ongoing investigation</a> has revealed, among other things, that Easterbrook sent explicit photos from his McDonald’s email account, purportedly lied about other sexual relationships with co-workers and approved an extraordinary stock grant worth hundreds of thousands of dollars to one McDonald’s employee “… shortly after their first sexual encounter and within days of their second.”</p>
<p>As a result, the board belatedly filed a lawsuit against Easterbrook seeking to claw back the severance it had awarded eight months earlier, maintaining the CEO should have been dismissed for cause. Easterbrook responded in a court filing that the company and board already had all of this information — and had his entire email account and history stored on its company servers when it negotiated his severance package.</p>
<h2>‘Bro’ behaviour is infectious</h2>
<p>So, once again, toxic “bro” behaviour, <a href="https://www.businessinsider.com/bro-culture-harassment-discrimination-uber-business-2017-6#:%7E:text=Now%20Uber%20CEO%20Travis%20Kalanick,has%20gone%20to%20the%20bros.">as we have seen at Uber</a> and other organizations, infects an iconic organization, leaving the courts to decide.</p>
<p>Certainly, Easterbrook is to blame for, by his own admission, breaking the company’s code of conduct and, more importantly, the values it set for behaviour. However, the board shares responsibility for its singular failure to observe, recognize and act on what emerged as an ongoing, long-term, cultural and possibly legal fiasco.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/mcdonalds-upheaval-is-a-stern-reminder-to-ceos-about-ethics-127009">McDonald's upheaval is a stern reminder to CEOs about ethics</a>
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<p>In 2020, the business world is regrettably replete with examples of poor CEO behaviour, and the #MeToo movement is both widespread and widely known. So why do these situations persist? More to the point, why do boards seem to be constantly surprised by such egregious conduct?</p>
<p>Corporate governance focuses a lot on “tone at the top.” Boards and directors are told and aware that they are under constant and unremitting scrutiny. Their acts — tacit and explicit — filter throughout their organizations, shareholders and stakeholders. They are the instigators, nurturers and custodians of one of an organization’s most critical and enduring assets: its culture.</p>
<p>So how can a board best ensure it discharges its responsibilities to corporate culture in an ethical, responsible and credible manner? How can boards best ensure, observe and embody the culture they desire for their organization?</p>
<p>We suggest three key strategies:</p>
<p><strong>1. CEO selection</strong></p>
<p>The board sets culture through its selection of the CEO. Boards are fascinating organisms inasmuch as they are a group that has only one employee — the CEO. Finding, recruiting, retaining and eventually replacing the organization’s chief executive is the board’s solemn function.</p>
<p>The CEO defines and leads the organization’s strategy. Through their behaviour and expressed beliefs, they come to define and perpetuate the organization’s culture. As such, when considering the organization’s succession plan, the board needs to be explicit about the values they’re seeking in a CEO — and test for those values not only through interviews with candidates, but through interviews with people they have worked with, as well as with clients and suppliers.</p>
<p>It also goes without saying that vetting includes a thorough background check. Past behaviour is one of the best predictors of future behaviour. If an aspiring CEO has inappropriate behaviour in their past, a thorough, confidential investigation before they are hired will likely reveal some of it.</p>
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<img alt="A picture of people sitting around a desk." src="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.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">
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<span class="caption">One strategy that board members should employ is getting to know the companies they oversee.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<p><strong>2. Compensation schemes</strong></p>
<p>Once the CEO has been selected, the board negotiates a comprehensive compensation package. This package is based on a number of short, medium and long-term incentives and composed of both cash and shares or options.</p>
<p><a href="https://www.jstor.org/stable/256656">Compensation research</a> is clear in concluding that executives are remarkable in their ability to discern which behaviour is being compensated, and in turn, engaging in that very behaviour.</p>
<p>In developing compensation schemes, boards should include behaviour targets (such as employee engagement and <a href="https://hbr.org/2003/12/the-one-number-you-need-to-grow">net promoter scores</a>) in addition to more traditional performance-based metrics. They may even include a morals clause.</p>
<p>In evaluating the CEO’s performance annually, the board should keep checking on the CEO’s behaviour through both interviews and observation. The board should also anticipate and plan for involuntary dismissal of the CEO and include clawback mechanisms or even phased payouts in severance provisions.</p>
<p><strong>3. Get out of the boardroom</strong></p>
<p>Many boards hold at least one meeting per year offsite. This has the effect of familiarizing directors with the organization’s operations, as well as signalling to the organization’s employees and other stakeholders the board’s engagement with the entire organization, no matter where. Unfortunately, these off-site meetings are all too often highly scripted and co-ordinated affairs, more reminiscent of a theatre performance than a genuine pulse check.</p>
<p>Directors, individually and collectively, must make it a priority to see the organization’s operations from all perspectives. They should interact with employees, suppliers, customers and all stakeholders on a regular, unscripted and perhaps even unplanned basis. Only by doing so will they get a thorough idea of the company’s culture.</p>
<p>One highly successful director we know bases their decision to join a board partly by trying the organization’s products or services as a customer and witnessing first-hand how frontline employees perform. Another CEO provides every director with an all-access security pass and keycard to all of the organization’s workplaces, encouraging these directors to drop in unannounced to see operations firsthand.</p>
<p>The situation at McDonald’s did not arise spontaneously or suddenly. There are suggestions that it also extends beyond the CEO. Easterbrook’s personality did not undergo a radical transformation when he became the CEO at McDonald’s.</p>
<p>There is an old adage that says “the fish rots from the head down.” McDonald’s board failed in its duty to create, nurture, monitor and sustain a positive, healthy organizational culture. Easterbrook’s behaviour — and the ensuing impact on the entire company — was the result.</p><img src="https://counter.theconversation.com/content/145826/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>Bad behaviour and toxic culture at a company can be corrected if the organization’s board of directors states clearly the values they are looking for in a CEO.Michael Parent, Professor of Management Information Systems / Fellow - David and Sharon Johnston Centre for Corporate Governance, Rotman School of Management, University of Toronto, Simon Fraser UniversityRichard Powers, Associate Professor, Rotman School of Management, University of TorontoLicensed 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/1241672019-10-08T18:55:35Z2019-10-08T18:55:35ZPainting Qantas chief executive Alan Joyce as a superhero is part of a long Australian tradition<p>Alan Joyce is Australia’s <a href="https://www.abc.net.au/news/2019-09-17/ceo-bonuses-soar-as-qantas-boss-alan-joyce-tops-list/11518356">highest-paid chief executive</a>. </p>
<p>Alan Joyce is one of the Financial Review’s <a href="https://www.afr.com/work-and-careers/leaders/australia-s-10-most-covertly-powerful-people-20190828-p52lon">ten most covertly powerful people</a>. </p>
<p>Alan Joyce writes <a href="https://twitter.com/Qantas/status/1104924677175169026">heartwarming notes to children</a>. </p>
<p>Alan Joyce is <a href="https://www.msn.com/en-au/news/australia/qantas-boss-alan-joyce-53-announces-hes-set-to-marry-his-partner-after-20-years-together/ar-AAIbJ0e?li=BBU4PL8">getting married</a>.</p>
<p>And he is apparently some sort of <a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">superhero</a>.</p>
<p>Something about chief executives brings forth testimonials <a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">like this</a>, published in the News Corporation tabloids last month, which followed the revelation that Joyce was Australia’s highest paid corporate chief (taking home <a href="https://www.abc.net.au/news/2019-09-17/ceo-bonuses-soar-as-qantas-boss-alan-joyce-tops-list/11518356">A$24 million</a> in 2018-19).</p>
<p>Penned by Angela Mollard, a journalist specialising in celebrities, it <a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">said he had</a></p>
<blockquote>
<p>turned around a failing company, put thousands of dollars in shareholders’ pockets, boosted the superannuation of Mr and Mrs Average and prevented thousands from losing their jobs.</p>
</blockquote>
<p>Joyce, and all the best chief executives, she argued, were </p>
<blockquote>
<p>alchemists, strategists, innovators and geniuses. They have the sort of agile brains that produce solutions to problems which seem intractable. They lead not from a textbook but from an internal well of brilliance that seems constantly replenished.</p>
</blockquote>
<p>Further, executives like Joyce deserved to be rewarded for</p>
<blockquote>
<p>the risks they take, the entrepreneurship they exhibit, the education they’ve invested in and the particular brand of brilliance that comes along all too rarely.</p>
</blockquote>
<h2>It’s been said before</h2>
<p>I’ve been examining the language used to describe Australia’s elite executives over the past 100 years, and what’s being said about Joyce is familiar - right down to the use of the word “genius”.</p>
<p>This kind of talk, repeated for more than a century now, leads us astray if we keep repeating it. It creates misunderstandings about how large companies work. Chief executives aren’t superhuman, their characteristics are not those of their companies, they don’t single-handedly determine the fate of those companies or personally employ their workers, they aren’t necessarily selfless or patriotic, and they don’t necessarily have the best interests of the nation at heart.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ceos-who-take-a-political-stand-are-seen-as-a-bonus-by-job-applicants-121334">CEOs who take a political stand are seen as a bonus by job applicants</a>
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<p><a href="http://adb.anu.edu.au/biography/mackellar-sir-charles-kinnaird-7382">Sir Charles Mackellar</a>, chairman of the Mutual Life & Citizens’ Assurance Company and a director of a host of other companies including the Colonial Sugar Refining Company was labelled a “<a href="https://trove.nla.gov.au/newspaper/article/15572188">genius</a>” when he died in 1914. </p>
<p>FA Govett, the London-based head of Australia’s
Zinc Corporation was labelled as a “<a href="https://trove.nla.gov.au/newspaper/article/45952519">man of exceptional ability</a>” in 1926. </p>
<p>Often they had higher ideals. </p>
<p><a href="http://adb.anu.edu.au/biography/raws-sir-william-lennon-840">Sir William Lennon Raws</a>, a director of four of Australia’s biggest companies including BHP and Elder Smith, was a “<a href="https://trove.nla.gov.au/newspaper/article/146726001">well-meaning capitalist with a dream</a>”. </p>
<p>Like Joyce and his contemporaries that work their “<a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">butts off to do the right thing</a>”, Raws was</p>
<blockquote>
<p>palpably rich and could be richer; but I doubt if the making of another million would be as much to him as the achievement of one of his cherished hopes.</p>
</blockquote>
<h2>It’s their own work</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1133&fit=crop&dpr=1 600w, https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1133&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1133&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/295944/original/file-20191008-128652-a1051n.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://trove.nla.gov.au/newspaper/article/245762056/26911232">Daily Telegraph, May 6, 1926</a></span>
</figcaption>
</figure>
<p>Executives have long been seen as the sole reason for their company’s success. In 2019, Joyce single-handedly “<a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">took a beleaguered company and transformed it</a>”. </p>
<p>Similarly, in the late 1800s, BHP director <a href="http://adb.anu.edu.au/biography/jamieson-william-6827">William Jamieson</a> was <a href="https://trove.nla.gov.au/newspaper/article/45936299">solely responsible</a> for the development of the Broken Hill region.</p>
<p><a href="http://adb.anu.edu.au/biography/philp-sir-robert-8040">Robert Philp</a> of Burns Philp and Company was an Australian patriot who “<a href="https://trove.nla.gov.au/newspaper/article/120184641">controlled her destinies during a critical period</a>”. </p>
<p>Industrialist and car manufacturer <a href="http://adb.anu.edu.au/biography/holden-sir-edward-wheewall-7065">Edward Holden</a> worked tirelessly to “<a href="https://trove.nla.gov.au/newspaper/article/129208064">benefit the state and the company”</a>. </p>
<p>Corporate director and university chancellor <a href="https://trove.nla.gov.au/newspaper/article/61634919">Sir Normand Maclaurin</a> was “endowed with talents of a very high order […] having at heart the welfare of the nation”.</p>
<h2>They’re exceptional</h2>
<p>Joyce’s success might be due to his “<a href="https://www.news.com.au/finance/money/wealth/qantas-chief-executive-alan-joyce-deserved-to-make-24-million-in-2018/news-story/5b25597a186e24adedd01887165e398c">big dick energy</a>”, but he wasn’t the first. In the early 1900s, <a href="http://adb.anu.edu.au/biography/pratt-joseph-major-8098">Joseph Pratt</a> – director of the National Bank of Australasia, the Land Mortgage Bank, the Melbourne Tramway and Omnibus Company and Metropolitan Gas Company – was described in the most masculine of terms as a <a href="https://trove.nla.gov.au/newspaper/article/145710392">big man</a></p>
<blockquote>
<p>tall, erect, well-made and muscular. He has a pleasant, manly face, indicative of straightforwardness and goodness of disposition, and upon which grows a russet beard, containing a few grey hairs…</p>
</blockquote>
<p><a href="http://adb.anu.edu.au/biography/sheldon-sir-mark-8411">Sir Mark Sheldon</a> - chairman of the Waterloo Glass Bottle Works, a director of the Australian Bank of Commerce, and vice president of the Sydney Chamber of Commerce - also <a href="https://trove.nla.gov.au/newspaper/article/245762056/26911232">also big </a>,</p>
<blockquote>
<p>big in his outlook, his ideas, and his accomplishments. Perhaps his height (6 feet, 1.5 inches) enables him to look a bit farther ahead than the ordinary man</p>
</blockquote>
<p>Painting corporate chiefs like this gives corporations a human face. It helps convince customers and investors that their money is in safe hands. If Alan Joyce is a ‘good man’, then the Qantas Group is seen as a good company.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/swollen-executive-pay-packets-reveal-the-limits-of-corporate-activism-123988">Swollen executive pay packets reveal the limits of corporate activism</a>
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<p>It also makes executives untouchable. After all, if they are blessed with unique or exceptional abilities, and if their company is doing well (whatever the reason), it is hard to argue with the millions being spent on them.</p>
<p>Even if it’s $24 million, even if it’s more.</p><img src="https://counter.theconversation.com/content/124167/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Claire Wright 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>Paying a chief executive $24 million because he has exceptional abilities is a con we’ve perpetrated on ourselves.Claire Wright, Research Fellow, Centre for Workforce Futures, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1239882019-09-24T20:14:01Z2019-09-24T20:14:01ZSwollen executive pay packets reveal the limits of corporate activism<figure><img src="https://images.theconversation.com/files/293736/original/file-20190924-54744-7rgofp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Though Qantas chief executive Alan Joyce might be outspoken on some progressive issues, he supports the system that pays him 300 times that of the average Australian.</span> <span class="attribution"><span class="source">Mick Tsikas/AAP</span>, <a class="license" href="http://artlibre.org/licence/lal/en">FAL</a></span></figcaption></figure><p>Qantas boss Alan Joyce is reportedly Australia’s highest-earning chief executive. He’s also a firm believer in corporate activism.</p>
<p>His pay packet is estimated to have been <a href="https://www.smh.com.au/business/companies/qantas-chief-alan-joyce-tops-ceo-pay-table-20190916-p52rta.html">A$23 million</a> last year – though it’s apparently dropped a little since. </p>
<p>Joyce thinks he should use his position to push social causes he believes in. Under his watch, Qantas strongly backed the 2017 campaign for same-sex marriage, much to the chagrin of politicians with a different view.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-market-for-virtue-why-companies-like-qantas-are-campaigning-for-marriage-equality-82905">The market for virtue: why companies like Qantas are campaigning for marriage equality</a>
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<p>Senior government minister Peter Dutton told business leaders at the time of the same-sex debate to “<a href="https://ethics.org.au/activist-ceos/">stick to their knitting</a>”. Similar sentiments have been expressed recently by Ben Morton, the point man of prime minister Scott Morrison. </p>
<p>Corporate leaders should mind their own business and focus on maximising shareholder value, Morton told the Australian Chamber of Commerce and Industry. </p>
<p>Joyce responded. “That’s democracy and companies are part of democracy, we represent individuals, passengers, employees, shareholders,” <a href="https://www.smh.com.au/politics/federal/bad-for-democracy-alan-joyce-weighs-in-as-war-of-words-between-government-and-business-intensifies-20190918-p52sq1.html">he said</a> “We should have a voice on that, and it shouldn’t get to a stage if you don’t agree, don’t speak up, because I think that’s bad for democracy.” </p>
<p>It seems like it has the makings of heavyweight stoush. But really it’s a phoney war.</p>
<p>All this twisted debate in which chief executives talk about democracy and politicians about business management shows are the limits of corporate activism.</p>
<p>The whole thing is simply a distraction from the need for a real debate about the fact already huge CEO salaries <a href="https://www.epi.org/publication/ceo-compensation-2018/">continue to grow</a> while <a href="https://theconversation.com/theres-an-obvious-reason-wages-arent-growing-but-you-wont-hear-it-from-treasury-or-the-reserve-bank-122041">average wages stagnate</a>. </p>
<h2>Moral postures</h2>
<p>Morton, who is assistant minister to the prime minister and cabinet, <a href="https://theconversation.com/view-from-the-hill-morrisons-right-hand-man-dispenses-with-niceties-in-lecturing-big-business-123530">unleashed his critique</a> in the wake of reports companies were <a href="https://www.afr.com/politics/federal/banks-leave-staff-open-to-join-atlassian-at-climate-rally-20190903-p52nin">giving employees time off</a> to attend climate change rallies on September 20. </p>
<p>“Too often I see corporate Australia succumb or pander to similar pressures from noisy, highly orchestrated campaigns of elites typified by groups such as GetUp or activist shareholders,” <a href="https://www.theaustralian.com.au/business/business-seduced-by-noisy-elites-mia-on-tax-industrial-relations/news-story/6d2a9b8780e1e0aa1fb6cc6f3ace1d82">Morton said</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-behind-the-current-wave-of-corporate-activism-102695">What's behind the current wave of 'corporate activism'?</a>
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<p>“Too often big businesses have been in the front line on social issues, but missing in action when arguing for policies which would grow jobs and the economy.”</p>
<p>This could well have been interpreted as criticising the likes of Joyce – and Joyce certainly appeared to jab back when he <a href="https://www.smh.com.au/politics/federal/bad-for-democracy-alan-joyce-weighs-in-as-war-of-words-between-government-and-business-intensifies-20190918-p52sq1.html">addressed the National Press Club</a> a few days later. </p>
<p>He listed advocating for company tax cut and its industrial relations reforms as evidence he and other chief executives talked about major economic issues.</p>
<p>But businesses that ignored social issues, he said, hurt their bottom line: “You have to do both – and good companies will do both.”</p>
<h2>In defence of inequality</h2>
<p>Looking beyond <a href="https://www.smh.com.au/politics/federal/bad-for-democracy-alan-joyce-weighs-in-as-war-of-words-between-government-and-business-intensifies-20190918-p52sq1.html">Joyce and Morton’s hyberbole</a>, what’s evident is what the debate is not about.</p>
<p>It entirely avoids the problem of the <a href="https://www.acoss.org.au/inequality/">broadening gap between the rich and poor</a>. </p>
<p>Whatever Joyce’s social justice instincts on other issues, he is clearly not the person to talk about about inequality. But it’s not just that he’s silent on this issue. Instead of retreating to his counting house, he came out swinging in defence of his earning almost 300 times the average Aussie income. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ceo-pay-is-more-about-white-male-entitlement-than-value-for-money-100245">CEO pay is more about white male entitlement than value for money</a>
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<p>“My salary was determined by our shareholders,” <a href="https://www.canberratimes.com.au/story/6392297/why-jetstar-wont-fly-to-canberra/">he said</a>. “That’s because our market capital went from just over $2 billion to $10 billion. And our shareholders did exceptionally well out of it”.</p>
<h2>So much for the quiet Australians</h2>
<p>Morton said he had “an old-fashioned view” that businesses should “maximise return to their shareholders”.</p>
<p>The case of Alan Joyce shows profit maximisation is not at all incompatible with corporate activism. Nor is support for a limited range of progressive social causes incompatible with defending the inequality epitomised by super-size executive salaries.</p>
<p>Morton described himself as standing up for the “<a href="https://www.smh.com.au/politics/federal/bad-for-democracy-alan-joyce-weighs-in-as-war-of-words-between-government-and-business-intensifies-20190918-p52sq1.html">quiet Australians</a>”. So it might be considered an irony that his complaints about CEOs pandering to a left elite helped distract attention from the issue of inequality. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/another-official-australian-report-has-been-doctored-to-gloss-over-rising-inequality-123091">Another official Australian report has been doctored to gloss over rising inequality</a>
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</p>
<hr>
<p>Joyce meanwhile insisted he would continue to do what is <a href="https://www.theguardian.com/australia-news/2019/sep/18/qantas-and-virgin-bosses-reject-morrison-government-calls-to-be-silent-on-social-issues">“morally right”</a> for society. </p>
<p>But declaring unelected corporate executives have a responsibility to use their privileged position in the economic pecking order to push business-friendly political causes is, at best, controversial. At worst, his belief he has the right as a chief executive to represent people who haven’t chosen his as a political representative is downright anti-democratic. </p>
<p>All this quibbling narrows the political and economic agenda to a sterile debate between “good ethics is good business” activism and good old-fashioned capitalism. </p>
<p>Whichever one you pick, the fair distribution of economic prosperity among working Australians has been left off the democratic table. Such are the limits of CEO activism.</p><img src="https://counter.theconversation.com/content/123988/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>The phoney debate about corporate activism distracts from the need for a debate about inequality.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1036382018-09-25T12:23:40Z2018-09-25T12:23:40ZThree reasons some countries are far more unequal than others<figure><img src="https://images.theconversation.com/files/237889/original/file-20180925-149958-4cbxgn.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/miniature-people-standing-on-piles-different-1072789088?src=WkYy_6NoVVCLQUU2cWjV7g-1-1">Hyejin Kang / Shutterstock</a></span></figcaption></figure><p>Why do the richest 1% of Americans take 20% of national income, but the richest 1% of Danes only 6%? Why have affluent British people seen their share of national income double since 1980, while over the same period, the income share of wealthy Dutch hasn’t budged?</p>
<p>Technological change and globalisation act as powerful forces for income distribution, but these market processes cannot alone account for the continued range in top income inequality in different countries. After all, some of the most technologically advanced and globalised countries, such as Denmark and the Netherlands, are the ones that are the most equal. </p>
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<p>To explain why some advanced capitalist countries are more unequal than others, we need to look beyond the market and explore the role of politics and power in shaping distributive outcomes. </p>
<p>Want to have a more equal society? In a <a href="https://academic.oup.com/ser/advance-article/doi/10.1093/ser/mwy036/5078588?guestAccessKey=43d50522-cc4b-4129-8cfa-97215e2f14ed">critical review of recent research</a>, I’ve found that the formula is surprisingly simple: tax the rich, vote for left-wing parties, implement electoral systems of proportional representation, and empower trade unions.</p>
<h2>1. Tax levels</h2>
<p>One key political factor is government policy, especially taxation. Countries that have made the biggest reductions to their top rates of income tax have seen the largest increases in top income shares. <a href="https://eml.berkeley.edu/%7Esaez/alvaredo-atkinson-piketty-saezJEP13top1percent.pdf">For example</a>, in more equal France, the top rate in 2010 was only 10% lower than it was in 1950. Meanwhile, in the more unequal US it was 50% lower. <a href="http://pseweb.eu/ydepot/semin/texte1112/STA2012OPT.pdf">At the company level</a>, CEO pay tends to be much higher when the top income tax bracket is lower. </p>
<p>Tax policy plays a pivotal role in explaining top-end income inequality. But policies do not emerge out of thin air. These variations in the policies that influence distributive outcomes at the top result from social power relations, which have been <a href="https://academic.oup.com/ser/advance-article/doi/10.1093/ser/mwy036/5078588?guestAccessKey=43d50522-cc4b-4129-8cfa-97215e2f14ed">shown</a> to shape the evolution of top-end income inequality over time.</p>
<h2>2. Politics</h2>
<p>The formal political arena is one site where these power relations unfold. A <a href="https://academic.oup.com/ser/advance-article-abstract/doi/10.1093/ser/mwx027/4096441">recent study</a> by Evelyne Huber, Jingjing Huo, and John Stephens studied the income share of the top 1% in postindustrial democracies from 1960 to 2012. They found that centre and right-wing governments in rich countries are consistently associated with increases in top income shares. Meanwhile, policies of left-wing governments generally reduce inequality at the top end.</p>
<p>The institutional design of the political system also matters. Electoral systems of proportional representation tend to favour left-wing parties, while systems that are led by majority rule favour right-wing ones. Certain institutional features, such as having presidents and bicameral legislatures encourage gridlock and empower special interests to block progressive policy reforms. </p>
<p>There are questions about the extent to which the institutional story can be <a href="http://eprints.lse.ac.uk/67573/">generalised</a>, but as <a href="http://www.simonandschuster.com/books/Winner-Take-All-Politics/Jacob-S-Hacker/9781416588702">Jacob Hacker and Paul Pierson</a> show, it is crucial in explaining the spectacular rise of the super-rich in the US.</p>
<h2>3. Trade unions</h2>
<p>In addition to left-wing parties, strong trade unions act as a power check on top income shares. Unions can align with left-wing parties and push for egalitarian policies. Within the firm, unions can bargain to increase their wages and reduce the amount of revenue going to executive compensation and shareholder dividends. </p>
<p><a href="http://eprints.lse.ac.uk/19865/">One academic study</a> found that unionisation decreased the compensation of top US executives by 12%. <a href="https://academic.oup.com/sf/article-abstract/92/4/1339/2235824">Another</a> found that in US industries with higher levels of union membership, the gap between executive and non-executive pay was narrower. In the numerous cross-national statistical studies <a href="https://academic.oup.com/ser/advance-article/doi/10.1093/ser/mwy036/5078588?guestAccessKey=43d50522-cc4b-4129-8cfa-97215e2f14ed">that I surveyed</a> the rate of unionisation is one of the few variables consistently associated with lower top income shares.</p>
<p>Prompted in many ways by the pioneering efforts of <a href="https://eml.berkeley.edu/%7Esaez/atkinson-piketty-saezJEL10.pdf">Thomas Piketty and his collaborators</a>, the study of top incomes has made remarkable progress in the past decade. But there is still room for further exploration. </p>
<p>The study of top incomes tends to be US-centric. There needs to be more <a href="http://journals.sagepub.com/doi/abs/10.1177/0032329216656844?journalCode=pasa">in-depth analysis of the experiences of other countries</a>. We need further research that investigates <a href="https://www.theguardian.com/inequality/2017/may/03/how-do-britains-highest-earners-feel-about-their-income">who the top 1% are</a> in different countries, and how their political preferences compare to other segments of the population. We also need to explore in much greater detail the <a href="https://www.demos.org/publication/asset-value-whiteness-understanding-racial-wealth-gap">racial</a> and <a href="https://www.ineteconomics.org/perspectives/blog/new-evidence-shows-gender-inequality-in-top-incomes">gender</a> dimensions of the income hierarchy in different countries.</p>
<p>Given the <a href="https://www.penguin.co.uk/books/188607/the-inner-level/">compelling evidence</a> that living in highly unequal societies destroys our minds, our bodies, our relationships, our communities, and our planet, this is something we should all take seriously. The better the grasp we have of the causes of top-end income concentration in different countries, the more effective we will be in assessing what, if anything, can be done to slow or even reverse it.</p><img src="https://counter.theconversation.com/content/103638/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sandy Brian Hager is a member of the Labour Party. </span></em></p>A critical review of research into inequality shows the formula for reducing it is surprisingly simple.Sandy Brian Hager, Senior Lecturer in International Political Economy, City, University of LondonLicensed 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>
<p><iframe id="ZAnUe" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ZAnUe/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></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/1002452018-07-24T03:36:33Z2018-07-24T03:36:33ZCEO pay is more about white male entitlement than value for money<p>What a week it was for the CEO class. On the Monday, July 16, the <a href="https://www.bloomberg.com/news/articles/2018-07-16/happy-prime-day-jeff-amazon-ceo-s-net-worth-tops-150-billion">Bloomberg Billionaires Index</a> announced that Amazon chief Jeff Bezos had amassed a personal net worth of over US$150 billion. He’s the richest person in modern history. </p>
<p>On Tuesday, the Australian Council of Superannuation Investors published a <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/CEO-Pay-in-ASX200-Companies-2017.Jul18.pdf">report</a> showing that total pay for Australian corporate bosses hit a 17-year high in 2017. Topping the list was Domino’s Pizzas chief Don Meij who received a hefty annual income of A$36.8 million. </p>
<p>Meanwhile, over in Vermont, US Senator Bernie Sanders invited the CEOs of Amazon, Walmart, McDonald’s and Disney to meet their employees for a live streamed discussion, <a href="https://edition.cnn.com/2018/06/28/politics/bernie-sanders-workers-ceos-town-hall/index.html">saying</a>: </p>
<blockquote>
<p>I really hope (the CEOs) have the guts to sit on a panel with their own employees and explain why it’s acceptable that they receive huge compensation packages while their very own workers are struggling to put food on the table. </p>
</blockquote>
<p>None of the CEOs showed up.</p>
<h2>Public outcry</h2>
<p>The vast income enjoyed by the corporate elite jars with Australia’s “fair go” culture. While top bosses averaged yearly take-home <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/CEO-Pay-in-ASX200-Companies-2017.Jul18.pdf">pay increases of more than 12% to A$4.36 million</a> in 2017, <a href="https://www.smh.com.au/business/the-economy/australian-wages-stall-at-record-low-of-19-per-cent-20170816-gxx44w.html">wage growth for ordinary workers hit record lows</a>, and is still <a href="https://www.theguardian.com/business/2018/jun/13/australias-bank-chief-warns-low-wages-growth-will-hurt-economy">barely keeping up with inflation</a>. </p>
<p>Rubbing salt into the wound are <a href="https://www.theguardian.com/australia-news/2018/jun/30/pay-rise-for-politicians-as-penalty-rates-trimmed-further-in-hospitality-and-retail">cuts to penalty rates</a>, <a href="https://www.smh.com.au/business/workplace/wage-theft-endemic-across-australia-20171119-gzol3l.html">wage-theft scandals</a> and retailers announcing they want to <a href="https://www.theaustralian.com.au/national-affairs/industrial-relations/retailers-seek-minimumwage-freeze/news-story/5382e6c6f35d397e3e1e6f93f67616e9">freeze the minimum wage</a>. </p>
<p>Things must be getting pretty bad when even Prime Minister Malcolm Turnbull, normally bullish in his support of corporate Australia, admits that top-end remuneration appears to be “<a href="https://www.smh.com.au/business/workplace/turnbull-calls-out-extraordinarily-high-ceo-pay-20180717-p4zs0b.html">extraordinarily high</a>”.</p>
<p>Amidst the outcry, however, some still rush to the defence of the C-suite dwellers. “<a href="https://www.afr.com/news/economy/wayne-swans-claims-on-ceo-pay-populist-nonsense-20180702-h124z2">Executive pay experts</a>” have slammed criticism as nonsense, arguing that if Australian corporations wants to be competitive in attracting “global talent” then their pay should actually be higher. </p>
<p>The <a href="https://theconversation.com/australia-post-salary-scandal-highlights-our-nations-growing-wage-inequality-72738">market-based justification</a> for swag-bag sized pay packets is a common defence for executive excess. CEOs deserve massive remuneration because they single-handedly lead their companies to success, it’s argued. To suggest anything else is labelled <a href="https://www.afr.com/news/economy/wayne-swans-claims-on-ceo-pay-populist-nonsense-20180702-h124z2">crass populism</a>. </p>
<h2>Where is the evidence of performance?</h2>
<p>Do CEOs really add so much to a company that they deserve these gargantuan salaries? No, according to a recent study entitled ‘How much do CEOs really matter?’ by <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2597">Markus Fitza</a> at Texas A&M University. He statistically isolated the “CEO effect” – the extent to which they actually influence a company’s performance – in 1,500 of the largest US firms between 1993 and 2012. </p>
<p>He discovered that the CEO effect was negligible in these companies. Financial performance could be better explained by random luck or chance than the qualities of a great leader. </p>
<p><a href="https://www.cfauk.org/media-centre/cfa-uk-executive-remuneration-report-2016">Research</a> by Weijia Li and Steven Young at Lancaster University found something similar. They focused on the UK’s top 350 biggest firms between 2003 and 2014. These companies increased their value (returns on investment/capital) by only 1%, yet executive pay over the same period increased by 80%, most of it described as performance-related. </p>
<p>The UK government has now taken tentative <a href="https://www.theguardian.com/uk-news/2018/jun/10/uk-firms-to-be-forced-to-justify-pay-gap-between-bosses-and-staff">steps to rein in excessive pay</a> for chief executives.</p>
<h2>A white male culture of entitlement</h2>
<p>There’s another problem with this story about “business heroes” earning their due through extraordinary merit. When you look at the pictures of the top ten CEOs, all you see are smiling white faces of men. </p>
<p>This is so even though the number of <a href="https://conradliveris.files.wordpress.com/2018/03/gender-equality-at-work-20182.pdf">women CEOs in Australia</a> hit an all-time high this year. The top 200 listed companies now have 12 women in the top job! Not just a vast minority, on average those women earn about A$1 million less than their male counterparts. </p>
<p>The rapid explosion of CEO pay is part of a more general trend that has been building steam for the past 30 years. In what has been dubbed the <a href="https://www.zedbooks.net/shop/book/ceo-society/">CEO Society</a> bosses are lauded as supermen to be venerated, despite clear evidence – ranging from the Global Financial Crisis to eye-watering levels of inequality – that their collective influence is socially and economically damaging. </p>
<p>The level of CEO pay reflects an elitist corporate culture of privilege and entitlement. It’s dominated by middle-aged white men whose singular responsibility for corporate success is hugely overstated at best. </p>
<p>What is to be done? A <a href="https://www.news.com.au/national/breaking-news/polling-supports-limiting-ceo-pay-packets/news-story/9cc2feac414e35c579f9794a87da2150">recent survey</a> found that three-quarters of Australians agreed corporate salaries should be capped. Most said the maximum should be around $720,000. We would add that remuneration and stock options above that figure should be subjected to a <a href="https://www.investopedia.com/terms/w/windfalltax.asp">windfall tax</a> of say 90%. </p>
<p>So why not legislate for a system that where CEOs get fair pay for a fair day’s work? Well, as Professor <a href="http://mitpress.mit.edu/books/undoing-demos">Wendy Brown</a> of the University of California, Berkeley, shows, today’s political consensus is marked by an increasingly intimate relationship between corporations and the state, at the expense of democracy.</p>
<p>If the furore over CEO pay is anything to go by, it is the nature of that political consensus that needs to change so entrenched systems of inequality based on gender and racially based privilege are no longer acceptable.</p><img src="https://counter.theconversation.com/content/100245/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>The evidence suggests the impact of CEOs on company performance isn’t enough to justify their sky-high pay, which is really based more on a culture of power and privilege.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyPeter Fleming, Professor, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/972392018-06-20T23:03:52Z2018-06-20T23:03:52ZThe uproar over executive pay isn’t entirely warranted<figure><img src="https://images.theconversation.com/files/224029/original/file-20180620-137714-1xeaonu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Executive pay is an issue that often causes public uproar. But it's not as greed-driven as we might think.</span> <span class="attribution"><span class="source">Razvan Chisu/Unsplash</span></span></figcaption></figure><p>For those inclined to view big business as irresponsible, poorly governed and out of touch, CEO compensation provides the biggest and juiciest target. </p>
<p>The average annual pay for a CEO of a <a href="https://www.cbc.ca/news/business/ceo-income-pay-canadian-worker-1.4462496">Canadian company hit a record $10.4 million in 2017</a>, more than 200 times the average employee’s salary. A public uproar ensued last year when it was revealed that executives at troubled Bombardier <a href="https://www.thestar.com/business/2018/03/23/bombardier-executive-compensation-rises-to-334-million-in-2017.html">gave themselves hefty pay raises</a> after receiving hundreds of million of dollars in taxpayer subsidies.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=521&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=521&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223836/original/file-20180619-126566-8kpslo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=521&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">People throw paper airplanes during a demonstration in Montreal in April 2017 to protest pay hikes and bonuses to Bombardier’s top executives.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Graham Hughes</span></span>
</figcaption>
</figure>
<p>Last year in the United States, CEOs at the largest companies <a href="https://www.businesswire.com/news/home/20180530005540/en/Performance-Pays-CEOs-Highest-Compensation-Increases-Recession">received the highest compensation increases since the Great Recession.</a> The trend has angered some shareholder activists <a href="https://economia.icaew.com/en/news/may-2018/shareholder-revolt-grows-over-executive-pay">who have staged rebellions against company boards</a> for approving huge paydays to senior managers.</p>
<p>For economists, CEO compensation has been a source of spirited debate. <a href="https://doi.org/10.1111/j.1468-036X.2009.00500.x">Some say</a> that high executive pay is merely a reflection of supply and demand and the stock-based incentives built into compensation packages. They point to standard economic models in which compensation packages are designed to encourage CEOs to maximize company value. </p>
<p>But that’s been hard to square with the <a href="https://doi.org/10.1162/00335530152466269">empirical evidence</a> that CEO compensation has often more to do with luck than with the value CEOs create. </p>
<h2>CEOs rewarded for luck?</h2>
<p>Many critics will argue that, notwithstanding the deliberations of board compensation committees, chief executives tend to be rewarded for factors outside their control. </p>
<p>Those may include a favourable business cycle or a change in the price of key commodities, such as oil, that can shape the fortunes of key sectors of the economy. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223834/original/file-20180619-126543-txdyd8.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">
<figcaption>
<span class="caption">President and CEO Bharat Masrani speaks at the TD Bank Group annual general meeting in March 2017. Masrani pulled in $10.85 million in compensation in the 12 months that ended Oct. 31, 2017.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Frank Gunn</span></span>
</figcaption>
</figure>
<p>One way to understand this is to consider that compensation packages are designed to not only provide incentives but also to attract and retain key executives. In a marketplace for senior executive talent, different types of firms compete for different types of CEOs.</p>
<p>This is the perspective that Nicolas Sahuguet and I took in <a href="https://doi.org/10.1017/S0022109017001065">our study</a> on executive pay. For one thing, some firms do a more thorough job of monitoring — for example those with very large shareholder blocks or powerful boards. </p>
<p>They are able to get more and better information on CEO performance and ability, which means these firms have the confidence to hire untested and inexperienced CEOs and to dismiss those that under-achieve. </p>
<p>This is important because inexperienced CEOs arrive with a lot of uncertainty about how they’ll perform once they’re at the helm and have to make high-stakes decisions. A few good or bad months often go a long way towards determining their value going forward. </p>
<h2>Close monitoring</h2>
<p>So companies with strong boards that can closely monitor a CEO’s performance will take a chance on an inexperienced CEO and pay them according to their performance — how well they build the firm’s value — rather than on the vagaries of prevailing business conditions.</p>
<p>By contrast, experienced CEOs — say former <a href="https://www.cnbc.com/2017/11/17/former-ge-ceo-jack-welch-how-to-be-a-great-leader.html">General Electric CEO Jack Welch</a> or onetime <a href="https://variety.com/2018/digital/news/meg-whitman-tapped-as-ceo-of-jeffrey-katzenbergs-mobile-content-venture-1202674576/">Hewlett Packard CEO Meg Whitman</a> — arrive with extensive media recognition.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223838/original/file-20180619-126534-14ki6uk.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">Meg Whitman is seen in this 2015 photo at the New York Stock Exchange.</span>
<span class="attribution"><span class="source">(AP Photo/Richard Drew)</span></span>
</figcaption>
</figure>
<p>In their case, the unknown is the possibility of disruptive change in business conditions. </p>
<p>This CEO will likely be hired by a firm with relatively weak monitoring abilities — for example, firms with more diffuse ownership and weak boards. Since board members of these companies kowtow to senior executives and find it harder to dismiss a CEO, they look for a known quantity. And they will more likely pay that known quantity based on business conditions (or “luck”) rather than performance.</p>
<p>In sum, firms with strong governance end up paying their CEOs mostly for performance, whereas firms with weak governance end up paying theirs mostly for luck. </p>
<p>Interestingly, contrary to a naïve interpretation, governance does not have any direct causal effect on pay-for-luck. Instead, the cause-and-effect relationship has more to do with the fact that different types of firms hire different types of CEOs. In particular, firms with a good corporate governance system will be less reluctant to hire a promising yet inexperienced CEO. </p>
<h2>Size of firm correlated to CEO pay</h2>
<p>As for the increase in the compensation of large firms’ CEOs since the early 1980s, the most striking empirical fact is that the pay increases are very strongly correlated with the significant expansion of those companies.</p>
<p>Indeed, CEO pay is very <a href="https://doi.org/10.1162/qjec.2008.123.1.49">strongly correlated with firm size</a> both over time and across firms. The explanation is simply that a CEO will have more impact in a larger firm, so increases in firm size increase firms’ willingness to pay to attract CEO talent. It’s similar to how professional athletes earn higher wages when the value of their sports franchise increases. </p>
<p>Does poor governance allow executives to increase their compensation? This idea is hard to reconcile <a href="https://doi.org/10.1111/0022-1082.00405">with the fact</a> that governance has generally improved over the last few decades while top executive compensation has also increased. </p>
<p>And if faulty governance were really the reason behind excessive CEO compensation, then a governance improvement plan in a firm would be accompanied by less generous compensation packages. Such governance improvements typically take place when a company is taken over by a private equity fund. Yet they are often accompanied by rising rather than falling executive compensation, notably via stronger pay-for-performance. </p>
<p>This may not make you feel any better about seemingly high CEO compensation or why CEOs can be rewarded for favourable business conditions yet go unpunished for poor performance. </p>
<p>Of course, as in any sphere of life, some top executives will abuse their positions and extract undeserved benefits. As a whole, however, trends in executive compensation are consistent with fundamental economic forces.</p><img src="https://counter.theconversation.com/content/97239/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre Chaigneau 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>High CEO compensation angers the public, particularly when it doesn’t seemed tied to performance. But as a whole, trends in executive compensation are consistent with fundamental economic forces.Pierre Chaigneau, Assistant Professor at the Smith School of Business, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/927652018-05-15T11:52:18Z2018-05-15T11:52:18ZBritish government relying too heavily on business to make society fairer<figure><img src="https://images.theconversation.com/files/218990/original/file-20180515-195305-19lfii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's the government's responsibility.</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/POYDluw0tyw">David Dibert / Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The UK is <a href="https://www.ft.com/content/d8e01ac4-43c1-11e8-803a-295c97e6fd0b">introducing new legislation</a> that will require companies to publish the ratio of what they pay their CEO compared to the average worker’s salary. The move follows a number of corporate governance reforms introduced by the government over the last year and a half as part of an <a href="http://www.telegraph.co.uk/news/2016/10/05/theresa-mays-conference-speech-in-full/">effort to build a fairer economy</a>. But if the government was truly committed to building a fairer economy, it would not rely primarily on companies to do its work for it. </p>
<p>When Theresa May first became prime minister, she vowed to reform the UK’s economy to ensure that it would <a href="http://press.conservatives.com/post/147947450370/we-can-make-britain-a-country-that-works-for">work for everyone</a>. Reforming the way that companies operate is a key part of this vision. According to May, corporate governance mechanisms are the tools by which these responsibilities should be imposed.</p>
<p>May is not alone in her views on the usefulness of corporate governance mechanisms to promote public responsibilities. Countries around the world, from <a href="http://www.mca.gov.in/Ministry/actsbills/rules/CDoPitRoBoDR1988.pdf">India</a> to <a href="https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000022470434">France</a> to <a href="https://www.sec.gov/opa/Article/2012-2012-163htm---related-materials.html">the US</a>, rely on these mechanisms to advance public interests – from protecting the environment to promoting humanitarian aid. </p>
<p>The UK’s <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/627671/good-work-taylor-review-modern-working-practices-rg.pdf">Taylor Review</a> into modern working practices even argued that corporate governance – and not government regulation – was the best way to reform work in the UK. There seem to be few ills of society that governments believe cannot be addressed through corporate governance. </p>
<p>The latest set of corporate governance initiatives aligns with the government’s views on its usefulness to address public problems. The ratio of CEO to worker pay requirement is being introduced, in part, to tackle the wide disparity in pay between executives and ordinary working people. This is not surprising, as CEO pay has increased by 82% over the last 13 years and today the average CEO makes <a href="http://highpaycentre.org/files/Reciprocity_at_the_top_table_Progress_on_boardroom_pay.pdf">120 times as much as an ordinary worker</a>.</p>
<p>Corporate governance tools are also being used to level the playing field between men and women. Since 2011, the government <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2442041">has recommended</a> that companies increase the number of women on their corporate boards and more recently required companies to <a href="http://www.legislation.gov.uk/ukdsi/2017/9780111152010">disclose the gender pay gap in their companies</a>. Plus, corporate governance regulations are being used to promote myriad <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206241/bis-13-889-companies-act-2006-draft-strategic-and-directors-report-regulations-2013.pdf">other issues</a> relating to the environment, society, and communities.</p>
<h2>Three problems</h2>
<p>Of course governments have broad discretion to use any type of regulation to achieve public policy goals. But we question whether public-oriented corporate governance rules are the best way forward. This is because this approach can lead to three problems. </p>
<p>First, this approach may not be enough to change corporate behaviour. For instance, despite countless attempts by the government to regulate executive compensation, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2798001">a recent
study</a> found that neither the pay gap between CEOs and employees has narrowed nor has the relationship between executive compensation and firm performance improved.</p>
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<p>Second, current corporate governance mechanisms rely mainly on an indirect regulatory model, through disclosure. For instance, the new rules only require companies to disclose their CEO to worker pay ratio; they do not require companies to actually change the ratio of pay between the CEO and workers. Instead, the hope is that by having to reveal this information, companies will be prompted (or shamed) to reduce this disparity on their own. </p>
<p>If the government is truly committed to keeping executive pay in check, it shouldn’t leave it to companies to distribute their wealth more fairly. Instead, it could have more direct approaches such as capping the upper limits of executive pay or establishing acceptable pay ratio requirements between the lowest paid employee and the CEO. </p>
<p>Third, and most concerning, governments may be hiding behind these corporate governance rules to give the appearance of progress, instead of working to eradicate the root causes of these problems. For instance, despite executive pay <a href="http://www.gmb.org.uk/newsroom/gap-bosses-workers">continuing to rise</a> the government continues to introduce <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640631/corporate-governance-reform-government-response.pdf">further reporting requirements</a>. Conversely, the government seems less interested in addressing the reasons for the widening inequality between employees and executives, such as zero hour contracts or the lack of a true living wage.</p>
<p>In these cases, corporate governance tools may be no better than good public relations. They appease the public and, given their toothless nature, do not subject governments to pressure from businesses.</p>
<p>If the government really wants to build a fairer economy, relying only on corporate governance rules is not the answer. In many instances, it is more effective to address the issue directly rather than relying on shaming and nudging techniques.</p>
<p>Overall, corporate governance tools are not a one-stop shop to fix the ills of society. They should only be used strategically and form part of a concerted, multifaceted effort to address the root of public policy issues.</p><img src="https://counter.theconversation.com/content/92765/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barnali Choudhury receives funding from the Leverhulme Trust. </span></em></p><p class="fine-print"><em><span>Martin Petrin 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 gender pay gap and CEO to worker pay ratio won’t be fixed by corporate governance initiatives alone.Barnali Choudhury, Associate Professor (Law), UCLMartin Petrin, Associate Professor, Deputy Director - Centre for Commercial Law, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/909992018-02-04T18:07:13Z2018-02-04T18:07:13ZVice-chancellors’ salaries are just a symptom of what’s wrong with universities<figure><img src="https://images.theconversation.com/files/204687/original/file-20180204-19933-4pjhrm.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>The recent <a href="https://www.theguardian.com/education/2017/nov/28/bath-university-vice-chancellor-quits-after-outcry-over-468k-pay">furore</a> over the UK’s highest-paid vice-chancellor, Bath University’s Dame Glynis Breakwell, exposes much that is wrong with higher education. </p>
<p>The case has drawn public attention to the inflated salaries of vice-chancellors and the huge wage disparities between managers and low-paid casual academics. In some cases, vice-chancellors in Australia take home more in <a href="https://www.ngarainstitute.org.au/articles/2016/11/2/the-great-divide-the-new-fat-cats-in-australias-universities">one week</a> than a casual employee earns in a year. </p>
<p>Interestingly, the majority of vice-chancellors in both the UK and Australia are male. On the whole they earn significantly more than their female counterparts. </p>
<p>What has led to this great divide? What is driving inequality across the sector? And how do these wage disparities compare to the private sector? </p>
<h2>University fat cats</h2>
<p>While Breakwell’s annual salary of A$812,000 created a storm, Australia’s highest-paid vice-chancellors take home around 1.5 times that. In fact, Breakwell’s salary would <a href="https://www.theguardian.com/australia-news/2018/jan/22/pay-of-australian-university-heads-called-into-question-after-uk-protest">rank 28th</a> in Australia out of 38 public university vice-chancellors.</p>
<p>These 38 vice-chancellors <a href="https://www.theaustralian.com.au/higher-education/uni-vicechancellors-average-salary-package-hits-890000/news-story/f01aaa072fe5a7ceaa0c2d8154f282fb">were paid</a> an average A$890,000 in 2016. Twelve earned more than A$1 million. The best-paid vice-chancellor was Sydney University’s Professor Michael Spence, who received A$1.4 million, after a 56% increase over five years. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204751/original/file-20180204-19961-12sk8mz.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">
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<span class="caption">Michael Spence (left), the vice-chancellor of Sydney University, is Australia’s highest-paid vice-chancellor.</span>
<span class="attribution"><span class="source">AAP/Dan Himbrechts</span></span>
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<p>Professor Greg Craven at the Australian Catholic University followed on the heels of Spence, earning A$1.25 million. Just behind Craven was Professor Ian Jacobs at UNSW on A$1.22 million. The lowest remuneration went to vice-chancellors at Southern Cross (A$500,000) and Murdoch universities (A$585,000). </p>
<p>In addition to these lucrative salaries, many vice-chancellors get performance-related bonuses. </p>
<p>By comparison, vice-chancellors at a number of prestigious UK universities earn considerably less. The vice-chancellor of England’s Oxford University – which <a href="https://www.timeshighereducation.com/world-university-rankings/2018/world-ranking#!/page/1/length/25/sort_by/rank/sort_order/asc/cols/stats">topped the Times Higher Education World University Rankings in 2018</a> – was paid £350,000 (A$616,000). The vice-chancellor at Cambridge University received £349,000 (A$614,000) in 2016. </p>
<p>In fact, <a href="https://www.chronicle.com/interactives/executive-compensation#id=table_private_2014">university bosses</a> in Australia are among the <a href="https://www.chronicle.com/article/39-Private-College-Leaders/238561">highest paid in the world</a>. They also fare extremely well when compared to other public sector employees in Australia. Prime Minister Malcolm Turnbull earns less than all but one vice-chancellor, <a href="http://www.abc.net.au/news/2017-06-23/politicians-under-fire-for-pay-increases-while-penalty-rates-cut/8646872">taking home</a> around A$527,000 a year. </p>
<p>Despite repeated <a href="https://www.senatorbirmingham.com.au/sustainability-and-excellence-in-higher-education/">federal budget cuts</a>, job cuts and rising student fees, vice-chancellors’ salaries continue to grow. Much of this can be attributed to the mindset of university councils. They are often comprised of business leaders, retired politicians, senior university managers and senior academics who set salary levels by <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8543.2008.00689.x/full">benchmarking</a> against comparable positions in other corporate sectors. </p>
<p>Central to this calculus is income generation and the achievement of a surplus. That’s duly rewarded by a performance-related salary bonus. </p>
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Read more:
<a href="https://theconversation.com/universities-get-an-unsustainable-policy-for-christmas-89307">Universities get an unsustainable policy for Christmas</a>
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<p>The recent acceleration of vice-chancellors’ salaries stands in contrast to the remuneration of Australia’s highest-earning CEOs, with the median <a href="https://www.businessinsider.com.au/australias-10-highest-paid-ceos-in-the-asx-100-2016-8">top 100</a> down 5.2% in 2016 to A$1.72 million. </p>
<h2>The glass ceiling</h2>
<p>While Breakwell is the UK’s highest-paid vice-chancellor, women remain under-represented in the sector. They also receive lower pay than their male counterparts. </p>
<p>In the UK, only <a href="http://www.universityrankings.com.au/vice-chancellor-salary-packages.html">29% of vice-chancellors are women. In Australia, women occupy just 25%</a> of these positions.</p>
<p>In Australia, women vice-chancellors receive an average income of A$831,000 – A$42,000 less than their male peers. Only one female vice-chancellor – Professor Margaret Gardner at Monash University – earns more than A$1 million, compared to nine men. </p>
<h2>Well-paid VCs sell the corporate university</h2>
<p>Growing academic wage disparities have coincided with more intense global market competition for students and research funding. International students, who pay <a href="http://alluniversities.com.au/tuition-fees-list.html">up to three times more in upfront fees</a> than their domestic peers, now comprise Australia’s <a href="https://www.universitiesaustralia.edu.au/Media-and-Events/media-releases/Australia-s-education-exports-at-record-high#.WnaHFZP1VsN">third-largest export</a>, worth around AU$21.8 billion a year. </p>
<p>It’s little wonder that universities run multi-million-dollar marketing campaigns to “strategically differentiate” themselves in order to gain greater “market share”. </p>
<p>At the <a href="https://www.researchgate.net/publication/309558101_Introduction_Challenging_the_Privatised_University">corporate</a>, fiscally driven university, the ability of vice-chancellors and their senior colleagues to generate income is pivotal. This is evidenced in vice-chancellor job descriptions and selection criteria that appear occasionally in flashy brochures. </p>
<h2>Salaries a symptom</h2>
<p>Federal Education <a href="https://www.senatorbirmingham.com.au/interview-on-2gb-breakfast-with-steve-price/">Minister Simon Birmingham</a> has used the controversy around inflated salary packages to attack the sector, demanding universities show they’re creating value-for-money to justify such remuneration. </p>
<p>But demanding value-for-money from vice-chancellors alone is a distraction from the far bigger challenge of addressing the institutional inequities that span across Australian universities. These inequities - of which salaries are part - constrain university research and education <a href="http://www.researchcghe.org/publications/public-goods-and-public-policy-what-is-public-good-and-who-and-what-decides/">in the service of the public good</a>. </p>
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Read more:
<a href="https://theconversation.com/a-focus-on-private-investment-means-universities-cant-fulfil-their-public-role-45094">A focus on private investment means universities can't fulfil their public role</a>
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<p>The higher education policy of successive governments has played a significant role in driving this inequality, as well as creating the conditions for the corporatisation of universities. Fat-cat salaries are just a symptom of the corporate model, not the cause.</p>
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<p><em>The image of Michael Spence has been corrected since publication. We apologise for the error.</em></p><img src="https://counter.theconversation.com/content/90999/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Hil is the Convenor of the Ngara Institute.</span></em></p><p class="fine-print"><em><span>Kristen Lyons 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>Vice-chancellors often benchmark their salaries against comparable positions in other corporate sectors, a symptom of the trend towards the corporatisation of universities in Australia.Kristen Lyons, Associate Professor Environment and Development Sociology, The University of QueenslandRichard Hil, Adjunct Associate Professor, School of Human Serivces and Social Work, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/819992017-09-04T20:11:55Z2017-09-04T20:11:55ZWhy Australian CEOs are sharing part of our wages pain<p><em>Low wages growth has been a spectre hanging around the Australian economy for some time. In our series <a href="https://theconversation.com/au/topics/what-we-earn-42620">What We Earn</a> we unpick the causes for this and why some workers might be feeling it more than others.</em></p>
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<p>Even though shares and bonuses for CEOs have been fluctuating over the years, recently CEO salaries have remained stagnant. This trend lines up with the stagnant wages workers <a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0ahUKEwiqtJ7Ng9jVAhVDUbwKHTPPBMkQFgg9MAQ&url=https%3A%2F%2Fwww.rba.gov.au%2Fpublications%2Fbulletin%2F2017%2Fmar%2Fpdf%2Fbu-0317-2-insights-into-low-wage-growth-in-australia.pdf&usg=AFQjCNFV0AsGOp94cfJn301kpQjCB4f2y">have been experiencing across the board</a>.</p>
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<p>I calculated the average CEO salary, bonus and remuneration for a sample of ASX100 firms, for the period 2012-2016. I only included firms with available data for the same CEO for the entire five year period, which was 45 of the 100.</p>
<p>Looking just at the salary component of remuneration, it’s clear CEO salaries plateaued across 2016 and 2015 with modest increases of 2.31% and 3.15% respectively. In contrast, CEO salaries increased by 7.54% and 8.53% in 2014 and 2013, well above the growth in average Australian wages. CEO salaries as a multiple of average Australian wages show a small but steady increase over the five-year period. </p>
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<p>However CEO bonuses and share-based payments show a different story. Bonus payments were much more volatile across 2012-2016. </p>
<p>CEO bonuses are usually payments based on <a href="http://www.sciencedirect.com.ezproxy.library.uq.edu.au/science/article/pii/S1573446399300249/pdf?md5=f3d68f03169320b774cea3da861d1f0b&isDTMRedir=Y&pid=1-s2.0-S1573446399300249-main.pdf">short-term performance</a>. This explains their volatility across 2012-2016; the large increase in average bonus payments in some years and the large negative change for 2016.</p>
<p>Share-based payments are usually calculated with a standard accounting method and reflect the amount of shares a CEO owns during a year, rather than the money those shares earn during that period. </p>
<p>There’s been large increases in share-based remuneration awarded to CEOs in every year except 2014.</p>
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<p>Share-based payments are also usually linked to the company’s <a href="http://www.sciencedirect.com.ezproxy.library.uq.edu.au/science/article/pii/S1573446399300249/pdf?md5=f3d68f03169320b774cea3da861d1f0b&isDTMRedir=Y&pid=1-s2.0-S1573446399300249-main.pdf">share performance</a> and so its value is subject to changes in both the individual business and the whole capital market. </p>
<p>Overall the data shows that growth in total CEO pay has outstripped average Australian wage growth in every year of the last five years. But perhaps we need to look more closely.</p>
<h2>CEO pay and average wages</h2>
<p>CEO pay is made up of a base salary component plus a mix of elements that are subject to fluctuation. These parts of the executive pay packet are influenced by <a href="https://espace.library.uq.edu.au/view/UQ:252035">many factors</a> including firm size and complexity, individual company performance, internal benchmarks, share market performance, industry norms and the domestic and international economy. So many of the factors influencing low wages growth for Australian workers are also an important influence on CEO pay, although not necessarily in the same way. </p>
<p>For example, low wages growth has helped to <a href="https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-2.pdf">moderate growth in labour costs for firms</a> and so improving profitability. However, low wages growth <a href="https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-2.pdf">has also been linked</a> to higher unemployment levels, under-capacity in the economy, low consumer expectations about inflation and Australia’s weakening terms of trade. All of these factors will ultimately impact negatively on the profitability of individual businesses and it’s difficult to justify a large increase in CEO base salary if the firm is not performing well. </p>
<p>On the basis of the data provided, it’s reasonable to predict there will be a continued plateauing of CEO base pay and that any increase will, on average, be roughly in line with Australian wages growth. The other elements of CEO pay are much more unpredictable. Certainly if business performance slows, so will the amount of elements of executive remuneration that are variable because they are linked to performance.</p>
<p>Public scrutiny of executive pay and shareholder’s ability to vote against it with <a href="https://theconversation.com/au/topics/two-strikes-law-1721">Australia’s two-strikes rule</a> are also likely to moderate executive pay in the future. Pay levels well above industry norms or individual performance will continue to draw <a href="https://theconversation.com/australia-is-ripe-for-shareholder-activism-69422">shareholder ire</a> and a <a href="http://www.afr.com/business/banking-and-finance/cba-kills-shortterm-bonuses-for-ian-narev-top-executives-20170807-gxrd2d">swift board reaction</a>.</p><img src="https://counter.theconversation.com/content/81999/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker is affiliated with Chartered Accountants Australia New Zealand. </span></em></p>Data shows that growth in total CEO pay has outstripped average Australian wage growth in every year of the last five years. But perhaps we need to look more closely.Julie Walker, Associate Professor in Accounting, The University of QueenslandLicensed 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/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/697862016-12-12T05:12:18Z2016-12-12T05:12:18ZOverconfident CEOs are less socially responsible<figure><img src="https://images.theconversation.com/files/149563/original/image-20161212-31370-1841oow.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">CEOs who are more confident are less likely to sell their own stock in a company.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Overconfident CEOs tend to lead to less corporate social responsibility in a company, <a href="http://www.sciencedirect.com/science/article/pii/S0378426616302382">our research shows</a>. The more confident the CEO, the less their firm invests in activity that has a positive impact on society. </p>
<p>We looked at 2,138 firms with 3,478 different CEOs from US exchange listed firms across all industry sectors, and calculated overconfidence by measuring executive compensation. We looked at the share options provided to CEOs: if the CEO fails to exercise these options (selling them off) it means they are overconfident about their company.</p>
<p>If a CEO invests in corporate social responsibility it’s like an insurance policy. The CEO is mitigating the risks in a number of areas by planning strategies around them, so the market is more lenient if the firm suffers some setback. These sorts of areas include: community involvement, corporate governance quality, workforce diversity, employee relations, environment, human rights and product quality.</p>
<p>For example, <a href="http://cmr.ucpress.edu/content/53/3/40">another study found</a> firms with higher levels of corporate investment that were socially responsible suffer less damage to the company’s value in cases where there’s a product recall due to a defect. Being a good corporate citizen has positive spillover effects.</p>
<p>This lack of confidence reduced aspects of social responsibility the most in the institutional aspects of social responsibility, such as community and workforce diversity. This is in contrast to the technical aspects of corporate social responsibility such as corporate governance and employee relations. </p>
<p>Community aspects of social responsibility include giving to charity and support for non-profit organisations. Also included are support for housing initiatives or education that supports economically disadvantaged people, volunteer programs and indigenous peoples relations. Workforce diversity includes support for women on the board, outstanding employee benefits or other programs addressing work/life concerns. </p>
<p>We also found a significant difference between male and female CEO confidence levels and the level of investment in corporate social responsibility each undertakes. Female CEOs are significantly less overconfident than male CEOs and undertake significantly more social responsible investment than male CEOs.</p>
<p>However, the gender of the CEO doesn’t impact our original finding of overconfidence leading to less social responsibility investment.</p>
<p>CEO overconfidence has been blamed <a href="https://theconversation.com/overconfidence-is-responsible-for-a-lot-of-mistakes-heres-how-to-avoid-it-61907">for business failure and financial distress</a>. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1659440">Research finds</a> overconfident CEOs increase the risk of bankruptcy. <a href="http://dx.doi.org/10.1080/1351847X.2012.659267">There is also evidence</a> to suggest overconfident CEOs take greater risks and insure less than their non-overconfident peers. </p>
<p>Shareholders are keen to invest in companies that are headed for success. They may therefore be attracted to the high risk, high reward strategy of the overconfident CEO. On the other hand, <a href="http://dx.doi.org/10.1108/PAR-05-2013-0047">shareholders are showing more interest</a> in investing in firms who minimise risks associated with environmental damage and negative impacts on social well-being. </p>
<p>We argue that overconfident managers do not correctly recognise these risks and invest less in socially responsible behaviour than their less confident peers. </p>
<p>We also considered the impact of narcissism in our study. CEOs that have narcissistic traits have a strong need for admiration from shareholders. Investment in social responsibility <a href="http://dx.doi.org/10.1002/smj.2348">has been shown</a> to be a good pathway to help CEOs obtain this admiration. </p>
<p>There’s also research that <a href="http://dx.doi.org/10.1016/j.jrp.2003.09.010">links narcissistic traits with overconfidence</a>. However our study found there was no relationship between narcissism and social responsibility. We found instead that the risk aspect of overconfident CEOs dominates. </p>
<p>The take-home message for shareholders is that if you want to invest in a more socially responsible firm, you need to consider more than just the CEO’s resume. To invest in a firm with a continued focus on socially responsible investment, shareholders should select a CEO who isn’t overconfident. The challenge then is balancing that with a lack drive or direction in innovation and other positive risk-related activities that can result in growth. </p>
<p>It’s a trade-off that shareholders may struggle with. One solution may be for shareholders to use employment contracts with CEOs to specify the level of social responsibility they want to see happening in their firms. In this way, shareholders may be able to harness the positive attributes of an overconfident CEO while maintaining a socially responsible focus.</p><img src="https://counter.theconversation.com/content/69786/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Oliver 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>If a company is led by an overconfident CEO, the firm is less likely to invest in corporate social responsibility measures like workforce diversity.Barry Oliver, Associate Professor, The University of QueenslandLicensed 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/660532016-10-17T19:20:49Z2016-10-17T19:20:49ZExecutives’ short-term outlooks the real killer of Australian innovation<p>Malcolm Turnbull’s <a href="http://www.innovation.gov.au/page/national-innovation-and-science-agenda-report">Innovation Agenda</a> focused attention on startups and technology-driven innovation, but this is not enough to overcome the <a href="https://theconversation.com/australias-innovation-problem-explained-in-10-charts-51898">broader problems inhibiting innovation in Australia</a>. Businesses may be looking to the government to ease red tape as a means to increase innovation but what’s really blocking innovation is the short-term view of senior executives, our research finds.</p>
<p>We interviewed 12 board Chairs and nine CEOs of top ASX-listed companies, one-on-one in wide-ranging interviews to try and find out what the leaders of large Australian businesses are thinking and doing in the innovation space.</p>
<p>Our interviewees pointed out there is no real interest among senior executives in taking a risk that may pay off in the long-term because of current risk-reward practices <a href="https://theconversation.com/we-need-to-change-more-than-pay-for-executives-to-do-better-66113">that reward short-term outcomes</a>. One CEO said: </p>
<blockquote>
<p>“People try and blame shareholders, but it’s not. It’s management saying, ‘am I really going to be here in 10 years’ time when this actually kicks off’?”</p>
</blockquote>
<p>And another board chairperson agreed:</p>
<blockquote>
<p>“Does great innovation come out of Australasia? Not normally because the risk-reward perspective is skewed towards I must turn up with my number.” </p>
</blockquote>
<p>As a result of this short-term thinking, the amount of money allocated to innovation projects is conservative and released through a stage gate process with the need to report on outcomes. We also found there were <a href="https://hbr.org/2015/06/you-need-an-innovation-strategy">very few innovation strategies</a> within these companies. </p>
<p>Executives were risk averse even when a company could afford to make significant investment in innovation. For example one CEO said:</p>
<blockquote>
<p>“We are deliberately followers in pretty much everything we do whether it is financial structuring or application of technologies and it’s borne of a risk profile that is a consequence of our market position…we might distribute a couple of hundred million dollars, (and have) A$1 million to spend on something that’s risky.”</p>
</blockquote>
<h2>Who needs to lead innovation?</h2>
<p><a href="http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-big-companies-can-innovate">Executives</a> and <a href="http://quarterly.demos.co.uk/article/issue-2/innovation-and-growth/">academics</a> have argued that innovation often takes place in large, established businesses. Yet, there is evidence that big business <a href="http://www.forbes.com/sites/henrydoss/2015/01/12/why-big-business-fails-at-innovation/#3e32597a6ae9">mostly fails at innovation</a>. </p>
<p>In Australia, the <a href="http://news.nab.com.au/wp-content/uploads/2015/09/Innovation-Report-Summary.pdf">2015 NAB report on business innovation</a> showed that only 29% of very large firms (ASX 300) rated themselves as highly innovative. A recent study by the Centre for Workplace Leadership at the University of Melbourne revealed that just <a href="http://www.abc.net.au/news/2016-05-30/businesses-face-innovation-shortfalls-leadership-crisis-study/7457874">18% of private sector organisations reported high levels of radical innovation</a>. </p>
<p>The people we talked to as part of this study identified various challenges for innovation in Australia. They pointed out that the Australian market is too small and the Australian culture too laid-back, resulting in less motivation to innovate and disrupt.</p>
<p>Others blamed the large and complex system of government regulations, corporate tax levels, inflexible industrial relations, and the tall poppy syndrome. </p>
<p>However there was little evidence of global aspiration or ambition. Nor was there much discussion about companies’ positioning in a global marketplace. </p>
<p>Some CEOs and Chairs agreed that they are too risk averse to engage in radical innovation, but blamed the short-term orientation of the market and shareholders for their failure to innovate big.</p>
<p><a href="https://hbr.org/2012/09/why-big-companies-cant-innovate">As recognised by others</a>, large organisations tend to frame innovation in terms of improving existing business models rather than disrupting them. As one chair described it: </p>
<blockquote>
<p>“I don’t think innovation requires [betting] the business. Innovation now is much more about improving, constant change, constant improvement.”</p>
</blockquote>
<p>Based on the interviews we conducted, the current outlook for innovation being fostered by Australia’s established companies is bleak, as summarised by this interviewee:</p>
<blockquote>
<p>“Talking about business in Australia, I have a lot of concerns, because I don’t think that there’s enough people in the bigger companies in Australia saying, ‘OK, let’s develop a strategy, let’s develop a business plan, let’s engage with the market and tell them what we are doing, in a very open way, and let them take the rise and fall with us, as to if we get there we get there, if we miss it by a little bit, [let’s] explain to them why we missed it. That doesn’t happen.’ ”</p>
</blockquote>
<p>A lot has to change for Australian big business to become more innovative. As a start, companies need to introduce <a>long-term incentives for executives</a>, change attitudes to support <a href="https://hbr.org/2012/10/big-companies-cant-innovate-halfway">taking risks and thinking big,</a> and focus on <a href="https://hbr.org/2015/06/you-need-an-innovation-strategy">developing innovation strategies</a>.</p><img src="https://counter.theconversation.com/content/66053/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Spencer Stuart, Second Road and UTS Business School jointly funded the collaborative research study. </span></em></p><p class="fine-print"><em><span>Spencer Stuart, Second Road and UTS Business School jointly funded the collaborative research study.</span></em></p>Research shows the short-term view focus of senior executives may be inhibiting a long-term investment in innovation.Linda Leung, Honorary Associate, University of Technology SydneyJochen Schweitzer, Director MBA Entrepreneurship and Senior Lecturer Strategy and Innovation, University of Technology SydneyNatalia Nikolova, Senior Lecturer in Management, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.