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The party's over.

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Wednesday 28 May 2003

Peter Lewis, editor, ‘Workers Online’


The Party's Over  


Research into executive pay commissioned by the NSW Labor Council makes explicit what most of us have suspected for some time: the multi-million dollar CEO packages are a rolled gold rort. 


The Council asked a team of respected academics headed by Dr John Shields from the Sydney University’s School of Business to analyse the return these astronomical wages deliver to shareholders, workers and the broader community. 


These are not a bunch of sociologists applying some whacko leftist theory, it is a sober analysis of share return, dividends and long-term viability. 


You rarely see an animated academic, but when the researchers came into Labor Council to brief us on the results a few months ago it was as if they had discovered the equivalent of el Dorado. 


Here’s what they found: 


- Executive Remuneration levels in Australia grew over the decade 1992-2002 from 22 times average weekly earnings to 74 times the average wage.  


- At the same time, executive option packages, with ‘long-term incentives’ - such as share bonuses, share purchase plans and share option entitlements increased from 6.3 per cent of total remuneration in 1987 to 35.2 per cent of total pay ten years later.  


This all confirmed what everybody expected. 


But then the academics found something that surprised them 


They cross-referenced the pay levels of Australia’s top 150 CEOs, as outlined in the Australian Financial Review’s annual executive remuneration survey and compared it with the performance of their company.  


Crunching the numbers, they found the often-stated link between high executive pay and company performance does just not exist. 


Indeed, their evidence was that as an executive’s pay increases, the performance of the company actually deteriorates.  


Against three criteria: return on equity, share price change and change in earnings per share, their analysis shows that the best performing companies paid the lowest wages and the worst performing firms were paying the most. 


To those who have argued that you need to pay astronomical salaries and throw in Lotto-style options to get executive ‘talent’, we can now confidently say that their emperor has no clothes. 


The Labor Council research shows that once a CEO’s salary exceeds the average weekly wage by a factor of 20, there is a demonstrable deterioration in company performance. 


What this means for unions is that the debate about executive pay now transcends a moral argument about corporate excess and becomes a very real issue of job security for working people. 


If an executive takes home a salary that is outside the 1:20 matrix there is a real chance the company is in big trouble. 


The union movement’s challenge is to use this information strategically: industrially, politically and financially. 


Industrially, workers should be questioning the distribution of profits armed with this research. 


The salary of executives becomes a legitimate issue to be pursued during enterprise bargaining negotiations. 


Politically, unions need to push governments to make decision about corporate pay more transparent and accountable.  


The current situation, where it is governed by the Australian Stock Exchange, now a listed corporation itself, is an untenable conflict of interest 


We also need to convince Labor Governments to use purchasing policy to force firms to moderate executive pay.  


In the same way that Tony Abbott uses government funds to promote individual contracts, Labor must use its financial levers to promote corporate responsibility. 


And financially, we must wake the sleeping giant that is the union movement’s influence in superannuation - taking the next step in protecting our members long term interest through our stewardship of industry super funds. 


Fund trustees must seriously question whether their member's retirement savings should be invested in companies that pay extreme salaries, given the negative impact on performance. 


As researcher John Shields pointed out last week, the idea that there is some rational global market for talented CEOs is a myth that has been perpetuated by those at the top of the corporate cabal.  


Like all else, this market is constructed. 


But that’s political theory; the message from this research is that when you look at the numbers the claims for high CEO pay just do not add up.  


The message for the Top End of Town is clear: the party's over.  


Guests on this program:


Peter Lewis  


Workers Online