Why executive pay will become even more complex: Kohler

The Australian Council of Trade Union’s submission to the Productivity Commission’s inquiry into executive pay came in the other day and predictably demanded stringent laws against it.

Equally predictably, the Institute of Directors’ submission demanded the opposite: leave us alone please.

Public hearings begin today, so there is a long way to go, but it is highly unlikely that Professor Allan Fels and his colleagues on the inquiry will recommend legislation imposing new controls on executive pay and it’s even less likely that the Government would act on it if they did. All the action on employee share schemes has already happened, and that was a total mess – as tax-driven actions often are.

There will be no cap on base executive pay to keep it to 10 times average fulltime earnings, as demanded by the ACTU (the current average CEO pay is 63 times average earnings, up from 18 times in 1990), and the non-binding remuneration vote at AGMs will not be made binding.

The government will not get involved in prescribing the structure of performance incentives. The PC report might politely request that remuneration reports be made vaguely comprehensible, which the government will ignore because it can’t think of how to draft a law along those lines that would itself be vaguely comprehensible.

So will the PC inquiry be a complete waste of time – nothing but a ministerial announcement designed to give the impression of action where none is intended?

Yes indeed, although Fels and the PC team are doing some worthwhile work, and the submissions are all quite interesting, albeit rarely surprising. But nothing will actually happen.

Trevor Eastwood, the former CEO and then chairman of Wesfarmers, cut through a lot of the blather around this issue in May when he told an Institute of Company Directors’ forum, at which I was grilling him on stage, that incentives should be abolished altogether.

He suggested most incentive payments are simply disguised base pay and that the complex system of incentives is largely responsible for the blowout in remuneration (the ACTU calls it “out of control”, and it’s hard to disagree).

I would actually go further: short-term executive incentives based on shares and options are responsible for much of the world’s misery at the moment.

Banking executives took excessive risks to enhance their personal wealth through bonuses; industrial company CEOs often failed to invest for the long term and took on too much debt because their incentives are based on current performance; and institutional fund managers did nothing about it because they were usually on the same sort of deal.

Eastwood believes executives should be paid a fixed salary, in cash, with little or no performance component, and that they should buy shares in the company with their own money. “Good executives are driven more by their dedication and passion for the job than financial incentives,” he says.

But incentives won’t be abolished either: they will just be made more complicated so that management is not exposed to the vagaries of the sharemarket any more.

There is an awful lot of scrambling going on this year as boards find ways to pay bonuses that were half-promised but are not now payable because the share price has halved. This, of course, will need to be hidden in remuneration reports that are even more complicated than they are now.

This article first appeared on Business Spectator.

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