The danger of golden parachutes for high-paid executives: Kohler
Monday, December 1, 2008/
At the end of last week RiskMetrics published a survey of CEO termination payments and discovered what it, and we, already knew – that the bosses get a manure-load when they shoot through. Jumping or pushed, hero or villain – doesn’t matter whether they’v
On the day Qantas shareholders sent Geoff Dixon off with a flea in his ear along with the $12 million final pay packet, I met a prominent business person at the airport (the planes were running late, as usual) who said he had just come from a lunch where those around the table had rated the outgoing Qantas CEO out of 10. The average score among that group of customers and shareholders was 4.5 out of 10, he said.
It’s a bit unfair to publish the result of an anonymous lunch poll, so if any readers would care to contribute their own score so we can get a larger, more representative sample, we’ll happily average the results.
Qantas’s remuneration report received a stunning protest vote of 40% at last week’s annual meeting, so that’s perhaps a six out of 10 from shareholders. Dixon’s final cheque was certainly among the lumpiest.
At the end of last week RiskMetrics published a survey of CEO termination payments and discovered what it, and we, already knew – that the bosses get a manure-load when they shoot through. Jumping or pushed, hero or villain – doesn’t matter whether they’ve got the boot. Nothing “exceeds expectations” like exiting.
Some votes against remuneration reports this year were even higher; it was 50% against at Wesfarmers’ AGM, 56% at Boral and 58% at Transurban. Shareholders are definitely getting unhappy and letting it be known.
The average payment was $3.4 million, which is two years’ pay. The biggest was John Ellice-Flint of Santos, who got $16.8 million because the board decreed that all his options should vest. Next was John Alexander of PBL who got a nice round $15 million to go (and he didn’t even go far – he’s still executive chairman of Consolidated Media Holdings). Dixon would come in at number three.
It’s moonlight robbery. RiskMetrics’ Dean Paatsch says the solution is to require any payment above $1 million to be approved by shareholders. A measly million dollars? Good god, that’s hardly worth leaving for! The current rule is that anything above seven times final salary must be approved, which could mean hundreds of millions these days, and certainly more than $10 million in many cases.
And under the Paatsch scheme, would the amount be indexed? Or will it be like when Dr Evil in Austin Powers came back from a long cryogenic sleep and demanded a ransom for not blowing up the earth of “one MILLION dollars!” His minions ventured: “Err, don’t you mean a billion dollars? A million isn’t much these days.”
In my view this is part of the wider debate about executive salaries. Right now the financial crisis is producing a spirited backlash against salary excess that, among banks and financiers at least, is likely to result in stricter controls. The reasons top salaries blew out is that they were published, so that the spirit of competition kicked in, between boards and between CEOs. Salaries won’t go back to being confidential and a good CEO is always going to be worth his or her weight in platinum.
The guidance provided by the shareholder vote on the remuneration report is turning out to be quite effective, except for the companies like Telstra, where the board couldn’t give a toss about what shareholders think. It’s impractical for the vote on the remuneration report to be binding, so I think we’re stuck with the system of publishing the top salaries and then shouting about it at the AGM.
But something could be done about the rewarding of failure and the excessive rewarding of success through termination payments that are slipped through. The trouble is that even the fairly generous requirement that shareholders must approve anything more than seven times final salary in a binding vote is easy to get around.
Paatsch’s argument is that a fixed figure is harder for lawyers to subvert, and he’s probably right. But it’s too blunt; it is too much for some companies and arguably too little for others, and moreover it should be indexed in some way. In my view the multiple of salary should be reduced from seven times to twice, and the wording of the law tightened up.
This article first appeared on Business Spectator