In justifying large executive salaries, company directors will excuse their largesse by arguing that Australian companies compete in a global marketplace for talent — unless companies pay executives more than others, shareholders will suffer poor returns. Implicit is that the cost of the executive and their ability are correlated. While such a theory may work for cars or suits, paying more for executives does not only fail to lead to superior performance, it encourages inappropriate capital allocation and reduces long-term returns.

Crikey considered the share price performance of the companies of seventeen of Australia’s highest paid executives. As the table below indicates, while directors have been very willing to hand over shareholder funds to their CEOs, the returns earned have in reality, been terrible.

Executive Company Remuneration between 2006 and 2008 ($ million) Share return between June 2005 and December 2008
Rupert Murdoch News Corp 86.6 -44.17%
Alan Moss Macquarie 79.5 -42.22%*
Phil Green Babcock 51.3 -98.84%
Frank Lowy Westfield 43.6 -24.85%
Wal King Leighton 41.6 120.47%
Sol Trujillo Telstra 33.9 -26.48%
David Morgan/Gail Kelly Westpac 27.5 -13.23%
David Turner/Mike Ihlein Brambles 24.9 -13.10%
Leigh Clifford/Tom Albanese Rio Tinto 24.8 -17.45%
Geoff Dixon Qantas 24.1 -21.66%
Paul Little Toll Holdings 23.4 -44.79%
John Stewart NAB 23.1 -33.67%
David Murray/Ralph Norris CBA 23 -26.75%
Greg Clarke Lend Lease 22 -46.76%
All Ordinaries Index -17.52%

* Share price taken as at 30 March 2005

Of the fourteen highest paid executives between 2006 and 2008, ten companies recorded extraordinarily poor returns, led by Babcock & Brown, which paid former executive, Phil Green, $51.3 million while its share price slipped by 99 percent. Investors in News Corp, Macquarie Bank and Toll lost almost half of their capital, despite their CEOs collecting $86.6 million, $79.5 million and $23.4 million respectively.

The only CEO on the greed list who can point to above average returns being provided to investors is Leighton Holdings’ Wal King. However, King’s star has faded recently, with Leighton scrip dropping from almost $65 in December 2007 to around $25 per share on the back of a shock profit downgrade last week.

It should also be remembered that the comparator, the All Ordinaries index, has itself been a poorly performed asset class. Compared with residential or commercial property, bonds or cash, the returns earned by companies on Crikey’s Greed Index has been especially poor. In addition, the returns compared were not taken over the recent correction, but rather, over a longer three year time period.

Despite the evidence that highly paid CEOs provide terrible value for money, not everyone agrees. Former Wesfarmers CEO, “Saint” Michael Chaney (who himself was one of the few well performed executives), launched an impassioned defense of executive remuneration to the Financial Review last Saturday. In defending executive largesse, Chaney argued that there was a “lack of broader understanding of the remuneration issue and that there is, in most cases, strong alignment between shareholder and executive returns.” Chaney claimed that:

I think most companies now have schemes that don’t reward the executive really well unless shareholders do well…in the case of NAB for example, no long-term incentive granted after 2001 has vested, and many of them never will. There are hundreds of millions of dollars worth of ‘remuneration’ never actually received.

While Chaney’s comments regarding alignment between shareholder and executive returns appear to be contradicted by evidence, Saint Michael does have a point in relation to overstatement of equity rewards — that is, in a falling market, the value of equity instruments granted will often be significantly over-stated by Remuneration Report valuations. However, while the former head of the CEO Trade Union (also known as the Business Council of Australia) and current NAB chairman is correct about equity payments, he neglected to acknowledge the significant levels of cash remuneration paid to NAB executives.

In the last four years, NAB CEO, John Stewart, has collect more than $17 million cash, while NAB’s former Australian chief, Ahmed Fahour, has received almost $15 million in hard currency. During their tenure, NAB has managed to lose more than a billion dollars investing in US mortgages while Fahour controversially sold millions of dollars worth of NAB shares only days before the company announced a discounted placement. However, notwithstanding the cash showered upon Fahour and Stewart by NAB directors, since 2005, the bank’s shares have slumped by around 27 percent.

When looking at a potential investment, investors should take a few minutes to consider the company’s recent remuneration reports. Any business which pays executives high relative levels of fixed cash pay or cash short-term incentives is encouraging short-term, risk taking behavior (like NAB’s US mortgage fiasco). This is likely to be rewarding for executives, but costly for investors.

It now appears that when it comes to the Australian boardroom, when you pay caviar, you get monkeys.

Peter Fray

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