Rather than obsessing about executive salaries, shareholders should be rejecting incentive plans that put profits ahead of social responsibility.
After a century of badgering from pinkos and greenies, captains of industry are grudgingly starting to accept that profits are not everything. Society now expects employers take responsibility for occupational health and safety of their workers and, more recently, the wellbeing of the planet. Meanwhile, WorkChoices has wound back workers’ employment security at a time when employers are looking for ways to tighten the belt. If we want Australia’s social fabric to weather the present economic storm, we should now demand more corporate responsibility for the financial wellbeing of the workforce.
Given the general downturn in demand, some job losses are inevitable. But corporations and their investors who lived well off the workers during the good times should now be required to take extraordinary measures to look after their workers in the hard times.
Pacific Brands’ recent announcement that it will lay of thousands of workers was widely assumed to be an inevitable result of tough times. The reality is that Pacific Brands are doing very well. They have miraculously maintained profits at the same level as last year, about $50m after tax. They even reported that Christmas 2008 trading was better than Christmas 2007.
The widely reported loss of $150m was on paper only, due to a $200m “asset impairment” writedown.
Pacific Brands has made no effort to maintain its Australian manufacturing workforce. According to its Pacific Brands 2010 Strategy, there is “no long term sustainable advantage from local manufacturing”. Nearly 2000 sacked workers would no doubt disagree.
In spite of the government’s current generosity, the company turned down offers of support that might have averted the layoffs. Industry Minister Kim Carr said: “I spoke to the Chairman of the Board and I specifically asked was there anything further we could do to get the company to change its mind and the answer they have given me is no.”
Asked by a journalist whether there was an option not to cut jobs, Pacific Brands CEO Sue Morphet said: “There’s always an option not to cut jobs but the option is to carry a cost base that will limit our ability to keep our company relevant and engaged with the Australian market. I don’t believe it will be in the interests of our shareholders to do so.”
While acknowledging the interests of shareholders, Ms Morphett conspicuously failed to mention was her own short-term incentive. Her 2008 salary package comprised $724,444 fixed salary plus 100% incentive. To be paid the incentive, the company needed to increase profits by 17.6% compared to the previous year. It did, and she collected another $700,000.
It’s no wonder corporate responsibility goes out the window when success is measured by the aptly named “short term incentive” of profit growth. Pacific Brands executives are not rewarded for improving the welfare of their workers. In fact, in this case 1850 families will trade their income for the dole, so that the CEO can pocket an extra $700,000. Hardly a win-win formula.
Ms Morphett is not to blame for this situation. It is the Board, and ultimately the shareholders, of Pacific Brands which sets the key performance indicators and hence the objective towards which the executives work. It would be nice to think that in these difficult times they might rethink their definition of success. Keeping 1850 workers off the scrapheap while making a modest profit would be a far greater success than increased profits. To put it in perspective: increasing profits by 17.6% would mean last year’s dividend per share would have been $0.20 instead of $0.17.
However, to the CEO, outsourcing manufacturing could mean an extra $700,000 in her pocket within six months. It would be interesting to see whether shareholders would be willing to carry a little pain for the greater good if the question were put to the vote. If incentives were given for maintaining current profits and employment during difficult times, Pacific Brands’ executives might suddenly be very keen to work with the government and unions and achieve a real success.
Peter Vogel is a Creative Technologist who has developed a number of Australian innovations including the Fairlight synthesiser, Vitalcall medical alert, and IceTV personal digital video.