If the Australian Institute of Company Directors ever decide to hold a poker night, try to score yourself an invitation. For our esteemed company directors, many of whom themselves were once highly-paid and well regarded chief executives, the ability to “milk a pot” or bluff is a skill which  is sorely lacking.

In a functioning free market for executive talent, there would be no need for the government to appoint Allan Fels and the Productivity Commission to conduct a review of remuneration. Nor would there be any need to enact a law which prevents directors from paying retiring executives millions of dollars of shareholder monies simply for retiring.

No, in the rarefied executive floors of Australia’s leading public companies, the market is not free, nor is it particularly well functioning.

When it comes to remuneration, directors have been unwilling to call executives’ bluff. Instead, accepting the mislaid notion that paying more delivers some sort of better quality executive (often shareholders will be subjected to generalist comments from directors who claim that there is a “shortage of executive talent”, or they “needed to pay the executive a multi-million retention bonus to prevent them from working overseas”). However, if anything, it has appeared in recent years that high remuneration has had a perverse effect on shareholder returns, as Babcock & Brown, Macquarie Bank, News Corporation and a slew of overseas investment banks can attest.

Increased regulation would not be required if company directors cared more for duties to shareholders, than they did for preserving their own well-being (it is likely that company directors who agitate for change, such as former NAB director Catherine Walter, will soon find their stream of board invitations drying up rapidly).

The past decade has seen executive pay skyrocket and directors have placed far too great a premium of the so-called ability and scarcity of quality executives. Company directors have in effect formed a view of the supply and demand equation for executives that is contradictory to reality.

Directors should be able to deal with executives from a relatively strong bargaining position. As David Leonhardt, writing in the New York Times noted.

A few years ago, when the economy was still expanding, I looked into every large company that had changed chief executives over the previous six months. Not a single boss at any of them had left for another job. Such departures are so rare that Booz & Company’s annual study of executive turnover doesn’t even include a category for them. The benefits of the job — the pay, the perks, the gratification that comes from running a company well — are too good to leave, even for a similar job.

CEOs have very few places to go if they wish to receive the same recognition, remuneration and power. Further, most CEOs possess few other skills which can be easily monetised. Executives are really little more than capital allocating politicians, whose importance to a company’s success is in most cases vastly overrated. Executives have successfully bluffed their way to a 97% increase in remuneration over the past five years — largely holding a pair of threes.

If a company makes a job offer to a CEO who then rejects the offer on the grounds that the remuneration is too low, the company should publicly announce the full details (and remuneration offered) to the ASX. The prospective CEO is welcome to ply his trade elsewhere to flush out their true market value, while the jilted company could simply select another executive to do the job at a more reasonable price.

Shareholders shouldn’t need Productivity Commission reviews, APRA recommendations or Treasury studies to ensure that executives are not overpaid — rather, all they need their highly paid directors to do their jobs.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey