A research paper has rejected one of the great myths perpetuated by company directors — that Australian executives need to be paid millions of dollars each year to prevent them from leaving for greener pastures overseas. A study, commissioned by the Australian Council of Superannuation Investors (ACSI) by RiskMetrics has found that less than 3% of executives depart for an overseas firm — contradicting the oft-repeated claims that high remuneration is needed to prevent Australian CEOs from being poached by large US and UK-based companies.
The RiskMetrics report found that “13% of companies lost their chief executives to another Australian firm, and just three companies — or 4.3% — saw them poached by a foreign organisation. Termination and retirement accounted for almost 70% of the departures.”
The report was part of ACSI’s submission to the Productivity Commission’s review of executive pay.
The continued ratcheting up of executive pay in Australia (as Alan Kohler noted, CEO pay has risen from 18 times average earnings in 1990 to 63 times average earnings now) has been largely caused by impotent remuneration committees being out-manoeuvred by executives, believing myths like the one that executives could jump on a plane, land in New York, and be paid twice as much to run an American company.
Despite non-executive directors ostensibly being paid by shareholders to minimize agency costs, it comes as little surprise that Australian Institute of Company Directors (which is effectively the trade union for non-executive directors) has taken a pro-executive stance in its lengthy submission to the Productivity Commission. The AICD noted that:
It is important to have appropriate people serving as CEOs and other senior executives in these companies, and to have appropriate remuneration structures to attract, retain and motive them. It should also be borne in mind that these executives are some of the elite of Australian business. Elite entertainers, sports people, professionals, entrepreneurs, etc tend to be highly paid the world over.
The AICD’s claims appear to contradict common sense — for instance, why does an executive, already paid a base salary of several million dollars annually (and who stays at five-star hotels, flies first class and dines with high-flying politicians) need additional ‘incentives’ to do their job adequately? One would have thought a lower level janitor earning $15 per hour may be in greater need of incentive pay.
To compare executives, who risk none of their own capital and receive a virtually guaranteed income to entrepreneurs or professionals is misguided. CEOs are hired by shareholders to efficiently allocate capital — not a particularly difficult task — certainly not comparable to the perils faced by elite sportspersons or entrepreneurs who risk their livelihood to establish a new business or loss of earnings due to an injury or loss of form.
The AICD then purported to perpetuate the “global talent” myth (which was empirically disproved by the RiskMetrics study), claiming:
A key factor influencing remuneration arrangements and levels in our larger listed companies is, and has been, global competition for executive talent, particularly in the financial services and the mining and resources sectors.
Being unable to provide any actual examples of this alleged global competition for executive talent, the AICD provided “letters from Russell Reynolds Associates and Korn/Ferry International which provide support for the existence of a global market for executives and set out some evidence of how often global searches occur.” It is somewhat ironic that the only proof the AICD could produce for its so-called global executive poaching contention was from highly paid executive head-hunters. The legitimacy of the AICDs arguments is akin to a study of lung cancer being prepared by British American Tobacco.
The majority of the AICDs members are non-executive directors — paid by shareholders to represent their interests and specifically, to minimize agency costs. Reading the AICD’s submissions to the productivity commission underlines why executive pay in Australia has risen so drastically in recent years.