Shareholders can rejoice, the runaway freight train of executive remuneration has ground to a halt, with CEO pay falling in line with the collapsing share prices of the companies they run. That is according to the analysis of a leading remuneration consultancy firm. The Age today reported that a Hay Consulting study found that a “survey of 84 Australian companies, including more than half the ASX 50, shows chief executives’ yearly reward dropped 6.8 per cent in the year to May 2009 after having growth of about 15 per cent a year for the past few years.” As a result, Hay concluded that “the fact that there is that negative movement in CEO pay shows they are being linked to performance.”

While shareholders would no doubt be relieved that CEO pay has halted its race to the top, the drop in executive remuneration did not show an especially close correlation to shareholder returns. In fact, for the year to May 2009, the All Ordinaries index slumped by more than 35% — almost six times the fall in CEO remuneration. Further, while variable pay dropped slightly, executives’ have been cushioned by the corresponding increase in fixed pay, which rose by 2.9%.

Some companies, like Macquarie Bank, have readjusted their remuneration structures to adequately compensate for largely negative shareholder returns (Macquarie CEO, Nicholas Moore, saw his short-term remuneration fall from $19.2 million to $2.7 million in 2009). However, the trend was not unanimous. Former Telstra CEO Sol Trujillo, collected $13.3 million remuneration in 2008, despite Telstra’s earnings being less than when he arrived three years prior, and its share price dropping more than 30% during his four-year tenure. Trujillo also received 86% of his maximum short-term bonus last year, resulting in a bonus payment of more than $5 million.

Telstra shareholders were not the only ones to witness extraordinary CEO remuneration while returns crumbled. The long-time CEO of Leighton, Wal King, received $16.4 million in 2008, largely based on an employment contract which allows him to receive an annual bonus based on 1.25% of Leighton’s after-tax profit (rather than any metric links to actual shareholder returns). As a result, King’s remuneration increased by 19% while the company’s share price has slumped by 24% since July 2007.

Attempting to explain the increase, remuneration consultant, John Egan, told the Financial Review that “life at the top has become more onerous … executives are working multiple jurisdictions and across cultures, working 24 hours a day with an increasing number of their operations offshore.” While most executives work arduous hours, Egan’s claims seem to be contradicted by the fact that various leading executives, including Trujillo, John Stewart, John Stanhope and John Fletcher were not only able to work 24 hours per day at their day jobs, but also maintain non-executive director roles at other, large ASX-listed companies. Fletcher served as CEO of Coles, Australia’s largest employer, and a non-executive director at Telstra, one of Australia’s largest companies. Either CEOs don’t work the hours claimed by Egan, or they are breaching their fiduciary duties as a non-executive director.

Executives enjoyed skyrocketing remuneration during the share-market boom of the past decade, taking the credit for capital appreciation which was largely caused by cheap debt and buoyant equity markets leading to expanded price-earnings multiples. As the global financial crisis has exposed some executives as being little more than highly-paid mouthpieces, and others as charlatans, CEO pay has generally remained at peak levels, with only few, honourable exceptions.

Of course, don’t expect to read that in a report prepared by so-called, independent remuneration consultants. Warren Buffett didn’t name them Ratchet, Ratchet & Bingo because they helped keep a lid on executive pay.

Peter Fray

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