Fundamentally we get to the issue of fairness – what is a fair return for bearing risk, what is a fair return for effort on a company in falling or growing market, what is considered fair by the shareholders of the company, and what is fair for entrepreneurial return. The market sentiment from both sides are: 1. Some executives (and in most cases it is the executives singled out for the headlines) are getting paid large returns despite poor company performance 2. The personal career and financial risk is such that a return must be very high to justify it.

No doubt there will be plenty of comment on the issue, and it is good to see current headlines (The West Australian business section 23 May 2009) showing Wesfarmers executives choosing to cap salaries and reduce bonus payments. This is the sort of initiative that we should expect market forces to create.

Disclosure: I am a shareholder in Wesfarmers.

If you limit remuneration on some multiple of the lowest paid employee, you will get a situation where a multi-billion dollar company is paying their directors and executives a fairly average wage. This is because these large companies probably employ a junior with a wage that would not be too different to that of a small market cap company.

When you consider the personal risk and effort a Director or Executive takes in running a large company, why would they take on a high profile/high risk role when they could just go and take a place in a less risky business, unless there is some appropriate incentive? I think the key word here is “appropriate” (as opposed to “exorbitant”).

Of course, it is important to structure a remuneration package that shareholders support. This includes defining performance measures that determine the payouts (we’ve recently seen directors and executives being paid high remunerations when in fact the company is not performing well).

I agree – there needs to be some form of governance and shareholder approval to help get acceptable remuneration packages. The question I have is: does the average shareholder have the information they need to define (or even just to ratify) an executive’s remuneration package? And if its not the directors, executives or shareholders – who decides?

I also think that culture plays a big part of influencing behaviour. My brother worked for KPMG in New York for a few years before coming back to Australia, and his insights into the comparison of culture in the US vs Australia was really interesting (both in terms of positives as well as negatives), and I’d be really interested in your views on this.

Thanks for taking the time to visit this blog and for posting your comment….

Justin

The fact of the matter, at least in the US where I am for a few years before coming back to Oz, is that directors and any level of executive above a certain level of seniority are _no a junket_. Seriously, it’s about the cash, the power, doing as little as one can do to get paid a boatload. I really don’t think that is too cynical, it just makes sense when you step inside their mind for a while.

Shareholder value? Seriously? Think about this: can the price of a stock go up and up forever? Granted, I don’t have statistical proof of this, and some stocks (Berkshire) go up pretty much forever. But the idea of ever increasing stock value is bogus, therefore the idea of employing someone to increase stock value forever is bogus.

Protecting the franchise, yes. Keeping a business alive and generating profit, yes. Looking for new opportunities, and trimming bad ones, yes, absolutely.

But “shareholder value” … I think that is the myth in itself.

I can go on about how I think the notion of listing a company is the root of this flawed logic (if the idea is or was ever about giving operational money, then why is all the “real” money made after the IPO, hmm?), but for now, I want to sign off with one positive note: the idea of a 30x (or whatever) “reality check” is excellent. Very much what I think is appropriate. Wouldn’t fly in the US where the indentured class get $5/hr so executives could get no more than $150/hr = $300k/year (seriously, my manager earns multiples of that and he’s 4 levels down from the top), but I really agree that the work done by tops of companies isn’t more than 30 (or 50 or whatever) as important.

Though I’m sure they’d beg to differ.

AICD has put out policy in this area on termination payments: http://www.companydirectors.com.au/Policy/Policies+And+Papers/2008/Position+paper+no.+13+-+Executive+termination+payments.htm

The Regnan paper is also worth a look.