How much was Alan Joyce’s brilliant leadership at Qantas worth? The board has finally revealed the answer: $28 million in bonuses, for a total of $150 million in remuneration for his 15 years at the helm of the company. Speculation at the time of Joyce’s retirement in September that his bonus might be substantially cut appears to have evaporated. Of course, it turned out Joyce wasn’t quite the Midas-touch CEO that many claimed he was.
The public blowback at the Qantas board over the payout has renewed the decades-old thorny accusation that business elites have been taking shareholders and the public for a ride for far too long over how much they should be paid. The final Joyce payout was even too much for The Australian, which complained about the opaqueness surrounding bonus payments to former staff after they leave.
Public anger is naturally exacerbated at times of economic hardship for ordinary people or when perceptions of unfairness around corporate decision-making are just too ugly to ignore. Joyce is one example. But what was the public to make when in 2014 then-CEO of Australia Post Ahmed Fahour sacked 900 workers while earning $4.8 million?
It’s time for government to intervene in what has become a broken system of executive remuneration. As a society, we’ve bought the illusion that so rare are the skills needed to run big corporations, and the competition for them so fierce, that eye-watering amounts of shareholders’ funds have to be allocated to secure a slice of executive excellence.
On the back of the neoliberal economic revolution of the 1980s, executive pay entered an arms race reaching, in some corporations, 500 times the average wage. The arms race became a mindset among the self-entitled business elite. Compliant boards and the big institutional investors, drawn from the same class, ticked off on the ever-increasing packages with the self-serving justification that this was the reality of the turbo-charged world of global capitalism.
Even when boards engaged in due diligence by benchmarking remuneration packages against their competitors, the inevitable outcome was a race to the top.
But there was never a proven link between performance and executive pay. In fact, the reverse is equally true. Common sense tells you as much. As University of Technology Sydney Business School dean Carl Rhodes told the ABC, “In years gone by when CEOs weren’t paid that much, was it that corporate performance was poorer than it is now? Of course not.”
Several studies have confirmed the obvious. Morgan Stanley Capital International looked at hundreds of the biggest companies in the United States over more than a decade and found that those with the lowest-paid bosses outperformed those with the highest paid at least 40% of the time.
How could this be? My own work investigating the big corporate scandals in Australia indicates a link between excessive remuneration and the onset of corporate greed marked by excessive risk-taking – and “risk blindness” — for short-term profit. Australia has been littered with corporate scandals for 40 years. High-profile CEOs walking the plank have become a regular feature of public life, most with their bonuses intact.
We have largely forgotten the lesson of the 2008 global financial crisis, too. That fat bonuses were a key part in bringing the American banking system to its knees with its disastrous roll-on effects on the global economy. In the wake of the crisis, Lloyd Blankfein, the head of Goldman Sachs, acknowledged that executive bonus schemes “helped send the industry plunging into an abyss”.
Reform has been limited and largely ineffective. For years, top executives were loaded up with company share offers in an effort to promote longer-term thinking. However, like Alan Joyce did, there’s nothing stopping a CEO from seeking to maximise their share options before they retire. And equating corporate interests too strongly with those of shareholders ignores the risks that enriched CEOs can have on society at large. Joyce is in a long line of executives who left their corporations in a reputational mess, quite apart from the profit they generated.
Reform introduced in 1998 by then-treasurer Peter Costello to allow shareholders a say in remuneration packages was well-intentioned but has had little effect. A protest vote of 25% — known as a “first strike” — is meant to be a signal for boards to reconsider packages or face a “second strike”, which can then lead to a spill of board members.
A number of corporations — including CBA, NAB, ANZ and Telstra — have suffered first strikes after scandal-plagued years. Only Westpac has undergone a second strike, but the vote to spill the board was overwhelmingly rejected.
The problem here is that the interests of small investors — motivated by moral outrage at high executive salaries and poor performance — do not necessarily equate with the big institutional investors who are drawn from the same elite executive class and show less concern for reputational damage. Recently, industry-based superannuation funds have thrown their considerable weight around to hold corporations to greater account. But their influence can be out-gunned by global players.
It’s time for some more concerted thinking on corporate remuneration. One idea, among several, is to legislate a cap on the remuneration of CEOs to some more reasonable equivalent of average weekly earnings. Global Investment Management firm Triodos has a CEO payment limit of 100 to one against the average employee for a company to be included in their portfolio. For them it’s an ethical issue: “Excessive remuneration adds to income inequality within countries and causes tensions within the company”.
More regulation around CEO share equity schemes might be another way to curb excessive pay. The howls from the business community would be as loud as they would be predictable: precious CEO talent would rush for the door and head overseas.
But the case of Alan Joyce shows that such fears are exaggerated: in the end Joyce was paid $150 million to tank Qantas’ reputation along with its share price. Someone could have done a far better job at far less cost to ordinary shareholders.
Quentin Beresford is author of the recently released book Rogue Corporations: Inside Australia’s Biggest Business Scandals, published by NewSouth.
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