Why we need to stop paying executives for performance


There is an element of self-serving circularity in the arguments used to justify high executive salaries. But lowering the ceilings on SES pay could be a step to re-energising ‘frank and fearless’ policymaking.

After watching their companies’ reputations and share prices haemorrhage away during the financial services Royal Commission, it is not surprising that shareholders savaged their banks’ remuneration schemes during the recent round of annual meetings. At the date of writing this essay, it is not certain whether the opprobrium being directed towards banking executives will be quarantined to those specific banks. If it doesn’t trigger a significant scaling back of entitlements across the business sector, it should. If it does, it is likely to also lead, directly and indirectly, to a reappraisal of executive salaries within the public service.

Here are some questions that an external disinterested observer might ask the leaders of the business community as they respond to current public antipathy over the multi-million dollar salaries and bonuses that the business elite continues to award itself.

Is there a moral justification for any business person to be paid more than the Prime Minister? No business leader bears greater responsibility for the affairs of the country, is as directly hostage to the media 24 hours per day, leads a workforce of about one quarter of a million and is required to span such a range of portfolio functions.

No moral justification

“If a company’s performance is above average and justifies payment of a bonus, should not every employee receive a proportionate share?”

What is the moral justification for paying performance incentives anyway? If executives have to be bribed to fulfil their duties satisfactorily, companies would be better served by replacing them with employees who work diligently because they respect the company or believe in the products or services it trades.

If a company’s performance is above average and justifies payment of a bonus, should not every employee receive a proportionate share? The least highly classified clerk or process worker also contributes to the success of the enterprise and in many firms will be investing proportionately more of their career. Bonuses paid to executives alone breed resentment, especially if employees are dismissed or their wages and conditions clipped to satisfy the relevant KPI.

What is the justification for the common practice of adopting share price as a metric of performance? The share price is a resultant of a multitude of factors many of which are not even under control of the company, let alone of the individual executives. If any measure is predestined to encourage executives to spend their time plotting corporate restructures, insider trades, mergers and divestments rather than giving attention to the business, this would be it.

Telstra chairman John Mullen claimed at the telco’s October 2018 annual general meeting that setting executive pay was the single most difficult issue addressed by directors of large companies. “Maybe there is a case for doing away entirely with all the complex schemes and just go back to a fixed salary commensurate with the difficulty of the role…” Indeed.

Given the range of external challenges facing our economy (debt, electricity, peak oil, import competition…), it is not clear why boards waste their discretionary time deliberating on executive remuneration.

Mullen’s plaint hints at a simple fix: Let ASIC or a respected NGO publish a scale of executives’ salaries and directors’ fees, with vectors for company size, exposure to international affairs, regulatory complexity and industry-specific parameters. Let the brilliance of boards be turned towards developing their businesses. Convoluted executive enrichment schemes don’t strengthen businesses, rather they undermine them by distracting the attention of the senior people towards satisfying the targets.

Public sector implications

“Is there any justification for a servant of the government to be paid more than the leader of the government or even their portfolio minister?”

Turning to the implications for the public sector, comparable questions can be asked of leaders.

Is there any justification for a servant of the government to be paid more than the leader of the government or even their portfolio minister?

With the experience of decade or two, does any justification remain for performance pay? No senior executive, no matter how highly regarded, can do much at all without a capable team. Within the public sector, this must be especially true, as no department ever operates alone and the predominant workload of many senior managers in policy positions derives from coordinating across portfolios.

Performance pay in error-sensitive departments will tend to reward orthodoxy, not innovation. In the emerging knowledge era, this is likely to lead to reduced, not enhanced, effectiveness.

Further, if companies – who can avail themselves of a range of statistically precise financial indicators such as profit – have difficulty in apportioning overall performance to individual executives, how much more futile is such a mission in a portfolio department with a wide range of public interest objectives superimposed on top of any fiscal ones.

If the government really wished to reward good performance, wouldn’t the best technique be to grant the department a bonus in its budget, and liberate it from the dead weights of efficiency dividends for the next triennium?

Given the well-attested predilection of public servants to value highly their mission to serve the community, the prospect of an injection of funds for projects that will enable their team to pursue its aspirations would be far stronger as a motivator than any formula pay rise for their executive as an individual.

“If the government really wished to reward good performance, wouldn’t the best technique be to grant the department a bonus in its budget.”

Just as high salaries in corporations are parasitic upon the profits of the enterprise, so are high public sector salaries a drain upon departmental budgets. Why, the Commonwealth might even decide to reinstate security of tenure as recompense for lowering the ceilings on SES pay. Not only might such a move save tens of millions of dollars, it could re-energise “frank and fearless” policymaking.

There is an element of self-serving circularity in the arguments used to justify high executive salaries. Companies say they are obliged to match the market; then senior public officers claim that the SES has to be competitive with the private sector to avoid losing top talent. Mullen blamed a broader corporate culture for unduly generous executive payment arrangements. It would take only a handful of opinion leaders to break out of this treadmill. Business leaders could take a public stance instead of surrendering passively – a very easy step for banks to take just now; and the Commonwealth government could publicly deplore the self-enrichment culture for the nonsense that it is and show the way within its own service.

The national government’s approach to date has been to regulate – the two strikes legislation. There is a simpler way: change the taxation regime so that any remuneration higher than the Prime Minister’s salary is taxed at a rate of 90%.

To justify high salaries by deferring to market forces is craven: the market is a social construct and if it leads to disserviceable outcomes, then those who exercise influence in the market can change it.

Dr Geoffrey Edwards is an Adjunct Professor, Centre for Governance and Public Policy, Griffith University.


READ MORE: Why did Victoria axe executive bonuses?

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