Show me the incentive.....

The legendary investor Charlie Munger famously said "show me the incentive, and I'll show you the outcome", and this article questions if the incentive system in Australian politics has caused the sense in recent years, that our Prime Ministers have struggled to lead their parties, let alone the country, they were elected to represent.

This is not an assessment of any individual, or a political viewpoint, simply a question that the data might lead us to a conclusion, that perhaps from 2037 (5 electoral cycles from now) the Prime Minister of Australia's salary should be benchmarked against ASX 200 CEO's pay, to attract the right candidates into politics in 2025.

It is hard to argue that being paid $550,000 a year is not a lot of money, however, at the same time, the office of Prime Minister should be one which attracts the highest calibre of individual and CEO pay has been widely scrutinised in recent years, and particularly the huge acceleration in CEO reward relative to the average worker.

ACSI data shows that for the last 20 years the median CEO in the ASX100 has earned around 60-80x the average worker. However, it wasn't always thus. A paper by Pottenger and Leigh looking at long term trends in Australian remuneration showed the CEO of BHP to be earning only around 6x the average salary as late as 1980, but this had reached 50x by the end of that decade. The authors contend that "The Big Australian" is a reasonable proxy for what was taking place in corporate Australia at this time.

Meanwhile, Australia was christened the "Lucky Country" by Donald Horne in 1964, which has been fondly adopted as a compliment but which bemoaned that "[it is] run mainly by second rate people who share its luck. It lives on other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise".

So how are these so-called leaders rewarded. Data from Parliament of Australia's website (including papers by Madden/McKeown/Vandenbroek and Healy/Winter) allows one to see that from 1983-2011 MP's were paid 2.3-2.8x average wages, and this rose, post a review of the work involved to 3.2-3.5x since 2012. The Prime Minister loading is today 160%, having been 150-160% since 1996. This suggests that the Prime Minster is "valued" at under 9x the average worker in the country.

Meanwhile, the median CEO in the ASX100 per the ACSI data earns 70x the average worker, and the median in the ASX101-200 earns 20x the average worker, based on 2018 numbers.

Having lived in Singapore 2009-2012 and their Ministerial salaries were reviewed. The key element of their pay is that it is linked to top performers in the private sector which they believe is necessary for "capable and committed government" according to their own government's website. I know Prime Minister Lee Hsien Loong is a very capable and intelligent individual, but am biased as we both share Maths degrees from Cambridge University, and his was of a higher grade!

The Prime Minster of Singapore is paid a 20% premium to the median of the Top 1000 earners in Singapore and this comes out around $2.2m or 4x the Australian PM's income, albeit Lee has taken a cut to reflect the challenges citizens are facing with COVID-19.

Australia has 5x the population of Singapore, and 9,000 tax payers who earn over $1m, so the median of the top 5,000 earners is probably similar to that of Singapore.

While $550,000 puts Prime Minister Scott Morrison in the top league for leaders world wide, there are thousands of Australians earning more than this role, which was once, at least, highly respected. The revolving door at the top of politics here, on both sides, and the intense scrutiny of one's personal lives, means that this comes at a huge emotional cost to the incumbent and their families.

Analysis of the last 16 leaders of the two leading Australian political parties, which dates back to the early 1980s for the Liberals, and 1991 for Bob Hawke's successor, shows that the average leader of a political party becomes an MP at 36, and takes 12 years to ascend to leader.

This table shows the data, sourced variously from Wikipedia entries today.

On Munger's principle that the incentive drives the outcome, the CEO-worker pay gap emerged in the 1980's and by 1990 it was clear that becoming a CEO of a major company had a pay-off with an order of magnitude higher than becoming Prime Minister. This was accompanied by lower public/ media scrutiny, and I suspect, a similar level of political cunning required to become CEO as leader of a party.

At the Prime Ministerial level, John Howard was the last to enter politics before the gap emerged, and Kim Beazley was the last Labor leader to have faced a similar incentive game. For those subsequent to this, it is not so much the incentives that those in politics faced, but those that chose not to enter politics and go down the corporate path instead.

The Singaporean system ensures that those wanting to serve and not forced to make sacrifices versus a corporate career.

Bill Eddy's book "Why we elect narcissists and sociopaths" talks of a 30-year decline worldwide in the type of person running political parties around the world. This is coincident with the timeframe of the CEO pay gap.

He talks of the increasing dominance of "High Conflict Personalities" who have a symbiotic relationship with "High Emotion Media" - a key trait being an extreme tendency to blame others. While Eddy's book was popular because of the perception of the style of President Trump, he highlighted the divisive tactics being used by democratically elected leaders today to remain in power. They love to increase and prolong conflicts, and they split voters other than their "loving loyalists" into those with a tendency to flight, flee or freeze, and watch as these three groups fight amongst themselves, cementing their power.

I wonder, with the riches on offer, for becoming a CEO today, or even in some of the larger corportations, a senior manager, who is lured into politics, at an average age of say, 36, to become leader at say 48, and all the scrutiny it entails. Three groups spring to mind - those who have already made it and want to leave a bigger legacy (eg Malcolm Turnbull), those with a deep desire and sense of service, and the narcissist. I dont know enough about the personality traits of the leaders of both sides, among those who entered politics post 1990, but Eddy's observation is that this symbiotic relationship between media and high conflict personalities (aka malignant narcissists in his language), is a problem that is worldwide, and a trend which is increasing.

My conclusion is that, with this 12 year lag from becoming an MP to seizing internal power (even if the grip on that has been tenuous in recent times), and the 3 year electoral cycle, that were Australia to introduce an incentive system similar to Singapore well in advance of the 2025 election, we would have a chance of the 2037 Prime Minister being someone who chose this, with financial incentives, on a par with their becoming a leader in another field.

Food for thought perhaps.