Why CEO Pay Matters to the Australian Public

CEO pay grabs headlines. In the context of ongoing pressure on household budgets and revelations of dodgy employment practices involving low-paid workers, is it any wonder that Australians are both sick and cynical when it comes to CEO pay?

Take, for example, the Commonwealth Bank. The latest revelations in the Banking Royal Commission have helped us discover the rottenness that lies at the core of its business practices, as well as many others in the sector. But amid the furore and scandal, and with no fanfare, the man who presided over the mess will step down on June 30. Former CBA CEO, Ian Narev, will walk quietly away with $12 million in shares and the rights to another 168,000, potentially worth an additional $12 million.

This comes on top of numerous other examples of imbalance. In September 2017 the front page of The Sydney Morning Herald screamed: “A coffee a year: How much Australian incomes have grown since 2008”. That’s $3 a year, or by my calculation a total of $27. Later, the Herald Sun barked: “Qantas chief Alan Joyce pockets $25 million in a shares-laden package”.

The ratio of public-company CEO income to that of the average employee has skyrocketed in recent years. It’s a shift that can’t go unquestioned. Is this an issue solely for business and shareholders or is there a larger issue at stake – society itself? What kind of nation do we want Australia to be?

The Business Defence

Some say that shareholders are richer, as the Qantas share price has gone up, so what’s the problem? Plus, it’s in the agreement that Qantas struck with its CEO and that’s an end to it.

The problem with these justifications is that they reside solely at the organisation level and fail to engage the much bigger, and much more important, frame – the societal level. Focusing only on what’s good for a corporation can lead to justifying some truly awful practices. 

Still fresh in our minds are the scandals at 7-Eleven and Domino’s. In the 7-Eleven-convenience-store case workers were systematically underpaid in some cases, while in others they were paid the legal rate but then forced to refund a certain amount – all with head office cover up. The Domino’s Pizza case is similar, but worse. In addition, it involved the unlawful sale of migrant sponsorships for up to $150,000. In both cases the company ignored the internal pleas of employees and franchisees as the focus was on corporate profit. Head office only acted after the press got hold of the story and it became bad for business.

The exploitation of hapless migrants in these cases is appalling and, in the context of Australia’s egalitarian ethos, disturbing. Both cases are wrong at many levels, but my concern is that it impacts the type of society we live in. As one report described the 7-Eleven case it “goes against the Australian tenet of giving people living in this country a ‘fair go’”.

Not Our System

So where does this leave CEO pay?

We’re told it’s “the system”. But it’s not our system. It’s the American system. I’ve lived and worked in the U.S., so I know it reasonably well. I enjoyed my time there and have many American friends. The U.S. system has its strengths yet, overall, it’s a harsh and inequitable complex dominated by business interests. As Jeffrey Sachs has described it, in Building the New American Economy, the system is not so much a democracy but a “corporatocracy”. Its minimum wage is $US7.25 per hour and any attempts to increase it are met with cries from business, echoed then by Congress, that it will bring the system down.

The U.S. also has a habit of turning a blind eye to illegality if it suits business. There are 11 million illegal migrants in the U.S. and all are open to exploitation. They’re tolerated because they pick the lettuces in California and drive taxis in Washington. They account for 26 per cent of the workforce in farming and 15 per cent in construction – so they’re not hard to find.

A few years ago, I was on a tour bus in Philadelphia and I asked our well-informed and highly-educated guide about the minimum wage and tips. Tipping is big in the U.S. because waiters are paid a pittance. I inquired about the people who clean dishes in the back of restaurants: “Would they be getting the minimum wage?” The reply: “If they’re lucky”. It’s another job that illegal migrants fill.

The U.S. system is one of great and growing inequity as Joseph Stiglitz details in The Price of Inequality. The top 1 per cent of the nation’s population now controls 40 per cent of the country’s wealth. According to Credit Suisse, inequality in the U.S. has been on the increase since 2008. From Jeffrey Sachs’ book it’s clear that many Americans want a different system. So why does Australia seem to be copying it?

Australians have stepped away from doing so once already with the thumbs down for Work Choices in the 2007 federal election. This system was designed to individualise employment contracts and to lessen the influence of trade unions and industrial tribunals thus making the dismissal of employees easier. The rejection cost the sitting Prime Minister, John Howard, the election – and his seat.

Time to Lead

Thankfully, the Australian Government has been at the forefront of reform when it comes to CEO pay. When in power the Labor government introduced the two-strikes rule which specifies that if at least 25 per cent of shareholders vote against a company’s remuneration report at two consecutive annual general meetings, then the second meeting will decide whether all directors must stand for re-election.

As I’ve outlined in my Harvard Business Review article this has been employed in some cases to great effect in clawing back CEO pay. But this amendment to the Corporations Act took place some time ago on July 1, 2011. More needs to be done if the nation is to maintain its egalitarian culture. I suggest that the Prime Minister, Malcolm Turnbull, agrees when he describes the phenomenon as “almost a cult of excessive executive CEO remuneration”. But Australians need more than words.

Let me be clear. I’m not suggesting that being the CEO of a public company is an easy job. Nor am I contesting that this needs to be paid well. It’s the quantum that is at issue here.

Capitalism has great strengths and business can deliver much for many. However, both must operate within constraints set by society if society is to come out a winner.

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Graham Kenny is President of Reinvent Australia, an organisation that focuses on the nation’s future development, and Managing Director of Strategic Factors and KMS Education, Sydney-based consultancies that specialise in strategic planning and performance measurement.