Should we have a big debate about executive pay? Ross Gittins thinks so. Fred Argy thinks so too.
Australian Financial Review, Letters, 25 November 2005
Executive remuneration has become a very sensitive issue in the present industrial relations climate and it is not surprising that business leaders and their associations are seeking to justify the big increase (16%) that company chief executives have received over the last 12 months. But it wonâ€™t wash.
Sure, company profits have increased markedly in recent years. But if recent national productivity data is taken at face value, the increase in profits has been due only marginally to improved managerial efficiency. Instead one can surmise that it has been due to four other factors. Firstly, many companies have enjoyed windfall gains from sharply rising commodity prices (with the compliments of China). Secondly, employees are being driven harder and expected to bear more of the normal business risks (witness Qantasâ€™ recent demands on its workers) â€“ a trend which will accelerate after the new workplace reforms are in place. The third source of increased profits has been the transfer of costs to consumers – who now have to wait longer on queues and telephones to get served. And fourthly small suppliers and contractors are being mercilessly squeezed.
Many of these factors involve luck or externality costs for the rest of the community. So how do they warrant double digit increases in executive remuneration each year? Are CEOâ€™s really creating wealth or just shuffling it around?
I’m probably more sanguine than most progressives – including Fred – about the rise in CEO pay in the past 20 years. We know from a bunch of reports back in the 1970s and 1980s that the average quality of Australian CEOs was pretty bad, which was why we tapped into the global market for English-speaking CEOs. But to the extent that a wider income distribution imposes a negative externality on the rest of us, we clearly need to balance CEO quality off against the social cost of rising inequality.