Tuesday, September 22, 2009

Gravy Train Still Steaming Along

There has been a lot of discussion in the past couple of days about Geoff Dixon and the enormous salary he enjoyed as the C. E. O. of Qantas. In the last financial year, Mr. Dixon was paid almost $11 million, and he didn’t even work for the whole year. The total salary of $10.7 million included his termination payment, his unused annual leave entitlement, bonuses, and a $3 million compensation payment because a change to the law had capped his superannuation contributions and reduced his benefit. There has been sharp criticism of this arrangement because for most of us a change in the law which results in a disadvantage is just our bad luck, and we don’t have our employer pick up the difference. That’s a good point, but it is just one aspect of a larger problem.

It is not a question of whether or not Mr. Dixon deserved the payment, or whether or not he did a good job as the boss of Qantas. It is a question of whether or not it is good for business, good for shareholders, and good for the community generally to disproportionately reward executives, especially at a time when ordinary workers are having their wages frozen, and having their hours reduced to cut costs. Although Mr. Dixon is the one who attracted plenty of headlines, the fact is that he is not the only one. Recent figures indicate that on average executive pay has continued to increase despite the global financial crisis by a factor of about 10% over the past financial year.

During the same period, more than 200 000 full time jobs have been lost across Australia, pushing people into casual and part time positions if they can find them. Fewer hours are being worked, and workers on the Federal Minimum wage have been told that they will get no increase at all this year. We are told that times are tough, credit is tight, the world is in recession, and sacrifices must be made. But it appears that there are some people who are immune from the need to make any such sacrifice at all, despite all of the big talk from politicians and regulators about doing something to curb corporate excess and greed.

The real problem with corporate executives is not that they are highly paid. It is perfectly sensible to pay someone well for a job well done. The problem is the basis on which they are paid, and the disproportionate bargaining power that executives seem to have when negotiating their pay packets. While talented people may well deserve to be richly rewarded, too often the reward is not connected to the talent, and even more often the reward is not connected to the risk. Top executives get paid to make big decisions, taking big risks, with money which does not belong to them. It is not their own capital which is at stake, and that fundamental distinction impacts upon the decisions that they make.

I have spoken and written many times before about the corporate privateers, the buccaneers, who demand enormous salaries to run companies which do not belong to them, and do so with their own interests uppermost in their consideration. That can appear to work just fine so long as the best interests of the executive coincide with the best interests of the company, its shareholders and its customers, but when that is no longer the case it is the shareholders who are left to pick up the tab.

The truth is that despite the walloping of the Global Financial Crisis, and the big talk from the politicians, nothing has changed and the big end of town is still getting bigger, while everybody else is picking up the crumbs from the table. Over in America, the big investment banks like Goldman Sachs are generating record profits and paying their executives record bonuses. Here in Australia, we never had the same extremes which existed in the United States, and that is one of the most important reasons why our economy has survived so much better. It looks as if the fat cats on the gravy train still haven’t realized that, but then again it is much more likely that they just don’t care. And so long as the gravy keeps on running, and somebody else picks up the cost, why would they?

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