Monday, December 20, 2010

Just What Are These Clowns Getting Paid For?

The Federal Government has today unveiled draft legislation aimed at giving shareholders more power to influence executive salaries, which have been the subject of much criticism in the wake of the Global Financial Crisis. Of course, Australian salaries have not seen the same excesses as those that occurred in the United States, and Australian banks and financial institutions have not suffered from the same management failures, but all the same, executive remuneration, especially within the banks, has grown far in excess of ordinary wages. So much so, that many people consider them to be greedy, and out of step with community expectations, and up until now, shareholders have been virtually powerless to do anything about it.

Currently, shareholders have a non-binding vote on the remuneration report at the annual general meeting. It provides an opportunity for shareholders to express their disapproval of salary packages which they believe to be excessive, but little else. Under the proposed reform however, a “no” vote exceeding 25% of shareholders in two successive years will trigger the opportunity for a further vote to vacate the positions on the board of directors. What this means is that if directors cannot justify their remuneration decisions to their shareholders, there will at least be a mechanism allowing the shareholders to replace those directors. It’s a level of accountability which should have existed all along, because in the end it is the shareholders who have put their capital at risk.

While many have called for executive salaries to be regulated or in some way restricted, it is better to allow companies to make their own decisions, so long as they remain accountable to their owners. It’s easy to suggest that multi million dollar salaries are excessive, but the real question has to be by what standard? If an executive is doing a great job, increasing company profits, expanding market share, creating employment, and delivering dividends to shareholders, there is no reason that he or she should not be paid well. How well should remain a matter for the company to determine, no some government agency.

On the other hand, when a company performs badly, losing value in the market place, cutting jobs, and delivering disappointing returns to the shareholders, surely there is a need to ask just what are these clowns getting paid for? Too many times we have seen high flying executives appointed to Australian companies, and paid enormous salaries, only to see the company decimated and the executive paid even more millions just to go away and stop causing trouble. It is this sort of bad decision making for which boards should be held accountable.

And now perhaps they will, at least a little more than they have been.

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