Australian CEO salaries have increased to near pre-GFC levels even as most workers’ wages remain stagnant, a new report reveals.

The highest paid CEO in Australia earned $21.6 million in 2017. While the average chief executive take home salary was well below this, earnings for the top tier are nevertheless rising fast, according to a new report from the liberal think tank the Australian Institute.

This is happening even as real wage growth for most workers has remained stagnant. The average salary for a CEO in Australia has now reached $5.2 million a year, a level not seen since before the global financial crisis (GFC).

The institute analysed data from the top 100 companies to reveal that CEO salaries dropped from $5.5 million before the GFC to $4.7 million in 2011. Since then, it has gradually crept back up to its current level.

The report states: “while average earnings have less than doubled since 2000, NAB and CBA CEO pay has more than tripled”.

The report’s author and senior research fellow at the institute, David Richardson, told the Sydney Morning Herald that, “The lesson of the GFC should be that the surge in executive pay was not only unwarranted, but dangerous where it accompanied a high-risk culture among some of the world’s biggest financial institutions.”

Theories of executive pay

The report details two of the main theories behind how executives are compensated.

The first is that while there might be some distortions – such as when compliant boards are too generous with termination payment – for the most part executive pay is set by a competitive market.

Some who subscribe to this theory point out that it can encourage CEOs to think short term, because their pay is linked to visible performance. Because of this, they are keen to cut longer term investments like research and development because this gives an immediate boost to share prices.

The second theory is that salaries are set by the hierarchy above you, and there’s nobody above the highest level. It argues that there’s a “self-interested ‘directors club’ of board members, fund managers, and executives past and present” who are involved in a “you vote for my pay rise and I’ll vote for yours” arrangement. This theory draws on data showing that CEOs have a great deal of control over their boards.

The only true limit to executive pay, according to the theory, is what two researchers call “outrage constraint”. Which is to say that the limit is set by what would anger the public at large.

Transparency

Another issue with the increase in executive salaries is transparency. Many people in an organisation, indeed even shareholders, are simply not aware of how much a company has agreed to remunerate its top brass.

Even the Australian Institute of Company Directors, whose core mission is to ensure good corporate governance, came under fire last year after it was revealed that they had signed a confidentiality clause with their past two CEOs, John Colvin and John Brogden, which prevented them from revealing how much both men had been paid.

A key test of governance at member bodies is the disclosure of the remuneration of CEOs. Surely no one doubts that HR has a role to play in this by supporting and promoting the ethical framework to ensure that senior executive salaries are a matter of knowledge for all stakeholders, including employees.

When transparency is not there, organisations can end up with a ‘CPA scenario’. When the long-hidden $1.79 million salary of ex-CEO Alex Malley was finally revealed, it was the beginning of a a crisis that led to his sacking and the reputation of the accountancy professional association sinking – in the eyes of both members and the wider public.

With CEO salaries once again rising while household income for the majority of workers flatlines, HR professionals may find themselves coping with the stresses and tensions that arise as a result. In those circumstances, ethical behaviour becomes more important than ever.