Australia’s top executives are receiving lower base salaries, but the fall in CEO pay is still padded with million-dollar bonuses. What are the workplace ethical implications when the top earners get rewarded while the lowest face stagnant wages or worse – cuts to their pay?
Although average salaries for CEOs are trending downward, bonus payments are persistently high, according to a new report from the Australian Council of Superannuation Investors (ACSI). The average fixed pay for an ASX 100 CEO was a cool $1.86 million, and the typical size for bonus payments was 76 per cent of the maximum payment allowed.
Executive pay has been a controversial issue for many years, and it will continue to be a pain point until companies address key issues around equity and real pay-for-performance systems, says Adelaide University’s Professor Petrina Coventry (FCPHR), who specialises in business ethics.
Many theories suggest the Goldilocks zone for CEO pay is eight times the bottom earner in the company, she says. However, just one look at the top earners in the ACSI report show this isn’t always the case in Australia.
“If you look at average CEO pay in the report, you’ll see that it’s closer to 60 times more than a company’s lowest earner,” she says. This is supported by data from the ACSI report, which also found that 93 per cent of CEOs received bonuses last year – the highest number in the 15-year history of the survey.
What can HR do?
The line is blurring between fixed pay and at-risk pay, Professor Coventry says. Problems occur when CEO pay packages do not align with results or shareholder returns, and when there is unexplainable inequity between the CEO and the rest of the organisation.
For example, Domino’s CEO Don Meji claimed $21 million in salary, benefits and shares this past financial year, even as drivers and delivery workers saw their wages cut. And Babcock & Brown paid former executive Phil Green $51.3 million despite a shocking drop in share value of 99 per cent.
Human resources and company boards can do a lot together to stem this, says Professor Coventry. Three suggestions she has are:
- Be cognisant of facts around pay for performance theories, as greater pay does not always drive performance.
- Eliminate conflict of interest around CEO pay by having the executive pay decision-makers or HR report directly to the board.
- Strive for a company code of ethics and values that includes equity and transparency about executive remuneration.
If HR doesn’t act, others can, she says. Since 2011, public company shareholders have a ‘say on pay’. The two-strikes rule says that boards can face a spill if 25 per cent of shareholders vote ‘no’ on a remuneration report for two years in a row.
And more recently, in the last few weeks in the US new rules were adopted by the Securities and Exchange Commission (SEC) requiring that from 2017 public companies must disclose the ratio of CEO pay to median worker pay, providing transparency into the issue for shareholders and the public.
But beyond this, human resources needs to step up as the ethical centre of a business.
“HR is as responsible for company ethics and culture as they are for policy and strategy,” says Professor Coventry.One study showed that 80 per cent of employees view business ethics as the responsibility of HR. “High CEO pay is an issue of ethics.”
She says HR needs to take a step back and assess what executives should be earning based on outcomes – something called ‘distributive justice theory’.
“This issue is only going to gain more interest as time goes on,” says Professor Coventry. “People are becoming disillusioned about inequity at work, and starting to question why some people earn as much as they do.”
AHRI:ASSIST has resources for HR professionals who want to learn more about remuneration best practices. To access them, click here.
Human capital management methodology has the ability to size and value positions (sometimes called contributing element value). The HCM methodology has been around for 15 to 20 years and is quite different to the old “job evaluation”. The almost extinct JE focussed on an interpretation of what the employee was doing rather than a proper definition of the position especially the competence required in a role to deliver the specific outcomes at the standard set by the performance measures. The establishment of the role and then position specification is critical as it determines a) what the positions needs to deliver… Read more »
This is not only an ethical issue – it’s also a moral and a cultural issue, when the vast majority of society experiences such inequity in the reward system. Added to this, there seem to be very few penalties when CEO and other Executive performance is reflected in diminishing organisation performance, but at the other end of the organisation, workers are dismissed for poor performance.
What is missed in your commentary is the impact of the relationship between the Board and their CEO. There is a tension around bonus time which places this relationship at risk. Many CEOs are very optimistic in their outlook and performance driven by nature. My experience is that it takes a very courage Chair and remuneration committee to provide a fair assessment of their CEO without impacting this ongoing working relationship. This may account for the entitlement mentality discussed above amongst CEOs. The other issue which needs to be addressed, again in relation to reputation is the connection between CEO… Read more »
There is only one redeeming feature for the exorbitant CEO salaries, and that is the very unique Australian situation that their employment tenure is usually mercifully short. Accountability for the salaries sit with the Board’s and their lack of moral compass!! As for bonuses, there validity is questionable unless the converse applies; KPI’s and targets not met; reduce the CEO’s pay!!
Could one possible explanation for high CEO salaries and Bonuses paid for poor performance be that the Board wants the CEO to favour the Shareholders over other stakeholder groups, such as workers for example?