CEO pay — it’s not like they’re sports stars

CEO pay — it’s not like they’re sports stars, by Adam Creighton.

I’m hereby offering my services to be the next CEO of Australia Post for less than $560,000 year, including bonus, a mere 10 per cent of the remuneration of outgoing chief Ahmed Fahour. I’m hard working, organised, and reasonably bright. And I’d be fully across global postage and parcel trends before I started. Taxpayers would save more than $5 million a year.

Naturally, I don’t have a chance. The so-called market for chief executives of public (and state-owned) companies functions like a cartel, where suppliers, the managers themselves, exert huge power over the sale price.

Who could blame Fahour for accepting his outlandish pay? He’s only human. The problem is the system, not individuals, and a populist cut in the next Australia Post chief’s pay will do nothing to fix it.

We all enjoy a bit of economic rent in our lives — what economists call the excess of what we are paid over what we need to be paid to keep doing our job. But the world’s managerial class has gorged on it since the 1980s.

In Australia the pay of the top ASX200 companies has increased from less than 20 to more than 50 times average earnings, or more than $3 million, in 2015. In the US, average CEO pay, adjusted for ­inflation, has increased from about $US807,000 a year in 1965 to just under $US15 million a year in 2012. Plato would have a heart attack: he thought the richest residents of Athens should earn no more than five times the poorest.

The Productivity Commission in its 2009 analysis of executive pay found pay increases had easily outstripped growth in the value of stocks. Indeed, productivity and real median income growth in most countries have stagnated as the pay of managers has soared.

But CEOs aren’t in a market, but instead form a cartel where members set their own remuneration.

The so-called market for executive remuneration isn’t a free market at all. In a free market buyers and sellers negotiate; their own money is on the line. The wage a corner shop owner pays his assistant is set in a free market. But executives and their boards more generally, the sellers of management services, in effect set their price because the shareholders, the buyers, have no control over the decision. Shareholders might be able to vote for particular board members, but they can’t affect the pay offer. Remuneration consultants, incentivised to recommend “above average” pay, add fuel to the fire, and help perpetuate the myth that good managers must cost a fortune. …

The late Australian historian John Hirst once said to me that Australians get angry about CEO pay ­because they sense rightly it’s someone not too different from them sitting behind a desk.

The value added by sports stars and ­entertainers, especially the former, can be objectively measured. The output of chief executives isn’t measurable or verifiable in the same way. No one can split out the contribution of one manager to the success of an entire company, especially large ones.