As if!

Thump Thump Eyes has a new post (first in ages) that has an interesting video which explains

… what the banking system really means to our everyday lives.

TTE asks what can be done about the financial mess we are in, IMHO this is part of the answer:

Stop paying Directors, CEOs and other top executives so much money!

These people are rewarded way beyond what they are worth, and with their remuneration tied to the share price of the company as much as anything else, they will do radical dangerous things in order to get a quick rise in the share price (see sub-prime market and collapse of banks in America as prime examples). Not only that but their contracts are often written in such a way that even if the company loses money, or doesn’t make as much as expected, or it’s share price falls; the executives still get their massive bonuses and retirement/severance payouts.

One of the biggest problems has been the huge rise in CEOs wages as compared to the average workers wage, as evidenced by this simple graphic: >

So what can be done about this? Lot’s of people are asking this question now the world is going into financial meltdown, including our own government.

The Greens proposed an amendment to the governments stimulus package that

would have limited executive pay packages to no more than $5 million or ten times the Prime Minister’s salary of $330,000, whichever is the lesser.

Of course the Rudd government is all talk and no action as:

Only Senator Xenophon voted with the Greens in support of action to curb obscene executive pay packages.

Not surprisingly CEOs have snubbed the wage restrain plea. Sol Turillo (possibly one of the most disliked CEOs in Australia, and one of the most distrusted people) had this to say:

Telstra boss Sol Trujillo, who took home almost $12 million last year, remained defiant, with a spokesman saying: “CEO remuneration is a matter for the board.”

and any smart person knows that board members are just a “big boys club” (I say boys club because it is mostly men on boards, need to find facts but quite sure lees than 10% of board members are female) who always back each other. How else will they get those massive pay packets for doing very little? Especially as quite a few board members are on more than one board and some of the CEOs are on boards of other companies. No biases there. As the article goes on to point out:

… shareholders at Telstra’s annual general meeting were completely ignored despite casting an overwhelming 66 per cent of votes against an executive remuneration package.

So even though the majority of shareholders, including the government, voted against the increase in the executives pay packages the board still approved it! (see below for more on non-binding voting)

So what can be done?

Well one of the things that everyone who owns shares should be doing is sending the message that they no longer stand for this. Here’s some things every shareholder should do; on the proxy voting form always:

  • vote against incumbent directors
  • vote against the remuneration report
  • vote against any grant of securities or remuneration increases to CEOs or other Executives.

My reasons for doing this:

Directors get lazy, they think they have the job for life and thus can vote themselves bigger and bigger remunerations. If more and more people voted against them they may eventually get the hint that they need to lift their game, including being more circumspect about rewarding themselves such large remunerations.

The Remuneration Report is what gives these people such big pay packets. Note that often this vote is non-binding, so even if everyone voted against it the directors can still allow it; again perhaps they’ll get the message eventually.

Voting against CEO wage rises and grants of securities is obvious.

Now I’m not so naive that everyone would vote against these items, for a start the directors and executives won’t as they want these big pay rises. Also for some reason I’ve never fathomed the ‘big end of town’ (other big companies, superannuation funds, etc) that own large parcels of shares seem reluctant to vote against these items. I’ve never heard a reasonable reason why they wouldn’t vote against them, a cynical me thinks that they hope to one day be in those high paying positions?

One other thing to do is try and get on a board yourself, or assist new members to get on boards (especially if they are independant or promise to make changes) , I recently voted against all the incumbents on a board but voted for Steve Mayne (creator of and shareholder activist).

So, are Non-Executive Directors paid too much?

Here’s an example from the current Commonwealth Bank of Australia (CBA) AGM:

Re-election of Director JM Schubert, currently on a total remuneration package of $741,748. Schubert along with the ten other non-executive directors get a total remuneration of $3,443,216; and they want to increase this pool of money to $4M. That’s on average a pay rise of $50,617 (that’s per year folks), which is close to the average workers total annual wage of $58,000. Tell me how that is fair, equitable, or deserving especially in the current downturn in the economic climate. By the way that’s about a 20% pay rise for most of those non-executive directors. Don’t forget these directors don’t actually do any work for the company, they don’t work five days a week to get that. In fact from two reports I found on the net Directors work on average about 40 days/year. From one report, dated 2002/2003:

… the average annual remuneration for non-executive directors in all types of companies in 2002/20003 was $33,213 ($971 per day) for an average of 34.2 days per year devoted to board matters.

I’m sure there are a lot of Australian’s who’ don’t even earn $971/week working 40 hours/week 48 weeks of the year! This includes small companies which pay only nominal fees in some cases, and possibly NGOs which sometimes pay no fees. Also note the above facts may be from an American report, even though I found the report on an Australian site? The report also states (this is definitively American figures, but I know Australia is quite similar) some facts about CEO wages

… the CEO-to-worker wage gap is rising again. The CEO pay to worker pay ratio reached 301:1 in 2003, up from 282:1 in 2002. If the minimum wage had increased as quickly as CEO pay since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.

Note that the gap in 2006 is now 364, as shown in graphic above. But they reckon they are worth it, well are they:

One rationale for high CEO pay is that CEOs bear tremendous risks and responsibilities for their companies, yet the report found that CEOs are far more financially secure than those risking their lives in war. Average CEO pay is 56 times more than the pay for a US Army general with 20 years experience ($144,932) and 634 times more than the pay for a starting U.S. soldier ($12,776).

No wonder CEOs sometimes get called ‘Fat Cats’.

Before people start thinking I’m some sort of socialist communist who thinks everyone should earn the same amount, you’d be wrong. Obviously the higher up the corporate ladder the more you should earn, but there’s a limit and we have gone way over the limit. Unlike the average worker who gets small wage rises often related to increase in productivity, increased directors fees (20% for CBA directors this year!) are not necessarily based on longer hours worked or greater productivity but on factors such as:

… corporate revenues, assets, profitability and number of employees

I’m not sure if that is more or less employees, I’d hazard a guess at less? Where does some of the profitability come from? By reducing the workforce and making the remaining ones work harder and smarter, or outsourcing the workforce to cheap foreign labour. Interestingly over the last decade when workforces have decreased the number of members on boards has increased.

Anyway back to the CBA example, the CEO total remuneration has increased from $6.5M to $8.6M between 2007 and 2008, no idea how much that’s’ planned to increase this financial year?  It’s also mostly made up of a more than doubling of share-based payments.

Now lets for interest sake calculate how many extra people the CBA could employ based on average wage of $58,000/year (to be fair I will increase the amount to $100,000 to take into account all the overheads) only taking into account his pay rise. The answer is 21, now I know that’s not a huge amount but I’m sure those 21 people would be happy to get a job. I’m also sure that many other people would be happy to not have to queue for quite so long now there are a few extra tellers or customer service people available. Just an example.


Since I started writing this article, I have heard of several other examples, as follows:

1) The NIB (a private health fund which used to be a mutual society, but is now a publicly listed company) had their AGM recently, a lot of shareholders were rather miffed. The CEO’s package rose from about $750,000 to $2.3 Million; the remuneration package for all top executives rose from $4M to $10M (I think that is for 8 people) .

As some of the shareholders pointed out the share price for the NIB (along with just about every other company world wide) has fallen dramatically, but the executive salaries still rose substantially. What also should be noticed is that the NIB had recently laid off a number of employees (at the lower levels of course, all in the name of saving money! Don’t the Execs see the irony in all this?).

Once again, even though a lot of the smaller shareholders were upset about the massive executive salary packages, the packages were still approved because the Remuneration report was voted for. People – always vote against the Remuneration Report! Of course there is one small snag to this recommendation, each year top execs get more and more shares as part of their salary, so each year they have a larger and larger stranglehold on the overall voting rights. Clever huh?

2) At the Fairfax AGM the CEO was awarded a 24% pay rise, at the same time announcing the loss of hundreds of jobs (I heard about 550!) in order to cut costs. Many of the jobs losses were journalists, and the execs reckon there wont be any impact on the quality of journalism. Oh, the irony; Oh, the stupid it burns. One of the shareholders estimated they could employ about 30 journalists for the cost of one CEO.

Recent announcements made on the news stated that the average workers wage had risen about 4%, so why aren’t the execs wages also only rising by about that amount? Someone do the math: $.75M to $2.3; $6.5M to $8.6M, I’m sure they are both way more than 4%?

Also whilst deliberating on this post I read a few other articles on monetary affairs including Fiery’s What am I missing here post. In which we discussed the bail-outs of car companies and the question of how that helped the general economic population. I pointed out that it wasn’t only the American auto industry which was being bailed out, Rudd has also announced a car industry rescue package. Ostensibly these packages are supposed to help the car industry make greener cars, but why do they need direct taxpayers money to do this?

A little facetiously I replied to the question “what am I missing?” with a single word – BALLS.

I had meant to expand on the male domination of executive suites and boards, and how the ‘old boys’ system works (IMHO) in this post, but I think I’ll leave that for another day. Or not at all depending on my level of interest in doing all the research or your level of interest in reading my rant.

Well I’ve hit over 2000 words for this post so I think I should quit now. This isn’t one of the best pieces I’ve written, I’m not overly happy with it, and it’s a bit of a rant. But I said I’d do it to a few people, so I have. It only touches on one very small part of the overall economic decline we are facing, but it was something I had to “get off my chest” so to speak.

Some of the articles used as research:

  • You can view the CBA Annual Report here
  • You can view the Boardroom Report here (pdf)
  • You can view the Australian Shareholders’ Association – Non-Executive Director Workload research paper here (pdf)
  • You can read about the NIB AGM here
  • You can read about the Fairfax AGM here
  • You can read about Rudd’s plan to assist the car industry here

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One Comment to “and the banks cry poor”

  1. ozatheist says:

    The Frame Problem is back and his first new post follows along the lines of this one. Lets Take the Private Jet to the Welfare Office

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