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Oct 4, 2018

CEOs should reveal how much more they earn than their average worker | Greg Jericho | Business I The Guardian


Greg Jericho


The ALP is on a bit of a workplace-transparency tear. First they announced a policy for companies to reveal their gender pay ratios, and then in a speech on Tuesday, Andrew Leigh, the shadow assistant treasurer, announced a new policy for listed companies with more than 250 employees to reveal the ratio of the CEO’s pay to that of the median employee in the company. It is all part of a package of industrial relation policies aimed not just about improving inequality, but hopefully changing the remuneration culture of companies.
When we think of IR policy, we generally think in terms of legislation around pay and conditions. While the ALP has certainly been taking more interventionist positions with policies such as reversing cuts to penalty rates and ensuring labour hire workers are paid the same rate as others, they have also produced some more subtle methods to address inequality.
Last year amid much clamour to bring in a “Buffet rule”, which would set a minimum tax rate for people earning over a certain amount (such as the Greens’ proposal for a minimum of 35% for those earning over $350,000) the ALP announced a policy that would limit the amount that could be claimed on management of tax affairs. In essence, as I noted at the time, this was a Buffet rule by stealth.
The new policy, rather than placing a limit on CEO pay, would instead force companies to reveal the ratio of CEO pay to the median employees. It would not directly limit CEO pay, but it would put a degree of pressure on firms to justify to their shareholders why the CEO was being paid what they were.
And the reality is that CEOs are being paid much more now compared to everyone else than at any time in the recent past.
Andrew Leigh’s own research suggests that the change has been rather swift. He notes that in “the late-1970s, the BHP CEO was earning only around six or seven times what an average Australian worker took home. Yet last year, the BHP CEO earned 74 times the wage of an average Australian worker”.
And that ratio is standard now:
In the 2016-17 financial year the average CEO pay of the ASX 100 companies was $6.2m according the Australian Council of Superannuation Investors. That amount is 75 times the average full-time annual earnings of $83,491. Or to put it another way, while it would take 75 years for the average worker to make the average one-year pay of a CEO, it takes the average CEO less than five days to earn the average full-time annual wage.
A look at the growth of average CEO pay compared with that of average full-time earnings shows CEOs have been spared the flat wages growth the rest of us are experiencing.
Over the three years from the 2013-14, average full-time earnings for men rose by an average of just 1.6% a year. By contrast the average CEO pay rose by more than double that amount – 3.6%:
It is also likely we will see a larger disparity between CEO pay and that of average workers when the figures for the 2017-18 financial year come out.
CEO pay is very much linked with share price performance, and 2017-18, much like 2016-17, saw a strong rise in the share market after two poor-performing years:
But the problem, of course, is that the past two good-performing years have not been reflected in workers’ pay. Instead, as I noted when the last GDP figures were released, the share of national income going to employees is at levels rarely experienced over the past 50 years:
In his speech Leigh noted that the flattening of real wages had led to a situation where wages had not kept up with productivity growth. Ideally wages should grow in line with productivity improvement. That certainly occurred during the mining boom, but the global financial crisis saw a split – which has only been exacerbated in the time since:
In the past five years, while real wages have remained flat, productivity has grown by 6%.
Leigh suggests a number of reasons for this occurrence – mainly the decline in unionisation. This issue of a deregulated labour market is also key. A recent study by the IMF found that weaker job protections and deregulations of the labour market led to a “statistically and economically significant negative effect … on labour shares of income”.
But there is more at play, something that echoes the findings in the interim report of the Hayne royal commission into the financial system – the issue of company culture.
Leigh alludes to this in the conclusion of his speech when he cites corporate management expert Lynn Stout.
He argues the issue is not just about legislation or stronger unions but that CEOs and boards need “to recognise that a company’s purpose is to not only provide equity investors with solid returns, ‘but also to build great products, to provide decent livelihoods for employees, and to contribute to the community and nation’”.
That might be a big ask, and certainly getting companies to reveal their CEO pay ratios and gender pay gaps won’t do it alone, but the more importance we place on such measures in judging the performance of a company, the better the culture will become.
• Greg Jericho is a Guardian Australia columnist