Recent revelations of corporate excess have encouraged the almost
universal belief that top executives are paid too much. One argument for
stratospheric salaries and golden handshakes has been that boards must pay
to get talent: the forces of competition are at work.
Several writers have pointed out that competition has very little to do
with the process of setting a CEO's salary, but that is not the whole
Recent studies, including one published in the Harvard Business
Review, have shown that there is an inverse relationship between the
pay of chief executives and their company's performance. Companies that
recruit a "superstar" may enjoy a short-term boost to their
share price, but over the medium term their performance suffers.
The high-profile outsider may feel obliged to make changes before
finding out how the company worked before his descent upon it, and changes
for change's sake generally make things worse.
Sunbeam Corporation - whose shares rocketed when Al
"Chainsaw" Dunlap was appointed CEO but fell to zero three years
later when extensive accounting frauds were exposed and the company was
forced into bankruptcy administration - is not an aberration, but typical
of the superstar phenomenon. The ABC's ratings rose after managing
director Jonathon Shier departed and in the period when it didn't have a
The idea that increased pay produces increased performance runs against
a long record of research.
Frederick Herzberg showed in 1966 that "too little" pay
causes resentment and poor performance, but once pay is
"enough", further money has no measurable effect.
A look at the Australian Football League, with its salary cap and
well-documented collective agreement with the players, illuminates this
issue. (Like or loathe the game, nobody could reasonably suggest that AFL
players could try any harder than they do, and when splitting hairs, it is
often the younger and lowest-paid players who show the least regard for
their own safety.) Every club must pay a minimum of $5.14 million to
participate in a complete home-and-away season.
Playing in all 22 home-and-away games earns players a minimum of
$78,800. This means a club could afford one superstar on a $3.4 million
deal if every other player earned the minimum - an absolute maximum
differential, top to bottom, of 43 times. No club actually pays this much.
Most authenticated accounts suggest that the best paid player at most
clubs earns about $600,000 - less than eight times the minimum.
Until corporate governance was changed to concentrate on
"shareholder value", a salary of 10 times the minimum was
generally considered adequate to get the best performance from a chief
executive and company employees. Nobody has suggested that Commonwealth
Bank CEO David Murray slacked off when he earned a mere $350,000 a decade
ago, so paying him $7 million today must include a substantial amount of
economic rent. The sight of other managers being paid twice Murray's
salary just to go away and stop doing damage may make Murray's salary look
reasonable, but only in comparison with such rogues and incompetents. As
the AFL's experience suggests, a 10- fold top-to-bottom differential is
enough to draw peak performance from rookies and stars.
The whole concept of shareholder value is coming under increasing
challenge: how can people who buy shares in a company, with no
responsibility for its direction or its debts, be called owners? One of
the world's most influential management thinkers, Professor Charles Handy,
argues that shareholders are betting on a company - they are not its
owners. A trainer who put the interests of the punters ahead of those of
the horse would wind up disappointing the punters and killing the horse.
CEOs who focus on the share price neglect their duty to the company, and
As too many examples have revealed, "shareholder value"
proved no more than a convenient disguise for corporate plunderers who
promoted no interests but their own.
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