Heads I win: tails you lose

What is clear is that traditional option plans have fallen from favour since 2000, with greater emphasis now being placed on most sophisticated instruments, such as share appreciation rights and zero exercise price options, which closely resemble restricted share grants. So the accumulation of executive wealth continues unabated, albeit via ever more complex equity plans.

On this basis, it is very clear that the increase in total CEO annual income and wealth acquisition significantly exceeds the 10.7 per cent real increase in reported cash earnings. My own preliminary estimate of the combined increase in cash plus equity indicate that since 1990 annual total (i.e. cash plus equity) CEO remuneration in the 51 sample BCA companies has risen from around $0.6 million to approximately $5 million, which translates to a non-inflation adjusted 15 year rise of 730 per cent, an annual compound increase of 15.2 per cent, and an inflation-adjusted annual increase of 12.4 per cent. To reiterate: over the same period, for ordinary wage and salary earners the real annual increase has been just 1.4 per cent.

In other words, in real terms, BCA CEOs have enjoyed a long-growth in total remuneration almost nine times greater than that of ordinary employees. The figure of $5 million also represents a current total income gap between these workers and BCA CEOs of around 100:1. So the income and wealth flowing the way of BCA executives has far outstripped that going to ordinary wage and salary earners - the very same individuals whom the BCA chiefs insist must lift their performance in the interests of national economic competitiveness.

Since 2000 changes in average CEO pay have become less sensitive to changes in total shareholder returns, not more so.

While increases in CEO cash remuneration correlated quite closely with growth in total returns (i.e. dividends plus share price appreciation) to ordinary shareholders during the 1990s (as measured by the S&P/ASX200 accumulation index), over the past five years CEOs have enjoyed earnings increases disproportionate to those of investors in their own and other “top cap” companies. Despite the return to a bull market, the gap that opened between CEO pay and returns to shareholders during the recession of 2001-2 shows no sign of being corrected.

How can this be, especially when we are assured repeatedly by defenders of current executive pay practice that the application of executive “performance hurdles” guarantees “alignment” between “shareholder value” and executive rewards?

Notwithstanding the greater application of performance hurdles to CEO incentive payments, the evidence suggests that the earlier coupling between CEO pay and “shareholder value” during the 1990s boom is, if anything, breaking down. Performance hurdles, it would seem, are not all that they purport to be. Indeed, it is possible that their chief effect is to disguise additional wealth transfer.

Performance targets are open to considerable manipulation. As is well recognised, carefully timed announcements of staff cut-backs can also serve as a powerful share price stimulant and it appears to be far from coincidental that past and present BCA CEOs with the most to gain from share options and rights have also been among the most committed practitioners of workforce downsizing. Accounting-based hurdles are also open to manipulation. For instance, with profit-based targets, the executive may artificially inflate paper profits by postponing infrastructure investment or cutting back on research and development.

Hurdles based on peer company benchmarking may also still provide rewards for mediocre performance, especially where the pay-out target is set only at the 50th percentile (i.e. the median) of comparator company performance. By the same token, the use of more onerous hurdles, say a pay-out set at the 75th percentile of peer group performance, may also encourage executives to demand and receive a much higher potential reward. Of course the use of relative performance measures of this type may also result in a substantial payout to the CEO in circumstances where company performance is actually declining, albeit at a lower rate than that of comparator firms.

One outcome of the hurdle malleability and manipulation would be a tendency for incentive payments to outstrip performance and shareholder returns. As noted above, this is precisely what has occurred since the late 1990s in firms in the BCA sample.

Despite the public and media outcry against high payouts to departing CEOs, boards seem incapable of controlling their own largesse in this regard.

While it may be the case, as the BCA has repeatedly claimed, that the tenure of the typical Australian top cap CEO is - at around five years - relatively short, the pain of separation is certainly salved by non-superannuation-related severance payments - or “golden handshakes” - that generally amount to the equivalent of one-two years’ salary - and sometimes a great deal more.