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Overpaid and under performing

By Klaas Woldring - posted Monday, 1 December 2008

This is an interesting and important question. The first thing one can say about it that a search on Google yields little on this specific subject except relevant information provided by the National Committee on Employee Ownership (NCEO) in the US, discussed briefly below and, of course, the Mondragon experience. For information on this successful group of cooperatives in the Basque province of Spain see here. In recent weeks the widespread disenchantment with grossly excessive executive salaries has finally resulted in a flurry of opinions as to how this has happened and what to do about it. Indeed there has been much more criticism from senior politicians than is customary with such episodes in the past. Just recently it was discussed also at the G20 meeting where PM Kevin Rudd specifically described the trend as an untenable situation.

While it is argued that greed is the principal cause there are also other causes as well and plenty of justifications like the usual "Performance Pay" argument and "if you pay peanuts you get monkeys".

Early critics of the trend were Professor Ian Ramsay and myself in the early 1990s (Woldring, 1995). We both found that there is only a weak or, more often, no correlation between high executive pay and performance. Other researchers in the US and Australia have basically reached the same conclusion.


A justification within Australia has always been, "if we don't pay for talent it leaves the country". Where to? The US presumably. Not anymore perhaps, as many finance industry high fliers are actually coming back. However, that justification for spiralling salaries has never been very convincing. People migrate for many other reasons than just for doubling or tripling their pay elsewhere.

The causes of high executive salaries are many and varied. The "infinite wisdom" of the market place riding high in a time of economic rationalism; lack of preparedness by both major political parties to curb excessive salaries, probably preferring not to upset their corporate donors; weak boards; and lack of shareholder power are some of the explanations.

The endless, pious criticism from and moral exhortations by PMs and Treasurers has been singularly ineffectual in remedying the situation The recruitment head hunters have of course been great beneficiaries of the ever-higher packages in the shape of their own spiralling commissions.

Disconcertingly, there is little doubt that in Australia, as in the US, the Reward For Failure (RFF) principle can often be demonstrated as well as the amazing associated principle the Promotion of Proven Duds (PPD), both in the private and public sectors. We can be sure then that the highest paid are not necessarily the best at all.

With the growing financial crisis - and in Australia the superannuation crisis as well - finally the spotlight is on executive salaries and PM Rudd has even outlined some rather bureaucratic, regulatory ways to deal with it. No doubt there are still other ways that could effectively deal with the problem, like progressive taxes, greater power for the shareholders and more transparency.

In the UK ESOP News (The ESOP Centre, November 2008) reports that a "claw back" regime is being prepared "on both sides of the Atlantic" suggesting that foreshadowed performance bonuses will not be paid or may have to be repaid. This is also expected from the Obama Presidency as well as from European Commission.


While this is encouraging news the latest reports in the UK suggest that although the UK Government has bailed out several major banks, the "City" bankers (the Big end of Town) have nevertheless decreed that "bonuses will be paid as usual". Critics claim that the corporate elite culture there brooks no government interference in their extravagant remuneration practices - a pretty arrogant attitude.

But what about ESOPs? Employee Share Ownership Plans provide opportunities for employees to become co-owners in the business they work in. They were started in the US by Louis Kelso in the early 1980s. About 10 per cent of US employees are members of an ESOP there.

Since 1986 the Australian Employee Ownership Association, a local advocacy group, has endeavoured to persuade governments to introduce favourable tax legislation for broad-based schemes ( This development is still in its infancy in Australia.

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About the Author

Dr Klaas Woldring is a former Associate Professor of Southern Cross University.

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