CEO pay wake-up call

CEO PAY WAKE-UP CALL

Australian boards must focus on income equality or risk government intervention.

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LEADERSHIP: New Australian CEOs are already being paid around 33 per cent less than their predecessors as boards listen to the concerns of shareholders, employees and the community, says Debra Eckersley, executive remuneration partner at PwC. But some would argue the change in CEO pay rates is happening too slowly.

Research shows perceptions about executive pay are hampering trust in business to play a significant role in tackling income equality. And the old argument that companies create wealth and societies distribute it is increasingly seen as a furphy in the Australian community, and around the world.

“Companies are viewed as social entities in their own right,” Eckersley says. “And both the reality and perception of the fairness of executive pay is an issue that has to be dealt with, especially as wage growth is low and growing inequality is the hot topic in societal debates and now spans the political divide.”

PwC research shows that about 30 per cent of people feel companies are not delivering on the principles of fairness they espouse. Young people, in particular, are more cynical about trusting the market to produce morally appropriate outcomes and want stronger protection for the less well off. “These views are only likely to strengthen as the impact of job losses through technological and other disruption takes hold,” she says.

Photograph by Nic Walker

The US and UK governments are already taking action by announcing requirements for large companies to disclose the ratio of their CEO pay compared to their average (UK) or median (US) worker pay.

 “You can’t put your head in the sand and ignore the questions from media, shareholders and the community, who are often your customers, asking do you really think that your CEO is worth 100 times what your average worker gets? And what are you as a company doing to help the average worker who hasn’t had a pay rise for several years and is anxious about job security?”

Australian boards have to address community concerns with CEO pay – because without a change in approach, government will step in with more regulation, Eckersley says.

“My prediction is that the direction to disclose CEO pay ratios is coming. If Australian boards don’t focus more on income equality and fairness, government is ready and waiting to regulate.”

And CEO pay ratios can be misleading. For CEOs at a high paying company (for example, an investment bank), the disclosed pay ratio may look fine as all employees are well paid. However, in some companies (such as fast food or retail), where the average wage is lower, the CEO pay ratio is likely to be higher.

Suggesting the pay ratios at these two companies should be similar would be wrong but confusion will reign if companies don’t get on the front foot. Eckersley says companies

You can’t put your head in the sand and ignore the questions from media, shareholders and the community, who are asking do you really think your CEO is worth 100 times what your average worker gets?

Debra Eckersley

need to consider and better articulate what they think fair means from an employee, customer and shareholder perspective. Designing a suitable remuneration structure is only part of the challenge.

“A good stakeholder engagement and communications strategy is almost as important as the actual remuneration structure,” she says.

“Ironically, it’s often organisations trying to cater for every shareholder demand that have remuneration structures difficult for both shareholders and executives to understand – and pervasively can drive up executive pay through all the complexity.”

 

On the board agenda:

  1.  Develop fairness principles

    Increasingly, boards will need to consider the fairness of pay throughout their organisation (not only the CEO and top executives). Different businesses will place different weights on the various dimensions of fairness, which should be tailored to each company’s purpose, culture and strategy.

  2. Translate into tangible policies and practices

    Fairness principles will come alive through their expression in tangible policies, such as living wage adoption, pay for performance, worker security and equal pay (for gender pay equality, for example). Companies should identify the policies and practices that support their board-approved fairness principles.

  3. Measure and monitor

    Develop metrics that enable progress towards fairness to be measured and monitored. This can include objective outcomes, such as equal pay statistics, social mobility in the organisation, pay ratios and market positioning.

  4. Engage with employees

    The most appropriate fairness principles for the company will depend on employee attitudes and culture. Engage with employees to find out what fairness means to them and use the insight to refine company fairness principles.

The Press is a publication by PwC Australia, aimed at sharing expertise, capturing insights and working together to solve important problems.

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