Senior management can no longer get away with excessive salaries, writes Ann-Maree Moodie.
When the Commonwealth Bank board cut by 10 per cent the fees paid to its directors, starting from July 1, it sent a clear and decisive message to corporate Australia: the global financial crisis means everyone, from the top down, will feel the back-pocket effects.
The cut to the board fees paid to some company directors came during an intense period of debate about senior executive salaries.
Was Sol Trujillo really worth a $3 million base salary? Apparently not, according to Telstra shareholders, who successfully secured a reduction of $1 million or a full third of the base salary to be paid to Trujillo's successor, David Thodey. Whether Thodey is paid more will depend on his job performance. Another win for the company's shareholders.
What our chief executives and their direct reporters are paid is now the subject of a review by the Productivity Commission.
But according to board and executive remuneration specialists Guerdon Associates, 15 per cent of the ASX 300 companies have reduced the salaries of their CEOs, and those who report directly to the CEO, due to the downturn in the economy.
"Around 15 per cent of ASX 300 companies have reduced the fixed salaries paid to their senior executives but a larger number will drop the total remuneration that is being paid because of the significant drop in bonuses," says Guerdon Associates' executive director, Michael Robinson.
The structure of executive pay is "symmetrical" to economic cycles: when times are prosperous, base salaries are higher and bonuses are abundant; when there is an economic downturn, bonuses are smaller or even non-existent and earning just a base salary may mean doing the job of two people.
"If this downturn is sustained, then there will be more unemployment and companies will feel the need to restructure and to change job roles," Robinson says. "This means there will continue to be redundancies in senior and middle-management ranks and companies will put junior managers into more senior jobs, effectively asking them to do two jobs for the price of one."
If the downturn is long and sustained, as opposed to the short but hard-hitting recession of 1991, there will also be a drop in salaries for those seeking new roles.
"This is one of the reasons why there hasn't been much movement in director fees," Robinson says. "Most directors say the time to review fees is not when employees are experiencing a wage freeze or are losing their jobs."
The good news is that the downturn has seen a greater parity between the lowest- and highest-paid employees in a company. The latest salary research by the Australian Institute of Management (AIM) shows the fall in senior executive salaries over the past year has resulted in greater salary parity for the total employee population. "Traditionally, there has been a bigger gap between what the senior levels of an organisation are paid and those working in lower job levels," says AIM's manager of research and HR consulting, Matt Drinan. "The fall in movement is sending a message that pay parity is being felt by all job levels."
The AIM National Salary Survey, now in its 45th year, concluded that large companies are forecasting wage increases of 3.5 per cent in 2009-10, down from the actual 4.3 per cent increase reported in the previous year.
But what changes, if any, will occur in remuneration at all levels of a company once the inevitable uplift in the economy occurs?
The demand for board fees and executive salaries to be more directly linked to company performance has found increased traction following the economic downturn and its effects on the financial viability of companies.
The chairwoman of the Australian Shareholders' Association, Helen Dent, says the downturn has highlighted the weak relationship between pay and performance.
"Shareholders measure the long term over at least seven to 10 years and it is appropriate executives are measured likewise," Dent says. "Key management personnel should be focusing on the health of the business not for one year but for four or more years."
But academic research has found little correlation between company performance and performance-based remuneration.
This is why John Egan, a specialist in board and executive remuneration, says that coming out of the financial crisis, more attention will be paid by boards and senior executives to what measures are used to determine the level of bonuses, as well as when they should be paid.
"There will be greater discussion about the incentives being paid to employees because linking performance to financial profits clearly hasn't worked," Egan says.
