How much is too much when it comes to both executive pay and government support for struggling businesses?
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AMP’s Boe Pahari is set to leave AMP with a payout reported to be up to $50m.
Outgoing JB HiFi boss Richard Murray is set to join Solomon Lew’s Premier Investments for a base salary of $2 million, plus bonuses, plus shares. Total: a lot.
And car yard king Eagers Automotive was reported in today’s AFR as having taken $134 million in JobKeeper payments during the last calendar year.
These are all some very serious numbers.
And they beg the question of just how much is too much when it comes to both executive pay and government support for struggling businesses.
The numbers themselves are massive.
But — and stick with me here — we shouldn’t be looking at large numbers and arbitrarily deciding they’re too high.
See, what most commentary (and pretty much all commentary on social media), rarely asks, and almost never answers, is “what would have happened, otherwise”?
It’s what the boffins call the ‘counterfactual’.
Without meaning to deliberately stir up another hornet’s nest, it’’s the concept behind the vaccination debate.
You can’t just say ‘there were X number of side effects’ and leave it at that. After all, no one would accept side effects if there was no benefit.
It’s that benefit — the negative outcomes that, because they were avoided, will never be reported — that we need to take into account.
And so back to the (slightly) safer ground of executive remuneration (and corporate welfare).
I’ve written before on the latter, so I won’t go into it in much more detail other than to reiterate my main point: we can say ‘it was too much’, but we can never know how many jobs it saved. Maybe none. Maybe 5. Or maybe three-quarters of the company’s entire workforce.
JobKeeper was paid to the companies, but it was on the condition that they kept the staff employed — a decision that might have been different without the payment.
But let’s turn to executive pay.
There are two forces at work here. And they (unfortunately) intersect:
First, are the company specific decisions.
And then, there are the industry or economy-wide ones.
And they don’t so much intersect as become self-reinforcing.
Which is where the problems start.
See, the company question is ‘Will we get enough value to offset the cost of said executive?’
But the broader question is ‘What is the going rate for said executives… and how much do we have to pay?’
Which is where the self-reinforcing bit comes in!
Jane Smith got $1m for her CEO gig, so John Jones asks for $1.1m. When Jane goes for her next CEO role, she wants $1.2m, and that becomes the new reference point for CEOs.
The company looking for a new CEO sees those numbers and has to offer $1.3m to lure John away from his current position.
And up and up it goes.
I mean, a company could punt on paying $500,000 for some untried and untested CEO, but, for the board involved, why take the risk?
If the greenhorn fails, they’ll cop the criticism. And shareholders will bear the financial pain.
Far easier — and arguably better — to pay up.
But that, of course, only adds fuel to the fire.
Clearly, Premier’s chair, Solomon Lew, thinks Murray is worth paying up for.
Given his track record at JB HiFi, that’s hard to argue. And if Murray truly is that good, it’ll be money well spent.
The same could be argued of AMP’s Pahari.
While the company continues to circle the drain, desperately trying to find a way back to growth, the funds Pahari ran — and the results they delivered — were a rare bright spot for AMP.
Without those bright spots, AMP — and its shareholders — would be in an even worse position than they are now.
So, what do you do?
Yes, it sticks in the craw to pay one bloke 50 big ones, while shareholders are losing money.
But if the alternative was to have not offered Pahari the money, see him leave, and have AMP’s results look even sicker, and its share price even lower?
The choice might be between the devil and the deep blue sea… but you still have to make that choice.
Maybe Pahari’s contract was too generous. Maybe they could have offered him half, and he might have stayed and performed just as well.
But maybe not.
I hope you’re getting the sense that these aren’t easy decisions.
They have very real consequences.
“That’s too much” is an easy view to hold.
In isolation, it’s very, very hard to disagree with, too!
But when the choice is between ‘more pay’ and ‘worse performance’ which do you choose?
I’m happy to offer to work as CEO at any ASX 50 company that wants to give me $500,000 a year and a 5 year contract.
But would they hire me?
The answer, on both counts, is ‘no’.
I’d do my best, of course.
I actually reckon I’d do a decent job in a few industries I know most about.
But I don’t think a board would be smart to take the risk.
And therein lies the rub.
Logic, reputational risk, greed and shareholder expectations combine to push wages (and bonuses ever higher).
The best we can reasonably ask is that the incentives are set intelligently, based on factors that are truly in that executive’s control.
And that the criteria being set are sensible, stretching, and — most importantly — in shareholders’ interest.
(You’d be surprised how many CEOs are incentivised to ‘grow’, regardless of the risks taken or the impact on the stability of the company balance sheet, for example).
Bottom line? Our CEOs and senior executives are paid too much.
But in a competitive environment, where CEOs know how much the other guy is being paid, we’re stuck with it.
To mangle an old investing maxim, “Price is what you pay. Value is what you need to make sure you get”.
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